This is an astonishing article. The US Department of Education is making profits from student loans while the kids go deeper into debt.
This is 21st century entrepreneuralism at its worst.
Shahien Nasiripour of the Huffington Post writes:
The U.S. Department of Education says it has been working to help borrowers who are struggling under the weight of crushing student loan debt. But as Washington focuses on reducing annual federal budget deficits, the huge profits off those same borrowers may prove too alluring for Education Secretary Arne Duncan.
In the fiscal year ending Sept. 30, his department reaped more than $42.5 billion in profit from federal student loans, according to federal budget documents. That total was roughly a third higher than in 2012 and the agency’s second-highest ever profit haul after a $47.9 billion gain in 2011, according to a Huffington Post analysis. The Education Department confirmed the 2013 profit figure.
Had Congress and President Barack Obama not agreed over the summer to temporarily lower student loan interest rates, the Education Department’s 2013 profits would have been about $8 billion higher, according to the Congressional Budget Office, and they would have set a new record.
In a sign of just how important student loan profits have become for the Education Department’s bottom line, its reported gains off lending to students and their families over the last year comprised nearly half of the agency’s total outlays, the biggest share since at least 1997.
This is alarming because the best way to boost student enrollment and retention rates is to lower the cost of college. But now we find that the US Department of Education is making a huge profit instead of lowering costs!
No wonder its idea to lower costs is to collect data.
Diane Ravitch's blog 
No wonder college is so important for Arne and crew.Perhaps College Ready Standards should include standards on debt management. Yikes!
Where does this money go? Does Arnie just get to go out and spend it on educational initiatives?
Arne Duncan’s legacies: discredited public schools, federally imposed curriculum standards, and indebted college graduates.
M is correct that the issue is how that money is spent. If it is used to expand the Pell grant program, for example, it increases access for the relatively poor. This may, in fact, be the best feasible way to do that.
My question is: “Who is handling all the money and how much are they (whoever they are) making?
Open the books Arne, please.
Does anyone know where one can go to get an accounting of all that money?
Unsustainable student loan debt undertaken for low-paying jobs is a like a weight on the middle and lower middle class. It affects family formation, overall fertility, marriage/divorce/cohabitation and a host of other social issues that policy makers continually wring their hands about.
How much sense does it make for the federal government to earn money on loans rather than just supporting our state universities and community colleges? Apart from what this means for students, institutions of higher education are increasingly run by a profit motive and less lucrative, but socially worthwhile, disciplines feel the pinch. And now most university faculties are comprised of low-paid adjunct workers.
Great comment. Well said.
Thanks for reporting on this Diane. I have been an adjunct for 10 years at the same university and have watched the horrific toll this form of greed is taking on students and poorly paid adjuncts. Everyone is at their brink and it is frightening. My students are stressed as are the adjuncts that are also suffering while being asked to take on more and more responsibility without wage increases. I am working to gather students and adjuncts alike to address the horrors taking place in higher education. Students are depressed and some even suicidal with the increased “homework” we are required to give students nowadays. It is corporate greed at its worst. The push of untested technology onto our campuses is relentless as tech companies seek to quench their thirst for more and more. Universities do not oppose the push for untested technology since it is given free in the beginning for the university but students are charged outrageous prices for software so faulty that in class, we had to quit using it after 2 failed assignments using the new software. Keep up the terrific reporting, Diane.
I am curious about the connection between homework and “corporate greed” . At my institution there is certainly no required connection between the two. Perhaps you could elaborate on the connection.
If ever there were a reason to abolish the USDOE, this is it.
Agree and long overdue.
Folks need to actually read the article. The notion that there is a profit appears to be due largely because no accounting allowance has been made for defaults on these debts.
Meanwhile, Jason Delisle, director of the federal education budget project at the New America Foundation, a Washington policy group, is among a leading group of experts who have criticized the figures for not accurately capturing the cost of extending loans to student borrowers. The profit figures are recorded under a government accounting scheme that excludes certain risks that would be borne by private-sector lenders, thus minimizing costs and inflating the net gain in Delisle’s view.
