Key Points
- The federal government is projected to lose just 4 cents for every $1 it lends to students in 2026, down from 18 cents in 2025.
- The decline is largely driven by the replacement of prior income-driven repayment plans (including the Biden-era SAVE plan) with the new Repayment Assistance Plan under the One Big Beautiful Bill Act.
- Even with lower projected losses, federal student loans still carry an estimated 18-cent subsidy per dollar when measured using fair-value accounting, which incorporates market risk.
Student loans are often described as either a burden on taxpayers or a profit center for the federal government. Many Americans believe, because the government collects interest on student loans, that student loans may be profitable. The truth is far from that.
For years, official projections suggested that federal student lending would generate savings. That assumption collapsed as repayment plans became more generous, payment pauses stretched on during the pandemic, and forgiveness programs expanded. By 2024, new federal loans were projected to lose 28 cents on every dollar lent over their lifetime.
Now, new estimates from the Congressional Budget Office (CBO) suggest that 2026 could mark the "best year" in the history of the Direct Loan program, even though the government will still lose money overall.
Under recently enacted reforms in the One Big Beautiful Bill Act (OBBBA), the projected subsidy rate (the government’s expected loss per dollar lent ) will fall to 4% for loans issued in 2026. That means taxpayers are expected to lose 4 cents for every $1 disbursed, measured on a present-value basis.
While it's not a profit, it represents a shift from recent years and one of the lowest projected costs since the Direct Loan program began.
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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 exceeding $330 billion.
Early on, the program was expected to show some gains... but those gains never materialized.
By 2024, the same loans were expected to lose $205 billion - a swing of $340 billion.
The primary driver was the expansion of income-driven repayment (IDR) programs, culminating in the Biden administration’s SAVE plan. SAVE capped payments at as little as 5% of income above a protected threshold and eliminated unpaid interest growth for many borrowers. Payments could be $0 for lower-income households.
The COVID-era payment pause eliminated years of required payments. That further increased long-term costs.
By 2024, the subsidy rate on new loans reached 28%. Some graduate loans enrolled in IDR carried subsidy rates exceeding 30%.
What The "Subsidy Rate" Really Means
The 4% figure is calculated using accounting rules established under the Federal Credit Reform Act (FCRA) of 1990. That method discounts future loan payments using Treasury rates and estimates the government’s fiscal cost.
Under this measure, 2026 loans will cost taxpayers about 4 cents per dollar lent, far below the 18-cent loss projected for 2025.
But budget analysts often look at a second metric: fair-value accounting.
Fair-value accounting incorporates market risk - the possibility that borrowers will not repay as expected in weak economic conditions. Under this approach, student loans issued in 2026 are projected to carry an 18-cent subsidy per dollar lent.
Some experts argue the difference reflects perspective: FCRA measures budgetary impact on the federal government, while fair-value more closely approximates the economic benefit to borrowers compared to private student loans.
Why 2026 Looks Different
The shift begins with OBBBA’s overhaul of repayment rules and graduate borrowing.
The Repayment Assistance Plan Replaces SAVE and Other IDR Plans
For new borrowers, OBBBA replaces 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 forgave unpaid interest monthly, preventing balances from growing.
RAP changes several key elements:
- A $10 minimum monthly payment replaces $0 payments.
- Payments are calculated as up to 10% of adjusted gross income.
- Forgiveness occurs after 30 years instead of 20 or 25 years.
- Borrowers receive a $50 monthly payment reduction per child.
- Interest subsidies remain, and new principal reduction subsidy introduced.
The new formula requires higher payments from higher earners, particularly households with incomes above $100,000. Extending forgiveness from 20-25 to 30 years also increases repayment totals.
The result is a sharp drop in projected subsidy rates. For undergraduate Unsubsidized Stafford loans, the subsidy rate under prior plans was nearly 37%. Under RAP, CBO estimates it at under 10%.
Graduate Borrowing Is Being Capped
Graduate PLUS loans (long criticized for allowing unlimited borrowing) carried particularly high projected losses. In 2025, loans expected to enroll in IDR were projected to lose 33 cents per dollar. Under RAP, that falls to 27%.
OBBBA phases out Graduate PLUS and replaces it with new capped graduate lending. 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 means the United States government expects more borrowers to be repaying their student loans this year.
Lower subsidy rates do not mean student loans are becoming less accessible. They do mean repayment expectations are changing.
And the government is still not turning a profit.
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Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.