The $1.6 Trillion Rollercoaster: Inside the Federal Student Loan Portfolio

In this episode of The Center for USA Lending's The Lending Brief, sponsored by Allocore, we're joined by Jay Hurt, former CFO of the Office of Federal Student Aid and a 34-year veteran of the U.S. Department of Education, for a candid look at one of the federal government's most complex and politically charged credit programs. From a $37 billion profit in 2015 to a $493 billion liability by 2024, Jay unpacks how administrative actions — not just legislation — drove a half-trillion-dollar swing in portfolio value, and what that rollercoaster means for American taxpayers.

He also breaks down the coming waves of student loan defaults, what the collapse of the SAVE plan means for the 8.8 million borrowers currently in forbearance, and why the new Education-Treasury partnership to restart collections may be a critical turning point for the portfolio's long-term health.

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Transcript

SPEAKER_01 0:04

The United States government is one of the largest providers of credit in the world.

SPEAKER_00 0:09

We're talking five trillion dollars larger than the GDP of most nations and loans and loan guarantees that are made through more than a hundred different programs.

SPEAKER_01 0:18

And with that huge portfolio comes fragmented systems, rising fraud risks, but a lot of well-intentioned people trying to hold it all together with digital duct tape.

SPEAKER_00 0:26

These programs are critically important to keep the nation's economy humming and to help Americans at critical junctures of their financial lives. Welcome to the lending brief. I'm Robert Shedd. And I'm Doug Chris Atello. We're going to talk with the people who actually know what's working, what needs to improve, and what will it take to bring federal lending into the 21st century? So we're so fortunate this afternoon to have my longtime collaborator and partner in crime, Jay Hurt, uh, joining us on the podcast today. Jay, welcome.

SPEAKER_02 1:05

Thanks, Doug. Nice to be here.

SPEAKER_00 1:07

Could you give our viewers um some uh some of your background, sort of how you've come to this point where you're sitting here with Robert and I today?

SPEAKER_01 1:17

It's the pinnacle. This is the pinnacle.

SPEAKER_02 1:20

It's the high point. High point of my career, right here. No, I'm I'm about uh 34 years now back and forth as a federal consultant, federal employment, uh, the bulk of which I spent at the U.S. Department of Education, uh, specifically within the Office of Federal Student Aid. Uh so I I spent about 10 years as their CFO and about seven, eight years now as a consultant to uh the Office of Federal Student Aid or to others who are interested in that office. Uh so I have a lot of uh a lot of firsthand knowledge of the uh federal student loan portfolio.

SPEAKER_01 1:58

So speaking of which, we were talking before we pressed record that some are referring to this portfolio as the federal government's most expensive roller coaster, with one administration's leaning in on forgiving, the next um insisting on aggressive repayment. Tell us about that roller coaster and how we got here.

SPEAKER_02 2:22

So I'll put some data behind some numbers behind that roller coaster that understands why I love that that uh you know that that portrayal of it. In 2015, uh the entire portfolio was about a trillion dollars in value. And at the time, it was 37 billion of negative subsidy, which is uh you know the P word profit uh in in uh Criptsford credit programs. So it was, you know, it was a negative subsidy. Then, you know, fast forward nine years later to 2024, and the portfolio had grown slightly, $1.1 trillion in value, but positive subsidy now added up to $493 billion. That's a half a trillion dollars in a swing of in value, mostly because of administrative actions and uh and some policy that was implemented uh for the portfolio. A lot of taxpayer value uh kind of on this wild roller roller coaster ride in in nine years.

SPEAKER_00 3:22

Did you let me interrupt you just for a minute because I'm gonna make sure our listeners appreciate what that means. We were at a point not long ago where we thought that this activity would be a moneymaker for the government. And rather than being a moneymaker here more recently, the the expectation is that it will be a huge cost to taxpayers. That's quite a loop-de-loop on the roller coaster.

SPEAKER_02 3:54

Right, right. Loop-to-loop, and uh, you know, we'll we'll sure we'll get into it in a little bit, but it's a loop-to-loop driven by executive action, not necessarily congressional oversight, so to speak.

