Should the Government Profit from Student Loans?
February 19, 2013

With the trillion dollar student loan debt, many fear we are facing a debt bubble that will soon burst. Private lenders are profiting at extraordinary levels despite that half the loans made are currently in deferment or delinquency. But it’s not just private businesses that are profiting from educational debt – our government is also scoring billions each year off of loans that are crippling more and more Americans. The question is, how much is that profit?

The Congressional Budget Office (CBO) estimates that the government will earn $37 billion on student loans issued in 2013. This number is predicted to lessen each your through 2020 (which is as far as the predicted calculations take us). Even with default rates, the government is reportedly still raking in big profits from student loans, but is this okay?

Profits from student loans are the spread between the interest rate the lender is able to acquire funds and the interest rate they’re paid by the borrower. Since the federal government can borrow for next to nothing (they do print money after all), then the spread is pure profit. Current interest rates for subsidized loans are 3.4% and on unsubsidized loans are double that at 6.8%.

Even with the near 10% default rate, the government is still making money on student loans. With no statute of limitations and extreme collection methods available, it’s no surprise that these loans are money makers for private lenders as well as our government. But should it be? Obviously private lenders are in the business of profit, but should our government be?

Educating America’s people is a boon to our economy and important to our country. Would it be more reasonable to plow the profits back into lowering interest rates? Or in offering federally subsidized refinancing or consolidation of private student loans? This brings us back to a fundamental question of whether a government program should be a for-profit endeavor. I don’t think so.

httpv://youtu.be/xUPNTmaAnxk

If the government was investing student loan profits back into education, it might be a win-win. But if money gained from students seeking to educate themselves is used to fund dodgier programs, this seems inappropriate. What do you think? Should the government be profiting from graduates struggling to pay their student loans?

If you don’t think the government should be conducting for-profit business, how should the program change? Should there be zero or extremely low interest loans? Should profit from loans be invested in more grants? Or perhaps in expanded loan forgiveness programs or enhanced income based repayment options?

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