Blog: The Educated Reporter

Did Congress Cut the Wrong College Loan Rate?

Is it ethical for the government to make a profit off of student loans?

A new report released yesterday by the financial scorekeeper for Congress, the Congressional Budget Office, indicates the federal government profits off of the Department of Education’s Direct Loan Program. Paired with news Congress came to an agreement on keeping the interest rate of one of those loans at 3.4 percent, there are some unanswered questions. 

Debate over whether the federal government is capable of shrinking the deficit by issuing loans has raged for some time, with left-leaning thinkers pointing to the Direct Loan Program as proof the public sector can create wealth. Opponents of that thinking argue an arcane accounting rule allows the Dept. of Education to understate the total cost of lending to all students, irrespective of their credit history.

(EWA’s has a story up on this topic)

But the CBO report shows that the Direct Loan program—which includes subsidized and unsubsidized Staffords and PLUS loans for parents and graduate students—generates profit no matter what fiscal calculus is used. The ‘fair value’ approach—a way of determining loan risk that is in accordance with private financial institution standards—shows education loans will knock off $5 billion from the deficit in fiscal year 2013. Using the government’s special accounting methods, $36 billion is shaved from the deficit.

Some loans are bigger moneymakers than others. The unsubsidized Stafford and the PLUS loans have interest rates of 6.8 and 7.9 percent respectively, plus loan origination costs. Those three bring in $9.2 billion in profit, while the subsidized Stafford is a deficit contributor, adding on $3.5 billion for fiscal year 2013. As Jason Delisle of New America Foundation notes, the government kept steady the rate on the most expensive loan to taxpayers at 3.4 percent, adding to the cost of a program that’s a budgetary money loser. However, Congress and the Obama administration continue to charge high interest rates on loans that are already profitable. As Delisle asks, did the government cut the rate on the wrong loans? As a public subsidy, should these loans be cheaper to borrowers or cheaper to taxpayers?