Saturday, May 11, 2019

Education Secretary Betsy Devos Hires Private Accounting Firm to Audit the Student Loan program: Asking For Bad News

Secretary of Education Betsy Devos hired McKinsey & Company, a global consulting firm, to audit the federal student loan program. Why did she do that?

After all, the Congressional Budget Office, the Government Accountability Office or the Inspector General could have done the job. Why hire a private firm?

I'm thinking Secretary DeVos and the Trump administration realize the federal student-loan program is under water. They know the news is bad, but they want to know just how bad it is. After all, Secretary DeVos compared the program to a looming thunderstorm in a speech she made last November.

It took 42 years, DeVos pointed out, for the federal student-loan portfolio to reach half a trillion dollars (1965 until 2007). It took only 6 years--2007 to 2013--for the portfolio to reach $1 trillion. And in 2018--just five years later--the federal government held $1.5 trillion in outstanding student loans. In fact, uncollateralized student loans now make up 30 percent of all federal assets.

This wouldn't be a problem if student borrowers were paying off their loans. But they're not. As DeVos candidly admitted last November, "only 24 percent of FSA borrowers—one in four—are currently paying down both principal and interest." One in five borrowers are in delinquency or default, and 43 percent of all loans are "in distress" (whatever that means).

Although DeVos did not say so explicitly, she basically acknowledged that we've arrived where we are because the government is cooking the books. Student loans now constitute one third of the federal balance sheet. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk" DeVos said. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

We can hope that McKinsey and Company will give us an accurate accounting. But we already know the news will be catastrophic.  More than 7.4 million people are in income-based repayment plans (IBRPs) that stretch out for 20 and even 25 years. IBRP participants make loan payments based on their income, not the amount they borrowed. Virtually no one in these plans will ever pay off their loans. 

Millions more have their loans in deferment or are prolonging their education to postpone the day they will be obligated to start making loan payments. Thus--as DeVos disclosed--only a quarter of student-loan borrowers are paying back both principal and interest on their loans.

Over the past 15 years or so, presidential administrations have juggled the numbers to postpone the day of reckoning. "After us, the deluge," has been the watchword.  Meanwhile, university presidents are saying nothing about this looming thunderstorm. They hope the deluge won't come until they are drawing their pensions.

The McKinsey report, when it comes, will be a shock to the public consciousness. And there is only one solution. We must admit that the federal student-loan program is totally out of control and allow its victims to discharge their loans in bankruptcy.

Before the deluge: Photo Credit Yale Center for British Art


Michelle Hackman, Josh Mitchell, & Lalita Clozel. Trump Administration Hires McKinsey to Evaluate Student-Loan Portfolio. Wall Street Journal, May 1, 2019.


  1. I won’t hold my breath. McKinsey signed off on Enron’s financials until Enron imploded in 2001. The associates and partners of the Big 4 (used to be Big 5 until Arthur Andersen went the way of the Dodo) will sign off rolls of toilet paper as investment grade bonds for the right fee. The GAO could do better work for less money. LOL McKinsey. Please keep up the good work of this site; I do not want my snark to belittle your efforts to expose the debt treadmill that entraps so many students. I firmly believe in the benefits of a classic liberal arts education but am astonished in the metastatic explosion of costs for a college degree. Between scholarships & crazy jobs (bartending, construction labor, bouncer, insurance clerk, pigeon poop scrubber, etc.) I was graduated with a BS nearly debt free. Now the housing costs at my state’s flagship schools dwarf my tuition at a 4 year private college in the 1980s. WTF?

  2. The whole mistake is for the government to treat debt as an asset in the first place.

    If the government is holding debt on its citizens, then those citizens are worse off.

    Forgiving debt will in the long run produce more tax revenue than perpetuating the debt.

    The Department of Education sees itself as the guardian of the federal budget. This attitude preceeds Betsy DeVos too. This must change.

    Government funding of education was almost entirely in grants up through the 1970's. Moving to loans was in part a way of keeping the spending off the general budget. Like most such efforts, it is very bad long term.

  3. Hi, Bob. Thanks for your comment. I agree. The student-loan debt is not an asset of the federal government. In fact about half of it is debt that will never be paid back. Secretary of Education DeVos basically admitted that fact in her November 22 speech. I think she realizes the federal student loan program is a catastrophe. Thanks for reading and thanks for your comments.

  4. Is this a blog series? If not, it should be. I would love to read the next installment on this subject.
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  5. Secretary DeVos's decision to hire McKinsey & Company to audit the federal student loan program raises important questions about the severity of the situation. The move was likely prompted by the need for unbiased analysis from a private firm instead of relying solely on governmental bodies like the Congressional Budget Office or the Inspector General. This choice demonstrates the recognition by DeVos and the Trump administration that the program's scale of outstanding student loans, coupled with low repayment rates, has reached alarming proportions. Exploring engineering ethics case studies may shed light on the complex challenges in managing this substantial financial risk.

  6. I agree and I wish the audit report would get more public notice.

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  8. This move by Education Secretary Betsy DeVos to hire a private accounting firm to audit the student loan program is definitely an interesting one. On the surface, it may seem like a positive step toward transparency and accountability. However, the choice of words in the title, "Asking For Bad News," raises some concerns.
    While auditing the program is crucial to identify any mismanagement or inefficiencies, the tone of the statement makes it appear as though DeVos is merely expecting negative outcomes. Is this an admission that the student loan program is plagued with problems?
    It is essential for this audit to be conducted objectively and impartially, with a focus on finding solutions and addressing any issues that arise. The student loan crisis is a significant concern for many, and there is a need for effective policies that prioritize students' best interests.
    Let's hope that this audit brings to light the changes necessary to improve the system instead of just highlighting the negatives. We should strive for a fair and affordable higher education system that supports our students, rather than burdening them with overwhelming debt.
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