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.