But the accounting move has been embraced by the Obama administration, most notably in the White House’s budget for the 2013 fiscal year.
“They have gone out of their way to defend it,” Delisle said. “That’s essentially why those [student loan] profits are there.”
According to the article, the level of current defaults is massive:
Some $93.5 billion in federal student loans, or about 9.1 percent of outstanding debt from the Education Department’s Direct Loan and Federal Family Education Loan programs, were more than 360 days late as of Sept. 30, according to the most recent available federal data.
That compares with $89.3 billion, or 8.9 percent of outstanding federal student loans, that were in default as of June 30.
Recent college students are defaulting on federal loans at the highest rate in nearly two decades, Education Department data show. One in 10 recent borrowers defaulted on their federal student loans within the first two years, the highest default rate since 1995 and double what it was in 2005. A separate gauge, measuring defaults occurring within the first three years of required payments, showed that more than one in seven borrowers with federal student loans went into default.
Any excess interest payments – labeling them profits is IMHO an abuse of language – should be netted out against the $93.5 billion of bad debts.
Thanks for the info, Bernie!
Aren’t student loans subject to certain guarantees of protection, that other traditional loans are not guaranteed? Such as no forgiveness in bankrupty? If someone defaults, and they have an income tax refund, the DOE refers the person to the Dept. of Treasury, who refers them to the IRS, and they seize the refund. So, theoretically, eventually most of the defaulted debt is collected, assuming college grads have well paying jobs upon graduation, and that they stay in the U.S.
Laura:
Theoretically is correct. However, the chances of the loan being recovered via garnishment of tax refunds is pretty slim since once you default you can always make sure that you owe taxes. There are severe consequences for student loan defaults, but those consequences exist for anyone who borrows. Given the recent explosion in student debt and the increased role of the Federal Government as the guarantor, this is actually new territory.
The issue is that if there is a surplus of interest payments on existing student loans, the surplus should be used as a reserve against the defaulted loans.
I am one of those students, as I am sure many of you are. I took out loans to get a masters degree, to add to my bottom line salary. Unfortunately, my salary has not changed at all. I am losing over $10,000 per year because freezes and changes in the evaluation system. I regret ever wasting my time on a masters. it was not worth it.
I’m with you on that one.
This is why Massachusetts’ senior senator, Elizabeth Warren, has been pushing to reduce the interest rates of student loans. What kind of country are we that we rent-seek from people who are trying to get an education?
Two of my children have graduated from college and the third will next May. All three have student loans, as do my husband and I for them. The interest rates are quite high, relatively speaking. Both of us had long, satisfying careers as public school teachers, and education has always been valued in our home, so college was pretty much a given for our kids. But no one can put aside big bucks teaching, and we have no wealthy relatives.
The impact of reducing interest rates on these loans will depend on how the surplus is to be spent. If it is to be put back into the loan program, reducing interest rates would likely reduce the size of individual loans, the number of loans, or both. If the surplus is used to cross subsidize other programs like grants, reducing the interest rate will likely reduce the number of grants available to very poor students.
TE:
I agree. According to the Treasury report cited in the article, this year the USDOE borrowed (caused to be printed) $145 billion for student loans and handed out $41 billion in college student aid. The article lacks essential details and the overall college financing picture.
Christine:
As I read it,
http://www.direct.ed.gov/calc.html
the current student tax-payer subsidized loan rate is 3.86% for what is essentially an unsecured loan. In the previous two years, the tax payer subsidized loan rate was 3.40%. The repayment period is between 10 and 25 years.
Where is the “rent seeking”?
What are your stopping rules? Do PhDs in English or Art History or Anthropology all deserve tax-payer subsidized loans? Why do college students deserve more consideration from tax payers than say somebody who wants to put in a new bathroom or buy a more fuel efficient car or go on an extended sabbatical in Europe to find themselves?
Why should folks who chose not to go to college or who pay their own way through college, like my son, subsidize folks who chose to borrow in order to go to college and not really work, like my daughter? Who is actually “rent seeking”, my son who is paying extra taxes or my daughter who is being subsidized?
