Government Admits It Has No Clue How or If It Profits from Student Loans
February 24, 2014

Elizabeth Warren, tireless champion of oppressed student loan debtors, has sharply criticized the government for churning big profits off student loans. She has said, “This is obscene. The government should not be making $66 billion in profits off the backs of our students… the government is squeezing profits out of our young people and adding to the mountain of debt they will spend their lives struggling to repay.”

But the Washington Post insists that the government is not only NOT making millions, but is, instead, losing money on student loans. So what’s the truth? In fact, the reality is much more startling. A new report out of the Government Accountability Office reveals that the government has no clue how much money it’s making off of student loans – if any – or whether it’s losing money or breaking even, and they won’t know for decades to come…

It’s shocking that over $1.2 trillion in student loans have been issued with no idea as to whether they are a boon or a drain to the government’s budget. What’s doubly troubling is that a dodgy piece of legislation – the Student Aid and Fiscal Responsibility Act – married student loans to the Affordable Care Act. What does health insurance for all have to do with student debt, anyway? They funneled profits from student educational debt to help underwrite the costs of the ACA – but what if there are no profits?

Will numbers be shuffled around to make the ACA look like less of a cost-center by artificially buoying student loan profits? How could this happen? When you read the 46 page GAO report, what I see – as someone who understands finances, but not the intricate machinations of governmental money – is something akin to, “We don’t know because math is hard.” Okay, it’s not quite that simple, but that’s the upshot.

What the report says in all its many pages is that the life span of student loans can be 10-40 years and interest rates and principal vary by loan, as do administrative costs depending on collections issues, the cost to the government of borrowing and a myriad of other factors. Because of all this, the profitability (or lack thereof) of individual loans isn’t known until all is said and done. Multiply this by millions and millions of loans and you’ve got a big pile of uncertainty.

The report goes on to say that in some years, some cohorts (groups of loans by year) will be profitable and in a subsequent year, the same group will barely break even. What this news doesn’t change are the results from the borrower’s perspective. Millions of borrowers are in deep trouble with their student debt, can’t service their loans and are seeing their prospects diminished by the overwhelming debt. And even for those that can make their payments, it’s taking such a formidable chunk of their wages that they are not able to participate in many key markets – they can’t buy a home or auto and are putting off marriage and family.

Even if the loans are proven profitable, it would be realized far too late to affect the outcomes of those specific loan holders. We need to make changes now – we should allow borrowers to refinance federal loans at more reasonable rates, expand who can participate in Income Based Repayment and expand loan forgiveness. Even if the government ends up making less (which we won’t know for decades to come, but we can’t wait that long to make meaningful policy changes), the difference in the uptick to our economy should more than make up for it.

To read the whole GAO report – Federal Student Loans: Borrower Interest Rates Cannot Be Set in Advance to Precisely and Consistently Balance Federal Revenues and Costsclick here. Be sure to sign up for Tuition.io’s free student loan tool to track and optimize your debt and read our blog every single day for important news and info on dealing with your debt.