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How Student Loans Became a $120 Billion Government Bonanza

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.

Join the conversation. Click here to jump to comments…

  1. Samuel Ellsberry | May 17, 2013

    Why not tie the Student Loan (SALLIE MAE) to a ten (10) year T-Bil plus 1.25%. If the T-Bill is trading @ 1.90% and you look at the 200 day moving average on the 26 Month T-Bill, then this rate would be close to the rate on a 30 year mortgage.
    You mean that STUDENT LOANS would be just like a home loan?
    Uh-oh! Maybe, This CAP is asking too much to cap off the $51 Billion that is received annually into the General Treasury fund.

  2. m-girl | May 17, 2013

    the republicans would triple interest rates on students if they could get away with it.

    it is a TRAVESTY that republicans are not doing all they can to make it possible for students today to get a low cost higher education.

    The banks have a virtually near zero interest rate — the students should have EXACTLY the same rate as banks — and that should be a law from here on out that Guaranteed Student Loans can NEVER have a higher interest rate than banks pay.

    Furthermore, the US government needs to invest in its people. While republicans are cutting Pell Grants, it is furthering the class divide and removing the opportunity to advance. Poverty is cyclical and can be overcome through education. Where is that hand up from the republicans? All I see is their bootheel on the necks of anyone trying to get ahead that isn't already rich.

  3. H. Schmidt | May 19, 2013

    The problem will only get bigger until the educational establishment stops ripping off students who take out these loans. The educators will not stop until forced to by govt. or the lack of student mullets.

  4. Richard | May 20, 2013

    One more point of info about the current interest rates of graduate student loans. Beginning in 2006, the Stafford loan became fixed at 6.8% and Grad PLUS loans fixed at 8.5%. I finished grad school in 2010, so I am intimately familiar with what I owe Uncle Sam. The funny thing is that my grad school private loans are currently at 3.75% compared to a weighted average interest rate of my Stafford/Grad Plus loans at close to 8%. Cash cow!

  5. Jimmy Z | May 22, 2013

    When I was in school every year the financial aid limits went up some, and of course the schools raised their tuition by the same amount. I was never able to get any extra from my loans for living expenses; they only covered tuition. My part time income was of course limited by my schools program. Now I have a large student loan debt in addition to credit cards I had to borrow against to get by. And of course, there are no entry level jobs anymore.

  6. Karl | May 25, 2013

    The underlying cause of the problem is the government subsidy of loans in the first place, which initiates and sustains a tuition arms race. Higher education, and I'm not talking only about the diploma mills, jack up tuition because "students", whether "qualified" or not find ways to borrow.

    Same thing happened with the real estate bubble with the NINJA loans.

    The net effect is a bloated bureaucracy of federal government jobs to administer this program, a vicious cycle of expanding debt for students, and a phony, useless, non productive, no value added , make work job creation for "teachers".

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