51 Billion Reasons for Reform

Michael Lux Blog, News, Student Loans 6 Comments

The non-partisan Congressional Budget Office recently released their 2013 Fiscal Year calculations and the numbers are staggering.  The Federal Government will make a profit of $51 billion dollars on student loans for the year 2013 alone.  To put this number in perspective, the most profitable company in the United States, Exxon Mobile, made a measly 44.9 billion dollars.  If you combine the total profits of JPMorgan Chase, Bank of America, Citigroup and Wells Fargo for the last year you get a total of 51.9 billion dollars.

How is the government making all of this money?  It’s because the student loan lending business is booming.  College has never been more expensive, and the risk of default/bankruptcy on student loans is incredibly low. Even for loans that eventually default, the Department of Education estimates that they will get back between 76 to 82 cents on the dollar.  In short, this is an investment with almost no risk, and a fairly high upside.

Most interest rates, such as those on a mortgage, car, or credit card are based in part upon creditworthiness (the higher the probability that the loan will be repaid, the more creditworthy the borrower).  Interest rates on student loans are not based upon likelihood of repayment.  Instead, they are based upon whatever rate Congress decides to set them at.  At present, they are scheduled to jump from 3.4% to 6.8% on July 1, 2013.

Regardless of your politics, it’s apparent that something is clearly wrong with the student loan system in the United States.  Only the most extreme viewpoints would hold that the government should be making a huge profit when it assists the next generation attain their educational goals.  For those of you who think that the getting loans through the federal government is the problem, the fact is that private loans are even worse than the federal loans.

The situation for perspective students and recent grads seemingly gets worse by the day.  For-profit schools continue to appear and make money.  Colleges are charging more than ever.  Even the government is making a fortune on student loans.  It seems everyone is getting rich except those that tried to put themselves through college.

One recent Congressional proposal is called the Student Loan Affordability act, which is a bill to keep student loan interest rates at 3.4% for the next two years.  However, it does not address the record setting profits and is funded through highly contentious tax code changes.  Other proposals seek to tie student loan interest rates to those that banks have when they borrow from the federal government.  Those rates are currently set at .75%.  However, this approach, proposed by Senator Elizabeth Warren of Massachusetts, applies only to certain loans and only for one year.  Finally, more dramatic overhaul has been proposed by Representative Karen Bass in the form of H.R. 1330 – The Student Loan Fairness Act.  This blog has covered the advantages of H.R. 1330 and the arguments against H.R. 1330.

The sad part about the current state of events is that it appears there is no change on the horizon.  Congressional bills seem to either lack substance or have no reach chance at passing.  College costs show no signs of dropping.  Ultimately, the current conditions require any perspective or current student loan borrower to do extensive research before making any student loan decisions.

In the comments, please share what you think should be done to fix the student loan issues in the United States.


  • It seems that the student loan interest rate is arbitrarily set. It should be tied to the 10-year treasury note or some other market based rate (with a cap). I am very lucky that a good portion of my student loans were consolidated before July 2006 when the rates was under 3%.

    • You are very fortunate to be paying under 3% on your loans. That is a fantastic rate!

      I’m in agreement that the interest rate being arbitrarily set is a bad idea, but I have some concerns about it fluctuating with the market. Student Loans represent a big portion of many people’s budget and that number should be very predictable and stable. If the 10-year treasury note rate jumps, it could conceivably surprise a lot of borrowers.

  • I think they should cap the interest rate at 1.5% above (or a rate below 3%) the going prime rate. That way in good economic times, when Prime is a little higher, the fed’s will make more money. Yet, in not so good times, the borrower won’t go broke trying to pay back their education loans. I think this would be a “win-win” solution.

    • I think this sounds like a good idea. It would adjust for whatever the economic conditions may be.

  • James

    There is no question that there is a pressing need for student loan interest rate reform. However, the $51 million in profit that your article mentions is not correct. It is the result of an obscure law that requires that the CBO calculate “profits” in a particular way, which ends up distorting the numbers. The CBO regularly admits the limitations of their methodology and no finance experts would ever consider than to be accurate.

    There are some good articles out there explaining the details (can’t think of them off the top of my head) that are certainly worth reading. It’s always very important to keep in mind that most journalists have little background in even the basics of finance, let alone some of the more complicated stuff. This combined with the need to stir up page views leads to such ridiculous headlines as “Obama Student Loan Policy Reaping $51 Billion Profit” even though it is factually incorrect.

    This site seems genuinely interested in providing good information regarding student loans to help students. I encourage you to dig a little deeper when you see such extreme statements.

    • James,

      Thanks for your comment. If there is information calling into question the accuracy of anything on this site, I appreciate the heads up. I’ve always thought the CBO was considered to be the gold standard for statistics on our country’s budget, but I can see how a poorly worded law written by non-economists could skew the data. I’ll definitely look into this further.

      That all being said, I think the point of this discussion is not about the exact dollar figure of the government’s profit, but instead the fact that they are making a large profit on student lending. I think from a policy standpoint, profiting on young people trying to get an education is wrong.

      Even if you do find the $51 Billion to be a flawed statistic, is there any doubt in your mind that the government is making large sums of money on these loans?