Is the Fed Really Profiting from Student Loan Debt?

Education, Money, News, Politics

Student loans are intended to help young adults pay for their education. With the cost of education increasing at a faster pace than the average cost of living (4-6% versus 2%), most young adults need financial assistance to get through school. To aid them, the federal government offers several different kinds of loans. But should the feds be making money off them while students are struggling to repay their debt in this tough economy?

Different Accounting Methods, Different Profits

The federal government made $41.3 billion during the 2013 fiscal year from student loans. To put that in perspective, Exxon Mobil made $44.9 billion in profit and Apple, $41.7 billion. Last July, Education Secretary Arne Duncan said it is “neither accurate nor fair” to call it “making a profit” – but it depends on which kind of accounting method is used.

The Congressional Budget Office uses an accounting method that does not adequately account for the fact that the loans will be repaid over decades, or that there is higher risk in lending the money in the first place. That risk is loan default, now at 1 in 10 within the first two years, or 4-5% overall.

This accounting method, as outlined in the Federal Credit Reform Act of 1990, requires that the lifetime costs (to the government) of the loan be recorded the first year it is made. From that, the expected principal payments, interest payments, and fees are deducted. To get this figure, U.S. Treasuries of the same length of loan (e.g., 20 years) are used as the basis. U.S. Treasuries are considered some of the safest securities in the world, meaning that the comparison to student loan is not appropriate. Using them makes profits from student loans either appear higher. The complex nature of determining profits from these loans means that it changes year to year.

Student Loan Debt Income Expected Through 2024

Whether you consider them profits or not, the income from student loans will continue until at least 2024, according to a Congressional Budget Office study.

Last summer, Congress voted to base student loan interest rates with yields on the 10-year Treasury note, plus a little bit, meaning that the interest rates on student loans are higher than the interest rates the government pays on borrowing money. Current federal loans carry interest rates between 3.86%-6.41%. U.S. Student loan debt is approximately $1.2 trillion, and the average student loan debt owed by students of the class of 2012 is $29,400.

Senator Warren, President Obama Addressing the Problem

Massachusetts Senator Elizabeth Warren has been an outspoken critic of the current state of student loans. Warren cosponsored the “Student Loan Borrower Bill of Rights” (S.1803), introduced last December, along with Senator Richard Durbin (D – IL) and others. The bill aims to help those with student loans understand their repayment options. A similar bill, “Student Loan Borrowers’ Bill of Rights” (H.R.3892), sponsored by Representative Frederica S. Wilson (D-FL), was introduced on January 15th.

President Barack Obama proposed a system of rating colleges in order to hold them accountable for performance. Colleges will be rated on several factors, including amount of tuition, proportion of low-income students, and on-time graduation rates. Obama hopes that the Congress will agree to give more federal student aid for colleges with higher rankings: colleges that charge less and provide a high-quality education. The Obama administration will begin collecting this information by the 2015 school year.