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How the U.S. Government Makes $120 Billion From Student Loans Misery

Interest-Rates / Student Finances May 17, 2013 - 04:27 PM GMT

By: Money_Morning

Interest-Rates

David Zeiler writes: Business has been good for the federal government when it comes to student loans.

Over the past five years, student loans have generated profits of $120 billion for the Department of Education.

And the latest projections from the Congressional Budget Office (CBO) put the take from student loans for the 2013 fiscal year at $48.6 billion - helped along by a change in 2010 that eliminated the middleman and made the Education Department the direct lender for all government-backed loans.


It means the government will reap more in profits from student loans this year than any of the nation's largest corporations. Last year, for example, the most profitable company was ExxonMobil (NYSE: XOM), which reported income of $44.9 billion.

The money is rolling in partly because the Education Department has stepped up efforts to collect on delinquent loans, but mostly because the U.S. government can borrow money far more cheaply than the students to whom it is giving the loans.

The government's student loans now carry an interest rate of 3.4%, which has proved plenty lucrative.

But unless Congress acts soon, the interest rate on government student loans will double to 6.8% as of July 1. (The temporary 3.4% rate was supposed to expire last July, but last year Congress extended it for one year.)

Meanwhile, 10-year Treasuries go for about 2%, and 30-year Treasuries for about 3%.

That widening gap in rates could drive government profits even higher, but at the risk of appearing to exploit a struggling and vulnerable segment of the population.

"As the pomp of graduation fades, many college graduates become keenly aware of their financial circumstance: in debt," Ernie Almonte, chairman of the National CPA Financial Literacy Commission of the American Institute of CPAs, said in a statement. "They start out with an anchor that slows their progression toward future goals. It's a difficult reality confronting a growing number of people."

Student Loans Hurt the Young - and the U.S. Economy

Outstanding student loans now exceed $1 trillion, which put them ahead of all other forms of household debt except home mortgages.

That's triple what student loan debt was in 2004; and the number of Americans burdened with student debt, nearly 39 million, is 70% higher, according to the Federal Reserve Bank of New York.

And unlike other kinds of debt, bankruptcy does not release the obligation to pay back a student loan.

The stubbornly high unemployment rate has played a role as well. It's hard to pay back student loans when you have little or no income, and the unemployment rate for those 18-24 is an alarming 16.2% - more than double the average for the general population.

And it's starting to bite. A recent Harris Interactive survey of student loan borrowers found that 75% had made personal or financial sacrifices to keep up with their monthly student loan payments.

That, in turn, is starting to harm the U.S. economy. Young people struggling to pay back student loans consume less and postpone buying homes - vital catalysts to the economic recovery.

Congress Can't Be Trusted to Fix Student Loans

Miraculously, most in Washington agree that the interest rate on student loans should be lower, and some would like to see the billions in profits used to help students in danger of default.

But since everyone has a different idea on how to achieve the goal, there's a real possibility that no agreement will be reached and the student loan interest rate will increase to 6.8%.

House Republicans and President Barack Obama both have plans that would use a variable rate based on market rates but each uses a different formula. Both also have caps, but the Republicans would cap rates and the White House would limit payments to 10% of discretionary income.

Congressional Democrats would offer more relief to those who need student loans. One proposal would freeze the interest rate at 3.4% for two more years.

The most radical idea comes from Rep. Elizabeth Warren, D-MA, who has proposed that the government offer student loans at 0.75% - the same rate big banks get from the U.S. Federal Reserve discount window.

But even if lawmakers are somehow able to reach some sort of compromise solution, it's unlikely to change the fact that the government is making tens of billions in profits every year from student loans.

"Higher education loans are meant to subsidize the cost of higher education, not profit from them, especially at a time when students are facing record debt," Ethan Senack, the higher education advocate at the United States Public Interest Research Group, told The New York Times. "The revenue from student loans should be used to keep education affordable, and should never be used to pay down the deficit or for other federal programs."

For more on just how frightening the debt picture is that stems from student loans, check out The Scary Reality of the Student Loan Bubble in 5 Charts.

Source :http://moneymorning.com/2013/05/16/how-student-loans-became-a-120-billion-government-bonanza/

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