Estimates of Federal Student Loan Profits Inaccurate

April 17, 2013

Student debt has increased substantially over the last decade and now totals more than $1 trillion. The U.S. government originates a majority of the loans to students and has proposed raising interest rates several times in recent years. Opponents of raising interest rates claim that the government already makes more than $30 billion in profits every year but that claim is probably inaccurate, says Andrew Kelly, a research fellow at the American Enterprise Institute.

  • On July 1, the interest rate for roughly 33 percent of new student loans will double from 3.4 percent to 6.8 percent.
  • The interest rate increase will occur for subsidized Stafford Loans, which are largely granted to low-income borrowers.
  • Congress halted the rate increase one year ago as outraged students and both presidential nominees claimed the increase was unacceptable.

Congress held off on the rate increase, which cost taxpayers about $6 billion but only amounted to an average savings of $9 a month for those paying off the loan. In his new budget, President Obama has suggested that student loan interest rates should be tied to the government's cost of borrowing.

  • Opponents of raising interest rates use projections from the Congressional Budget Office (CBO) that claim that the federal government yields 36 cents of profit for every dollar lent.
  • However, the CBO admits that the accounting method it uses is laid out by the Federal Credit Reform Act of 1990, which produces overestimated loan surpluses by not accounting for the cost of market risk or the risk of default.
  • The CBO has experimented with a different method of accounting, called "fair-value accounting," which accounts for the cost of market risk.

After accounting for market risk, the education loan programs go from a surplus of $36.3 billion under the government's traditional accounting methods to a surplus of just $5.5 billion under fair-value in fiscal year 2013.

  • Most finance experts, regardless of party affiliation, believe that fair-value estimates are more accurate.
  • In order to effectively judge whether or not interest rates should be raised, details about how much the loan programs cost must first be clear.

Source: Andrew Kelly, "How Much Money Does the Government Really Make From Student Loans?" The Atlantic, April 11, 2013.

 

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