How Congress Cut Student Loan Losses by Hundreds of Billions

Student loans are often described as a burden on taxpayers or as a profit center for the federal government. Many Americans believe that student loans can be profitable because the government collects interest on student loans. The truth is far from that.

For years, official projections suggested that federal student loans would deliver savings. That assumption collapsed as repayment plans became more generous, payment holidays during the pandemic continued and forgiveness programs expanded. By 2024, new federal loans are expected to lose 28 cents on every dollar lent over their term.

Now, new estimates from the Congressional Budget Office (CBO) suggest that 2026 could be the “best year” in the history of the Direct Loan program, even though the government will still lose money overall.

Under recently passed reforms in the One Big Beautiful Bill Act (OBBBA), the expected subsidy rate (the government’s expected loss per dollar lent) will drop to 4% for loans issued in 2026. That means taxpayers are expected to lose 4 cents for every dollar disbursed, measured on a current value basis.

While not a gain, it represents a shift from recent years and one of the lowest expected costs since the inception of the Direct Loan program.

The federal student loan program has never been profitable

The federal government has issued roughly $1.6 trillion in loans, at an expected lifetime cost of more than $330 billion.

It was initially expected that the program would make some profit… but those profits never materialized.

By 2024, the same loans were expected to lose $205 billion – a turnaround of $340 billion.

The main driver was the expansion of income-driven repayment (IDR) programs, culminating in the Biden administration’s SAVE plan. SAVE limited payments to just 5% of income above a protected threshold and eliminated unpaid interest accrual for many borrowers. Payments could be $0 for lower-income households.

The COVID-era payment pause eliminated years of mandatory payments. That further increased long-term costs.

In 2024, the subsidy percentage on new loans was 28%. For some graduate loans enrolled in the IDR, subsidy rates exceeded 30%.

What the ‘subsidy percentage’ really means

The 4% figure is calculated based on accounting rules established in the Federal Credit Reform Act (FCRA) of 1990. That method discounts future loan payments based on Treasury interest rates and estimates the government’s budget costs.

Under this measure, the loans will cost taxpayers about 4 cents per dollar borrowed in 2026, far below the projected loss of 18 cents for 2025.

But budget analysts often look to a second metric: fair-value accounting.

Fair value takes into account market risk: the possibility that borrowers will not repay as expected in weak economic conditions. Under this approach, student loans issued in 2026 are expected to provide a subsidy of 18 cents per dollar borrowed.

Some experts argue that the difference reflects perspective: FCRA measures the budgetary impact on the federal government, while fair value more closely approximates the economic benefit to borrowers compared to private student loans.

Why 2026 will look different

The shift begins with OBBBA’s review of repayment rules and graduate loans.

The Reimbursement Assistance Plan replaces SAVE and other IDR plans

For new borrowers, OBBBA is replacing existing income-driven repayment plans with a new Repayment Assistance Plan (RAP) for new borrowers.

Under previous IDR structures, borrowers paid 5% to 15% of income above a poverty-based threshold, with forgiveness after 20-25 years. SAVE also waived unpaid interest every month, which prevented balances from growing.

RAP changes several key elements:

• A minimum monthly payment of $10 replaces $0 payments.
• Payments are calculated up to a maximum of 10% of adjusted gross income.
• Forgiveness occurs after 30 years instead of 20 or 25 years.
• Borrowers receive a monthly payment discount of $50 per child.
• Interest subsidies will continue and a new principal reduction subsidy will be introduced.

The new formula requires higher payments from higher earners, especially households with incomes above $100,000. Extending forgiveness from 20-25 to 30 years also increases repayment totals.

The result is a sharp decline in expected subsidy rates. For unsubsidized Stafford loans, the subsidy rate under previous plans was almost 37%. According to RAP, CBO estimates this to be less than 10%.

Borrowing from graduates will be capped

PLUS graduate loans (long criticized for allowing unlimited borrowing) came with particularly high expected losses. In 2025, loans expected to be included in the IDR were expected to lose 33 cents on the dollar. Under RAP this drops to 27%.

OBBBA is phasing out Graduate PLUS and replacing it with new, limited loans for graduates. It remains unclear how subsidy rates will evolve once the new caps are fully in place, but limiting borrowing reduces taxpayer exposure to large balances that are unlikely to be fully repaid.

What this means for student loan borrowers

In short, these updated numbers mean the United States government expects more borrowers to repay their student loans this year.

Lower subsidy rates do not mean that student loans become less accessible. They do mean that repayment expectations are changing.

And the government still doesn’t make a profit.

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