SPEAKER_00 4:08

So let's talk about these policy changes. You know, a very different regime. I don't think loan making has shifted all that much until very recently. I think the the correct me if I'm wrong, but I think the lending regime largely stayed intact through the Obama, first Trump and Biden administrations. Is that true?

SPEAKER_02 4:35

It is. So so the it's a fairly standard life cycle to student lending. Uh yeah, it's uh awareness um leads to application, which leads to origination disbursement, and then repayment and collections, and hopefully the paid in full. So it's a standard life cycle, always been that way for you know, that is the loan life cycle. During the uh the previous two administrations, uh, to your point, uh, really actually, since like I was saying, the nine-year span, there was there were uh changes in uh in discharges, uh, the way uh the choices around discharges, uh, there was uh leaning on uh a change in repayment plans that drove a lot of the the change.

SPEAKER_00 5:21

So the change, so let me make sure I have this right. So the change wasn't really about how the government makes these allowance, it how it services them, requires repayment, allows forgiveness. Those policies have shifted significantly through administrations.

SPEAKER_02 5:39

Right, right. It it the standard life cycle, uh, but a shift in repayment plans, for example. The income-driven repayment plans uh have taken on a much bigger role than they they did a decade ago. And as you know, income-driven repayment plans, the the big cost of that is at the end of a certain period of time, if you've made good on payments, you get a chunk of your um your loan discharged on the back end. And that discharge adds up to a lot of money, half a trillion dollars, uh, in uh in this case.

SPEAKER_01 6:12

You know, we we had uh Kyle Schofi, an analyst at the Congressional Research Service on, and we probed what his clients were interested in, and something that you know would be of interest to me was what outcomes we're getting for this from this program.

SPEAKER_00 6:30

His clients being members of Congress, importantly.

SPEAKER_01 6:33

So so can you reflect on what value the American taxpayer is getting for its leaning in in this arena? What the quality of education kids are getting, or whether that's even a role that this program plays?

SPEAKER_02 6:51

Yeah, that's a that's a good thought. In fact, I'm I'm writing a section of a book right now about the original purpose of the program and credit programs in general. The uh the goal is you're you're establishing a federal credit program for outcomes that are socially beneficial, and you're you're basically filling a gap that's in the private sector, and you have to be filling a gap that's in the private sector looking for a specific social gain. So in this case, it's just a more educated citizenry uh citizenry. We've got any one year, you're gonna have about 10 million recipients of student aid, uh, the most of which are gonna have direct loans. And there's about 42 million uh active holders right now, which is about six or seven percent of uh of the federal uh well it it adds up to be about six or seven percent total of the the uh the the total uh uh population. So raising up that education in theory raises the you know votes in all other areas. Um it's it it improves health, it improves many other areas. Healthcare, it improves you know the social uh the woes, it reduces um it reduces uh areas of concern in criminal criminal or criminality and justice. So it like fixes all social problems at its source in theory.

SPEAKER_00 8:18

So, yeah, I want to make sure we got the math right here. So the number of Americans instead of love is a very high percentage. It's much higher than six or seven percent, isn't it?

SPEAKER_02 8:29

I mean, if it's 42 million out of three fifty um, yeah, I'm sorry, it's it's closer to that's right, it's it's it's actually closer to 10, 15 percent. Uh uh, so it's that it's because it's about 45 million, and there's like 300 million, 350 million uh in the in the population. Point being it's a huge portion of the U.S. population, which then hopefully means it drives big outcomes. Uh, a bigger portion of the U.S. population is having a higher level of education, uh, and therefore uh you're seeing benefits across all the social spectrum, like I was saying earlier.

SPEAKER_00 9:08

Yeah. So I I want to talk about we've talked about these wild swings and cost expectations and put the policies that have been used to uh to spur repayment or forgiveness, but I'd like to zero in on where we are today. I mean, there there have been numerous reports that the number of delinquencies are on the rise. I was wondering if you could get us give us a sense as to, you know, as we enter this time when borrowers are expected to start repaying these loans, you know, sort of what's going on, and we haven't talked too much about this. Uh, you know, it's basically a long grace period during COVID where folks were not repaying student loans. What's the expectation now going forward? We have, again, 42 million loans outstanding. Are they gonna be repaid?

