President’s Budget Shows Student Loan Defaults Cost Taxpayers

Countless journalists, advocates, and lobbyists claim that the government profits when students default on their federal loans. But this week’s release of President Obama’s fiscal year 2013 budget brings further evidence that nothing could be further from the truth. The budget includes a new section that explains more fully the estimated recovery rates on defaulted federal student loans. The recovery rate refers to the percentage of defaulted loan volume the government expects to eventually collect.

This newly-released information also contradicts those who argue that the government doesn’t bear any default risk in making student loans. That’s exactly the argument that a number of readers have made criticizing a recent Federal Education Budget Project (Ed Money Watch’s parent initiative) issue brief that concludes that the current fixed 6.8 percent interest rate on federal student loans isn’t a money-maker for the government, due in part to the cost of loan defaults.

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