OPINION:
It is no secret that the federal budget is taking a major hit. The Department of Government Efficiency is slashing agencies and programs rapidly to reduce wasteful and unnecessary spending, and student loan servicing could be next on the chopping block. Gone are the days of President Biden buying the young vote by forgiving student loans and pausing all payments. The adults are in charge again; unfortunately, we must pay our bills.
Budget cuts to programs such as loan servicers may seem sensible at first glance, but if we aren’t careful, we may leave far more money on the table than the programs cost. Shrinking the budget is critical, but as the saying goes, sometimes you have to spend money to make money, and this is certainly one of those times.
The issue is not just about saving dollars, though we know that is DOGE’s priority. We need to focus on making sure the system works in the near and long term. The federal student loan system is huge and needs resources to function properly. Without proper funding and servicing, we’re looking at a disaster with widespread economic impacts.
The problem? Student loan servicing is complicated. Mr. Biden and the left wing made it political by telling students they didn’t need to pay. However, striking these programs is a decision that could harm taxpayers and student loan borrowers much more than one may realize. It could cost the federal government $1.6 trillion in revenue. As much as we like to pretend we can cut costs and move on, it is not so simple. Loan servicing is an essential part of our system, directly impacting returns to the Treasury. It ensures that borrowers make their payments and that the government can recoup its investment.
Many have been waiting for the government to step in and forgive student loans for years. That expectation has shaped much of the conversation, and many borrowers have become accustomed to not paying off their debts. As a result, the clock is ticking as we march toward a historic default crisis.
After nearly five years of pandemic-related pauses, borrowers are expected to repay. The number of borrowers who are current on their payments has dropped dramatically. Before the pandemic, more than 60% of borrowers were up-to-date. Now? That number has plummeted to 37%.
Alarmingly, borrowers at risk of default are no longer primarily those with credit scores below 600. Today, borrowers with sound finances and strong credit scores are also delinquent on their loans, and many are unaware that payments have resumed. Reestablishing communication will be critical to resolving this problem, but tracking down millions of borrowers requires resources.
Without intervention, the first wave of defaults could begin in six months. Experts predict that more than 3.5 million borrowers could default, an unprecedented wave that would have disastrous consequences, creating a ripple effect throughout the economy.
To be clear, this issue is not entirely new. Loan servicing has been underfunded for years. From the start, the federal government has failed to allocate enough resources to manage student loans properly. The result has been borrowers struggling to navigate a confusing system, often leading to missed payments, defaults and many financial problems. When that happens, taxpayers pick up the bill.
It’s less expensive to invest in loan servicing now than to deal with the consequences later. If we continue to underfund servicing, we will see higher default rates and loan nonpayments, leading to even greater costs. Cutting this funding might look good on a budget sheet today, but it will cost us much more tomorrow.
The good news is that the Trump administration has clarified its priorities, and Congress can do something about this. In the upcoming reconciliation process, lawmakers have a chance to simplify the student loan program and, more importantly, provide adequate and stable funding to loan servicing. They can shift this funding to how it used to be funded. Long-term funding provides much-needed stability for the program and treats it like a real financial system because, frankly, the federal government is a lender, and it’s high time it started acting like one.
Of course, many rightly advocate for reforms that make the student loan program function more like a traditional loan program. However, even those reforms would need the resources to work properly. We can’t just eliminate funding and expect everything to run smoothly.
We cannot afford to gamble with this. If loan servicing isn’t adequately funded now, defaults will skyrocket, taxpayers will lose out and borrowers will suffer. Investing in these servicers means reducing defaults, improving repayment rates and ultimately protecting the federal government’s massive $1.6 trillion asset.
If we want a student loan system that works, we need to invest in getting it right, and soon.
• Sean Spicer is a former political aide who served as the 30th White House press secretary and as White House communications director under President Trump in 2017.
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