We talk here mostly about how student loans impact individuals and how you can best deal with your educational debt. But there’s a flip side to student loans that we don’t often discuss – the profits raked in from the interest paid. Naturally, when you think of private student loans, we anticipate there is a profit motivation because the loans are made by for-profit entities such as banks.
But federal student loans are another matter. We don’t think of the government as a profit-seeking entity, but in the case of educational loans, that’s exactly what’s happening! The 2013 government fiscal year ended September 30th and numbers just released show that the government made $42.5 billion over the last 12 months. Granted this is down from 2012’s $47.9 billion, but it’s still a staggering profit.
This summer, Senator Elizabeth Warren accurately predicted the profits would be close to $50 billion and said, “That’s more than wrong. It’s obscene… Instead of helping our students, the government is making a profit on student loans. We can hear some booing at this point.” We agree.
By way of comparison, Apple’s 2013 profits were $37 billion. The federal government is earning as much off of just this one program as one of America’s most successful corporations. Back in July when there was much discussion about profits when the Q3 student loan numbers were released, Education Secretary Arne Duncan said, “It’s actually neither accurate nor fair to characterize the student loan program as making a profit.”
But if there are no profits, how then is the student loan program contributing money to fund other programs? For starters, a portion of the money is being diverted to fund other unrelated programs such as the Affordable Care Act (aka Obamacare). Roughly $9 billion or close to 25% of student loan profits will fund the already faltering healthcare initiative. Another $10 billion will go to reducing the deficit.
But with student loan defaults on the rise, why can’t these profits be funneled back into student loans in the form of more forgiveness or reduced interest rates? Why has the government constructed the student loan system so that there is profit generated at all? Shouldn’t it be a break-even, not-for-profit system designed to offer education to as many as possible for as little as possible?
US Department of Education representative Stephen Spector said, “The administration has 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. More must be done to bring down the cost of college, and we look forward to continuing to work with Congress, institutions, borrowers, and other stakeholders to make college more affordable.”
Granted, the administration pushed for lower interest rates and has instituted measures to try and force colleges to rethink their tuition increases, but that’s not enough when the student loan system is failing so many. If profits continue at these rates, it should be incumbent upon this and future administrations to reinvest in making student loans more affordable.
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