Student Loan Borrowers Mean Big Money for the Government

Student loans are a profitable business for the Department of Education.

According to a new Congressional Budget Office (CBO) report, student borrowers and their families will generate $127 billion for the department over the next 11 years.

Where does the money come from? Interest on federal student loans, which is set to rise over the coming year.

Here’s a bit of background:

Last summer, the government passed a student loan law that tied interest rates to interest on 10-year Treasury notes, essentially what it costs the government to borrow money. Congress used to be in charge of setting interest rates, but last year’s law changed that.

As the economy improves, rates on Treasury notes tend to go up, meaning it costs the government more to borrow money. When it costs the government more, it also costs students more in the form of higher interest rates.

So shouldn’t that just even things out if it’s costing the government more to borrow money? How is the Education Department making more, too?

The short answer is this:

Essentially, the Treasury borrows money at a low rate and then lends the money at a higher rate, pocketing the $127 billion in profit, or what the Education Department prefers to call “net negative subsidies.”

That $127 billion figure might be a little high, though. That’s because the Treasury does not factor in market risk, or the fact that some people might default and never repay their loans, the way a private company would. But that’s not reflected in the CBO’s estimate, which is based, by law, on a set federal measure. If the government used a measure more in line with the way the private sector operates, they might bargain on losing a portion of the money they lend, and their profit forecast would likely go down.

Regardless, the Education Department is still bringing in more money than it sends out on student loans. And the department has strong tools for recovering loans in default. Unlike a private lender, the government can go after people’s Social Security checks and other forms of federal payment.

The forecast from the CBO is likely to generate calls for student loan policy reforms. Lawmakers like Sen. Elizabeth Warren (D-Mass.) have been vocally critical of the burden student loans can place on students.

Warren has backed a plan that would let students borrow from the government at the same interest rate – less than one percent – as big banks.

But the Education Department has argued that it needs room to make up for people who default and don’t repay their loans, and for people paying less because of income-based repayment plans. Some grant programs, like the Pell Grant, will also soon need more money to maintain their current levels of funding.

Dorie Nolt, a spokeswoman for the department, wrote in an email that, ““The Obama Administration has fought twice to lower interest rates for students – including insisting that the most recent interest rate deal did not raise rates in order to pay down the deficit. Federal student loans remain a good deal for both students and taxpayers and enable millions of Americans to get a college education.”

These CBO estimates are just that – estimates. The real figures will likely be different depending on a lot of factors, including how the economy performs. But that $127 billion figure is eye-popping, as is the fact that student debt has now ballooned beyond $1 trillion. Student debt can impact a person’s ability to buy a house and delay major life events, like marriage and babies.

Politicians and think tanks have begun to try to address the nation’s student debt. Sen. Marco Rubio (R-Florida), a potential 2016 presidential contender, has proposed allowing private investment companies to pay for a student’s education with the understanding that a percentage of his future earnings will go back to the company. Oregon has considered making the state’s public college free.

The newly formed “Higher Ed, Not Debt” Coalition, a group of organizations aimed at reducing student debt, would like to see Congress lower interest rates on student loans, and more refinancing options and loan forgiveness for students.

“Basically, the government is making massive profits off the backs of students while giving these huge tax breaks to corporations,” said Sarah Lewis, the AFL-CIO’s senior lead researcher for policy and a member of the coalition. “It’s really, really frustrating.”

Emily DeRuy is a Washington, D.C.-based associate editor, covering education, reproductive rights, and inequality. A San Francisco native, she enjoys Giants baseball and misses Philz terribly.