Washington Update

U.S. to Earn $66 Billion from Student Loans Despite the Program’s Uncertainty

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It is difficult to know with certainty the future costs of the federal student-loan program, and therefore almost impossible to set an interest rate that guarantees the government does not make too large a profit or simply break even, according to a study from the non-partisan Government Accountability Office (GAO).

The GAO’s January 31 report says the government is on track to generate $66 billion in income from loans it made between 2007 and 2012. That number is simply an estimate, however, because the real cost or profit of a student loan to the government can fluctuate wildly each year, depending on such things as the amount of money the borrowers repay and the government’s own borrowing costs.

For example, the GAO report says that the government initially estimated it would make $9.09 for every $100 in loans it disbursed in FY08. But just one year later, it estimated that those same 2008 loans would actually cost taxpayers 24 cents per $100 disbursed. As a result, the GAO study was unable to provide a particular interest rate that borrowers should be charged in order for the government to break even.

The report is the latest in a two-year debate over the interest rate the government should set for student loans. Last year, legislation was passed tying the interest rate for student loans to 10-year Treasury notes, which put the rate at 3.9% for undergraduate borrowers and 5.4% for graduate students, lower than those offered by private lenders.

The total cost of the student loan program to the government is also clouded by the growing administrative costs that have arisen as the Department of Education handles an increasing number of student loans previously handled by banks. According to the GAO study, the department spent $864 million administering Direct Loans in 2012, more than twice as much as the $314 million it spent in 2007.
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