Political Calculations: The Contribution of Student Loans to the U.S. National Debt

January 28, 2011

The Contribution of Student Loans to the U.S. National Debt

W.C. Varones solved a math problem with the U.S. national debt that had been troubling the econoblogosphere since September 2010. At the end of the U.S. federal government's fiscal year in 2008, the total public debt outstanding for the United States was $10,024,724,896,912 (or more simply, over 10 trillion dollars). In 2009 and 2010, the U.S. government ran annual budget deficits of $1.416 trillion and $1.294 trillion respectively. During that time, the amount of money the government "borrowed" from itself (mainly from Social Security) rose by $141.9 billion (in 2009) and $180.8 billion (in 2010).

U.S. Total Public Debt Outstanding, Changes from FY2008 to FY2010

If you add those numbers together then, the amount of the full U.S. public debt outstanding at the end of the government's 2010 fiscal year should total $13,057,320,272,842. Instead, the total public debt outstanding for the United States was $13,561,623,030,892, over $504 billion more than what the combination of the federal government's annual budget deficits and "intragovernmental" borrowing should put it.

That more than $504 billion would then account for 14.3% of the total increase in the United States' national debt from 2008 through 2010, or roughly 1 out of each 7 dollars that the government borrowed during those two years.

Finally getting to the bottom of the matter with Econbrowser's Menzie Chinn's assistance, W.C. discovered that much of the 504 billion dollar disparity could be accounted for by the government's direct loan financing activities, where the U.S. Treasury directs money it borrows for the purpose of loaning it out to individuals and organizations in support of government-backed or subsidized loan programs operated by other government agencies.

The biggest portion of those programs are run through the Department of Education, in the form of the government's student loan programs. We thought we'd go back through the U.S. Treasury's historic data to see just how much the Federal Direct Student Loan program has grown since 1997.

The results are presented in the chart below, which shows the net outflows, which increase the national debt, or net inflows, which reduce the national debt, resulting from the federal government direct student loan program:

Net Borrowing to Support Federal Direct Student Loan Program, FY1997 - FY2010

What we find is that since 2008, the net outflow of money the federal government borrowed to provide direct student loans has exploded, rising by $89.7 billion dollars, or 17.8% of the $504 billion discrepancy. In terms of the total increase in the national debt from FY2008 to FY2010, the explosion in student loans would account for 2.5% of the entire increase above and beyond the deficits the government ran in those years, both with the public and with itself.

We should also note that this explosion in the Federal Direct Student Loan program is not a recession-driven phenomenon. There is no similar spike, or for that matter, there's not any spike, corresponding to the recession year of 2001.

At first glance, it might seem as if the U.S. government is going to quite some extremes to keep a bubble in higher education going, but we don't think that's really what's behind the federal government's motivation for its actions. As for what we suspect might be the real motive for why the federal government has suddenly become so keen to loan money directly to U.S. students in recent years, well, we'll revisit the topic at greater length on a future date.

Update 9 May 2011: We've since revisited the topic in The Transformation of Student Loans Into Taxes!