Michael Grunwald is a senior staff writer for Politico Magazine.

In obscure data tables buried deep in its 2016 budget proposal, the Obama administration revealed this week that its student loan program had a $21.8 billion shortfall last year, apparently the largest ever recorded for any government credit program.

The main cause of the shortfall was President Barack Obama’s recent efforts to provide relief for borrowers drowning in student debt, reforms that have already begun to reduce loan payments to the government. For more than two decades, budget analysts have recalculated the projected costs of about 120 credit programs every year, but they have never lowered their expectations of repayments this dramatically. The $21.8 billion revision—larger than the annual budget for NASA, or the Interior Department and EPA combined—will be tacked onto the federal deficit.


“Wow,” marveled Steve Ellis, vice president of Taxpayers for Common Sense. “Whether or not it’s good policy to help borrowers with their payments, it’s obviously costly for taxpayers.”

The 40 million Americans with student loans are now saddled with more than $1.2 trillion in outstanding debt. And with higher education costs rising much faster than inflation, the already massive program has been growing at a spectacular clip; direct government loans alone increased 44 percent over the last two years despite an aura of austerity in Washington. The Obama administration has tried to ease the burden for some borrowers by reducing their payments to 10 percent of their income and forgiving their loans after 20 years; this year, the Education Department plans to make all borrowers eligible for that “pay-as-you-earn” relief.

Student loan defaults increased somewhat last year, but the department says the primary drivers of the unprecedented “re-estimate”—budget-wonk jargon for the update of expected loan costs—were Obama’s policy changes, the recent ones as well as the upcoming ones. And because of a quirk in the budget process for credit programs, the department can add the $21.8 billion to the deficit automatically, without seeking appropriations or even approval from Congress.

That’s a big quasi-bailout, increasing the deficit nearly 5 percent. The White House budget office was unaware of any larger re-estimates since the current scoring rules for credit programs went into effect in 1992. As a January Politico Magazine feature on the government’s unusual credit portfolio reported, the Federal Housing Administration has stuck more than $75 billion worth of similar re-estimates onto Uncle Sam’s tab over the last two decades, most of them after the recent housing bust led to a cascade of FHA-backed mortgage defaults. But it’s never had a one-year shortfall quite as drastic as this.

It’s not yet clear whether this will be a hefty one-time revision, or a harbinger of oceans of red ink as millions more borrowers get relief on their payments to the government. Several reports by Barclays Capital have warned that Obama’s generosity to borrowers could leave the student loan program as much as $250 billion in the hole over the next decade. And behind closed doors, officials in the White House budget office and the Treasury Department have criticized the Education Department’s loan models as overly optimistic, with some officials pushing internally for third-party audits.

But administration officials said there’s no reason to think this year’s shortfall will recur. They believe that their budgets going forward will accurately reflect their new efforts to help borrowers limit their payments, that pay-as-you-earn will be “baked into the cake.” Historically, re-estimates for the better and for the worse have tended to cancel each other out across the government. In fact, this year, the government’s credit portfolio increased to $3.3 trillion, larger than any U.S. bank’s, but the re-estimates for all the programs besides student loans netted out to less than $1 billion.

The administration argues that even the $21.8 billion student loan shortfall is a relative pittance for the Education Department’s $740 billion book of direct loans, the second-largest government credit portfolio after FHA mortgage guarantees.

“Any re-estimate should be considered in this context,” says White House Office of Management and Budget spokeswoman Emily Cain.

An Education Department official pointed out that while the shortfall is way bigger than previous shortfalls in dollar terms, it’s actually not that much bigger as a percentage of the rapidly expanding portfolio. And he said the cause of the shortfall—additional relief to overburdened borrowers who were willing to take on debt to get a better education—reflected a laudable public policy goal.

“We see more kids taking advantage of income-based repayment, and that’s a good thing,” one Education official said.

If nothing else, the record adjustment illustrates how small changes in massive credit programs can have major budget implications. One reason student loans have gotten so big—even though many experts consider them less effective than Pell grants at improving access to education—is the unorthodox budget rules for credit programs, which tend to make loans look cheaper than direct spending. The student loan program is actually budgeted to produce $65 billion in savings for taxpayers over the next decade, although one third of those savings just vanished with the revisions.

It may seem odd that the government would expect subsidized loans to students regardless of their credit histories to turn a profit. In fact, the program is now running a 17 percent default rate, which no private lender would tolerate. But the U.S. government is a very patient and powerful repo man; it can garnish wages, tax refunds and eventually even Social Security checks. And since its borrowing costs are extremely low, it considers the time lags before it can recover defaulted loans much less costly than a private lender would, which makes student loans look especially lucrative.

“We continue to operate under a budgetary illusion that government credit programs are moneymakers,” said Doug Criscitello, the former chief financial officer for Obama’s Department of Housing and Urban Development.

Clearly, Obama’s push to reduce payments for borrowers and even forgive their loans is already reducing the flow of cash to the government. That’s true even though the initial demand for pay-as-you-earn has been surprisingly tepid; the Education Department has vowed to improve its outreach to make sure its borrowers know they will be able to keep more of their money in the future. This is why some deficit hawks worry that additional shortfalls may lie ahead.

Those fiscal fears may also explain why the Education Department, while forging ahead with its broad efforts to provide some debt relief to cash-strapped low-income and moderate-income borrowers, is quietly tightening some of its rules to limit the relief for the better-off. For example, married Americans who file their taxes separately currently qualify for income-based repayment based on their individual incomes; now they will have to adjust their payments to 10 percent of their combined incomes. The department also plans to eliminate a cap that currently allows some higher-income borrowers to pay less than 10 percent of their income in loan payments.

“We’re always conscious of the costs,” a department official said. “We’re talking about large amounts of money.”