SPEAKER_02 10:05

That is the that's a $64,000 question there, Doug. So we've we've already seen one default wave. Folks previously were kind of referring to it as a default cliff, but I think you have it's gonna come in waves. And the the first default wave that's come is there was a long period of non-payment, like you're saying, uh, in March of 2020, uh, the the uh entire portfolio was uh allowed to stop paying um and stop accruing interest at that time. Uh and then it it was a few years later that they were the repayment was turned back on, but there was again a pause in outcome, negative outcomes. You were uh you weren't you didn't get put into default or delinquency if you didn't make a payment. That happened for yet another year. So you went four or five years before having any outcomes. The outcome occurred, the first wave of possible delinquencies just rolled into default uh in the last quarter or two. So that was the first wave. Two and a half million borrowers out of the 40 uh 42 million rolled into default. That's wave one. There's another wave coming, though. There's uh there's a total of 8.8 million still in forbearance, which is far larger number, uh far bigger number of the portfolio than uh before COVID. Eventually they're gonna have to be pushed into a repayment plan over the next few months. And when that occurs, you can expect a lot of those 8.8 million to roll into delinquency and eventually into default, a second wave of default about a year.

SPEAKER_00 11:46

There's so many in forbearance. Why are so many in forbearance right now?

SPEAKER_02 11:50

Yeah, that's a that's a good point. So there was uh the back to the difference between the uh the administration. So the Biden administration attempted to establish the save plan, um, which would uh which was very generous to the borrowers, lower number of payments to be able to get to that discharge. And the courts held that that was not a legal repayment plan. Uh and so between the courts and the one big beautiful bill, that plan will will be eliminated. And because of the elimination of the plan, education has to move those 8.8 or some portion, somewhere between seven and a half to 8.8, have to get moved into another repayment plan. And when that happens, if they don't respond with a cho their choice, they're going to be put into the standard plan. 10 years, you know, equally advertised payments, which is you know it's very hard for some of these folks that are in the current IDR payment repayment plans to make to make payments.

SPEAKER_01 12:55

So it occurs to me that even though the policy pendulum swings pretty dramatically in this program, higher default rates is not going to be isolated to the student loan portfolio, especially as a lot of COVID loans come due. Am I right? And what's the ability of the government to withstand the shock from multiple credit angles?

SPEAKER_02 13:20

Both that's a great question. And I'll start, Doug, but you you probably have a good point of view broader than just the student lending. There are studies that so TKIS did a study, and a couple other organizations did surveys and studies about the interplay or interaction between uh student lender student uh borrowers and their ability to make payments on credit card debt, auto loans, uh, other lending areas. And those that are, there are many that are actually many that are struggling of those 42 million that are struggling to make their student loan payments in uh you know, kind of uh tied to these other payments, that has broader economic impacts than just the to the borrowers. That'll have many uh broader economic impacts. Um, you can expect to see a hit to the national economy, in my opinion, as these default waves uh to student uh borrowers start you know kind of rolling in. Sorry I brought it up.

SPEAKER_00 14:21

But yeah, I think student loans are somewhat unique for two reasons. One, they're direct loans. Uh, unlike most of the rest of the government's portfolio, are loan guarantees. So it's difficult for the government to effectuate a repayment pause when the payments are expected by private financial institutions. And the other point being just the nature of student loans. Yes, they're direct loans, but the this is um, you know, as Jay was alluding to, this is a financial instrument with broad macroeconomic implications. So the decision to forego repayment during the pandemic, and really what amounted to be four years, you know, was a conscious decision on the part of the U.S. government to ensure that uh, you know, the economy recovered from the pandemic. I don't think there are great other examples of this occurring. Specific pandemic assistance programs like the paycheck protection program, the economic injury uh disaster loan at SBA would qualify. But um yeah, I mean, this is uh pretty much a unique situation. When you're borrowing money from your Uncle Sam, it's very different than borrowing it from your friendly neighborhood lender.

SPEAKER_01 15:48

We've touched a couple of times with our guests on the back office of credit management. And Jay, you know, the administration is trying to migrate this portfolio that we're talking about over to Treasury in another sort of waves. What's your sense of the state of systems supporting these portfolios and the effort to centralize some of the uh at least the back office function?

