Trump Administration to Review Fed’s $1.45 Trillion Student Loan Portfolio

The Associated Press
AP Photo/Mel Evans

The Trump administration is addressing the U.S. government’s $1.45 trillion student loan portfolio, including hiring consultants to advise on selling all or portions of the portfolio to private investors.

The Wall Street Journal, citing “administration officials familiar with the matter,” said the move comes after a surge of defaults on loans and individuals taking advantage of federal debt-forgiveness plans that have led to reduced federal coffers.

The Journal reported: 

The Education Department has hired the consulting firm McKinsey & Co. to study how much money could be lost if low repayment rates persist, an agency spokeswoman said. Meantime, President Trump’s top economic advisers in the White House are studying ways to improve the program’s finances, senior administration officials said.

One option under early consideration is to sell at least a portion of the portfolio, a plan that has been discussed previously by Republican policymakers but faces many obstacles, including whether the government could find interested investors at the right price.

Under such a plan, the government would maintain its role as the nation’s primary lender to college and graduate students, but the government would raise money up front, instead of waiting years for borrowers to make payments and take the debt off its books. Investors would then assume the long-term risk of the loans.

Sources said this project is in the early stages and an array of options will be explored.

An Education Department spokeswoman told the Journal about the McKinsey study.

“It’s about getting a clear understanding of the state of the portfolio,” Liz Hill, a spokeswoman for Education Secretary Betsy DeVos, said, adding that the review ”is the responsible thing to do since we’re charged with overseeing it.”

Some statistics on student loan debt from the Journal report:

  • Five million borrowers who owe $106 billion are in default, which means payment has not been made in at least 360 days.
  • Some 43 million people have federal student loans.

• The amount Americans owe in federal student loans has nearly tripled since 2007.

The Journal reported:

The Higher Education Act, a longstanding law that authorizes the student-loan program, allows the education secretary, after consulting with the Treasury secretary, to sell student loans if the terms are ’in the best interest of the United States. The law prohibits any sale that would result in a cost to the government. It states that any money made off the sale could then be used to reduce interest rates for borrowers “to encourage on-time repayment.’

The Journal report also revealed that students may not be the only ones who have to reckon with federal student loan debt:

“If the review shows that the student-loan portfolio brings in less money than previously understood, the administration could gain more support for initiatives to pressure schools to rein in tuition increases. For example, the White House has suggested developing a system to put colleges on the hook to help pay off their graduates’ outstanding debt.”

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