I hope you enjoyed your turkey last week. This may cause some indigestion. For fiscal year 2013, the Federal Student Loan Programs turned a profit of $41.3 Billion. The only companies worldwide to beat this amount were Apple with $41.7 Billion and Exxon Mobil with $44.9 Billion. Not bad for an agency that claims to be in the business of helping students and keeping tuition costs at a reasonable level. In the meantime, student loan default and student indebtedness is at an all time high.
Department of Education Understating Their Profits
Of course, the Department of Education denies this $41.3 Billion is profit. In fact, they issued a statement in November stating that they have “taken steps to improve college affordability, and thanks to collective efforts, students and families are paying lower rates on their loans today than they would have otherwise”. Any suggestion otherwise is met with derision and apparently, hurt feelings. When asked about all of the recent bad press for his department and their federal student loan lenders back in July, Education Secretary Arne Duncan claimed that “It’s actually neither accurate nor fair to characterize the student loan program as making a profit”. Since this number is down from $44.9 Billion for fiscal year 2012, perhaps Secretary Duncan feels this has actually been a bad year for himself and his department.
While there are no details from the Department of Education on these collective efforts and what they did for students, the biggest form of help from the Federal government in the last four years came when Congress finally extended the current student loan interest rates this last summer. The legislation kept the interest rate to 3.4% for Stafford and most other federal student loans for this school year and tied further interest rate changes to the stock market. While many detractors claim that this is unfair, it does set the rates against actual economic indicators rather than a politician’s promise.
It’s not a perfect fix obviously and the Congressional Budget Office numbers from this summer show that. Their analysis shows that profits, while steady through 2015, will begin to rise in 2016 and continue to do so through 2023. We’re not certain after that because the Congressional Budget Office’s projections only go out for ten years. The “profit problem” comes about when the student loan programs experience a negative subsidy. This happens when the Department of Education programs take in more money than is released to students in the form of loans or grants. The negative subsidy for the next decade will be 20%; annually.
Supposedly, profit from student loan payment interest is supposed to cover administration costs and provide grant money to those who qualify. This is not the case anymore. If it was, the $41.3 Billion could be converted into checks for the maximum Pell Grant amount of $5,645.00 to over 7 million college students.
Students Carrying the Burden of These Profits
This isn’t really the problem with the federal student loan programs though, it is merely a symptom. Colleges, trade schools and universities have absolutely no incentive because of student and family indifference and a federal student loan program that has only “thrown money” at the situation. Too many students and family members see federal and private loans as “free money” to go to school. The idea that they will have to pay it back disappears quickly into four years of classes, road trips, etc. Because of that, students go to the biggest school their loans will get them into rather than choose the best fit for their needs and goals. to lower costs
The standard reaction from the Federal government has not been to try and work with universities to lower tuition and fees by providing tax breaks or other incentives. Instead, every time the institutions have raised tuition, loan and grant amounts (Pell for example) are raised in order to supposedly help lower and middle income families continue pursuing college. The resulting effect is that we now have tuition costs that have gone through the roof, with both the universities and federal government profits skyrocketing at the expense of the student.
Give me a good bill to vote on and I will
Not every elected official has signed off on this situation without trying to raise an alarm though. Senator Carl Levin (D-MI) was very reluctant to vote for the legislation and when directly asked about whether the Department of Education should turn a profit from student loans, he answered emphatically no. However, there was not another bill that had made it through both the House and Senate which dealt with the underlying issue of increasing tuition, “That wasn’t the alternative that was presented to us”. Not the best news to receive before Christmas, but it’s good to know that there are some elected officials looking out for us.