It looks, to some politicians and pundits, that the Federal government will be turning a profit off of the very people who need financial relief. Almost $51 Billion by the end of 2013 and over $110 Billion in profit by way of the Student Loan Programs will drop into the government’s coffers by the end of President Obama’s time in office. That $51 Billion, by the way, is more profit than Apple or Exxon earned in 2012.
As easy as it may be to get outraged over what is perceived as an obscene profit, keep in mind that the federal student loan program is allowed to make money on these loans for several reasons. This is how more money is generated in order to give out more loans to future students who may not be able to attend college. The profit made by these loans also keeps the Treasury from needing to go to Congress to ask for more funding. Finally, the profit gained helps to alleviate those loans defaulted on by graduates and former students who cannot afford to make payments.
The Congressional Budget Office determined the 2013 profit amounts from two sources: the current fiscal year loans to recent graduates who are just beginning to repay them ($35 Billion) and the student loans from prior years that have been more profitable than earlier forecasts predicted (over $15 Billion). In total, this was 40% higher than what was expected for 2013.
The profit from these loans is generated due to the differences in interest rates. At this time, federal student loans are keyed in and eventually repaid at a rate that is roughly three times what the Federal Reserve charges. The Department of the Treasury keeps the interest payment amount over what the Federal Reserve gets every month. This makes the federal student loan program more profitable than Exxon or Apple.
This is not going to be a constant influx of cash though. Since the economy is beginning to show some steady improvement, the Federal Reserve will have to begin raising their interest rates. Federal student loan interest rates are not expected to rise at the same ratio to the Federal Reserve though. If the economic recovery steadily continues, then profits are projected to shrink through the year 2023. At that point, barring changes in law or another recession, federal student loan profits should top out at around $6 Billion.
Right now, interest rates available through public lenders are much lower than when Congress set the current rate of 3.4% on federal student loans. The Federal Reserve rate charged to lending institutions is currently set at 0.75 %. As mentioned above, the difference in payments is collected by the Treasury Department. Since total student loan debt just recently crossed the $1 Trillion amount and so many graduates are still struggling to repay their loans, a number of lawmakers want to change it. (5) In particular, Senators Elizabeth Warren, D-MA and Sherrod Brown, D-OH are trying to get the student loan rate lowered to reflect the rate currently paid by the lenders and what is available through public lenders.
Irregardless of how much profit the Federal Student Loan Programs are making, students, graduates and parents still need to make payments and keep these loans in good standing. The Department of Education has a number of plans to help. The Income Based Repayment Plan, the Income Contingent Repayment Plan and Public Service Loan Forgiveness Program, among others, are in place to help a borrower’s financial situation and help them find the best way to discharge those loans with as little difficulty as possible.
Despite appearances, the projected student loan profits are not outrageous nor are they draining the life out of students trying to survive and build a life after college. The over-projected amounts are an indication that the economy is improving which will eventually drive up the interest rates set forth by the Federal Reserve. This will reduce the profit generated, but that also means the amount of money available for student loans in the future is reduced as well. If borrowers do find themselves in financial difficulty, there are repayment plans and forgiveness programs ready to provide relief.
Student Debt Relief can keep you up to date on the latest information and assist you with researching which plan or program is right for you if it becomes necessary.