SPEAKER_02 16:21

Yeah, it's a that's a good question. So what you're you're specifically thinking about, I think I'm referring to might be the uh there's a recent announcement to of a partnership between education and treasury on assistance around the portfolio. The first step that is being discussed, uh really acted on pretty quickly, is the Treasury hiring new private collection agencies similar to the ones they already have to do cross-servicing of the education um portfolio. So 25 years ago, education actually got an exemption from cross-servicing, and they did their own collections through private collection agencies in sometimes almost identical companies to what Treasury had. Um so uh over the years, especially the recent years, about eight years, they they've paused the PCA collections. They were thinking about doing it in a different way, using different contractors. Then they just canceled the PCAs outright. And now this is almost a this is a restart of collection efforts, but they're gonna do it through Treasury, through their cross-servicing function. That's the first big push to to have Treasury help education. Uh, and it's it's one that's you know long been missing. You know, it's been eight years since they've been collecting on you know new defaulted debt. It's too long. So it's it's it's a good time to make that happen.

SPEAKER_00 17:48

What where is this all headed, Jay? I mean, we know there's risk to taxpayers right now, but uh do you have a you know a bit of a crystal ball? I mean, how's this likely to all play out over the next couple of years?

SPEAKER_02 18:00

A good question. Remember, so we originally were talking about a roller coaster. Um, and we had seen through the end of 2024 a significant devaluation of the portfolio based on some of the actions taken and the bill, one big beautiful bill, and some of the actions taken around uh discharges and the um income-driven repayment plans. We've seen a significant swing back, uh $150 billion swing in one year of the portfolio gaining in value. I think you're gonna see more of that as as we start to re-establish the collections and re-establish uh the kind of a good repayment cycle for these borrowers. Uh so you'll see some of that. I am hopeful that you will see uh better engagement with the borrowers. Uh, what happened over the last 10 years was including, you know, up until now, we've we saw uh FSA and education not engaging the borrowers early enough and fast enough and staying engaged. A lot of times those collection agencies can be a good thing, believe it or not, even for the borrowers, because you're you're you're maintaining a connection with the borrower, giving them options they might not know even know about, you know, repayment plans that makes it easier for them to pay. Um, so maintaining that connection is invaluable. And we went for you know eight years without six years, I guess, without payment from these borrowers. So I think we're gonna see a much healthier portfolio, a much more higher value portfolio. The question is, can FSA and education pull it off from a capacity standpoint?

SPEAKER_01 19:42

Well, it sounds like you're also saying that the I don't know if the customer experience will improve, but perhaps it will be streamlined or or or more intentional, let's just say, because there's you know been famous uh failures in the interface that the department has created for the borrower, right? So what I hear you saying is that that's we're we're gonna see some positive improvements in in that arena.

SPEAKER_02 20:12

Nope, though. So the the big failure you're talking about there was uh the 24-25 award year cycle FAFSA had a huge problem. Uh it uh it wasn't uh it it wasn't implemented. It's an annual cycle. That annual cycle was six months late coming out, and when it came out, it was much lower scope. They had to trim back all the functionality just to be able to implement it. It's since made a recovery. And so we've seen kind of a return to what it was. The department would is planning for and trying to get to the point where they better use their data too. So using their data at the individual borrower level to be able to help uh one understand things like is that borrower more susceptible to default? And they're more susceptible for this reason, this reason, and this reason. And based on that, we're going to send them very specific communications at very pointed times to help them do the right thing to stay out of default or you know, make sure they know about and take action on the right um repayment plan. Much more proactive and tailored experience to help these borrowers stay out of trouble. That's the plan. They've got a long way to go, given uh, you know, kind of they they've recently seen some uh some reduction in staffing that they're trying to uh kind of stabilize from.

SPEAKER_00 21:37

Well, hopefully the roller coaster ride is coming to an end. And for some that means a huge uh sigh of relief. And for others, it's a sad event. But hopefully that's where we're headed, at least uh consistency and normalcy. So with that, I think we're just about at time. Robert, final thought.

SPEAKER_01 22:00

for Jay thanks for your insights we've enjoyed working with you these many years and appreciate your being on with us once again at the pinnacle of my career right here with you guys thank you for giving me that opportunity thanks so much take care all right