Bernie1815,
In Finland, all higher education is tuition-free. The Finns believe that education is a human right and should be free to the students. Regardless of field. We used to have free community colleges. Remember?
Diane:
Assuming that the remedial education issue gets fixed, I have no problem making the first year or two of college tuition free for disciplines that have relatively immediate payback to the taxpayers such as education, nursing, engineering, business and I certainly believe that $$ invested in majors in the Public Universities should be allocated based on likely benefits to tax payers. (This is essentially what happens in Finland and the UK: The number of places in each discipline at the universities are broadly controlled through funding mechanisms and explicit national priorities.)
http://www.minedu.fi/OPM/Julkaisut/2011/yliopistot.html?lang=en
Education is not free, it is just that sometimes someone else is paying for it.
When I see the new Mustangs, Camaros and the occasional BMW in the student parking lots, I think about the hard working taxpayers of my state working to pay a large fraction of the tuition costs of rich and poor students alike at the university where I work.
TE:
I missed that. You are absolutely correct. Someone else is indeed paying and that someone has a perfect right to see some disciplines as more valuable and worthwhile than others. After all those philanthropists who endow chairs or scholarships in esoteric fields have the perfect right to do so. Those representing taxpayers should take a different perspective.
“Do PhDs in English or Art History or Anthropology all deserve tax-payer subsidized loans?”
Yes
Should my foster son who works two minimum wage jobs to feed his family pay to subsidize the production of more English PhDs? He and his spouse are among the taxpayers subsidizing these loans.
PS: the implication that some areas of study are worthwhile (business…really? Exactly why do we need more business majors?), while others (Art, Music, Anthropology, etc) are not is ridiculous, IMHO.
All higher education repays society dividends in the form of a mor informed, reasoned society, better government, and thus a better world.
Ang:
The implication is that it is easier to justify taxpayer subsidies for some disciplines than for others, which is why the Finns subsidize graduate degrees in Education but not in other areas.
There are plenty of places for PhDs to study English, Music, Anthropology etc., they simply do not get the same level of taxpayer subsidies as other disciplines.
My Parent PLUS loans for my twins have an interest rate of 7.90% and were assumed in 2011. We had already refinanced our home (lots of equity, but our ONLY asset) to pay for their first two years because it was cheaper to take a loan on the house (4%) than to burden them with debt of about 6%.
My older daughter was less fortunate and more indebted because mortgage rates when she began college were higher than student loans, so we did not borrow against our home for her. Her interest rate is fixed at 6.89%
When the yearly family contribution for one like ours is $36,000 according to FAFSA, what are people supposed to do? Our kids all received merit scholarships, which paid for a good chunk of their tuition. They have all held jobs through college and worked full-time summers, saving their earnings to apply towards tuition. My husband and I were able to work our ways through college, but that’s no longer viable. And on two teachers’ salaries how much can you reasonably save in advance?
As to grants for poor kids to go to college, I spent most of my career advocating for my students who were exactly that – really poor. They too suffer from the burden of student loans, because only a handful get enough financial aid to cover everything even at a state college. For kids whose families do not have resources which make them credit-worthy even a small quantity of money can derail college attendance. One of my students was offered a 4 year scholarship to Rhode Island School of Design (she wants to be an architect) but could not afford to attend because her family could not raise the $2500 it would have cost them yearly. The most common reason I hear from my former students that they haven’t finished college in 4 years is that they have to take time off to work. If they don’t finish they are left with debts for something they do not have – a diploma and the career choices that come with one. And yet the President thinks we should measure “successful” colleges by their 4 year graduation rate.
It is a foolish waste of resources not to capitalize on our human potential. Ruinous debt for young people is a bad choice for a democratic nation. That the DOE is profiting from these loans is unconscionable. That is the rent-seeking.
Christine:
The background helps. I put 2 kids through college and one is putting himself through because he screwed up in other ways. It is certainly tough.
That said, the surplus of current interest payments over the current cost of money is not in any real sense “profit”. First, as I noted elsewhere, there is no reserve for bad or non-performing loans Second, as TeachingEconomist noted, without this surplus the volume of loans and/or the volume of grants would be adversely effected.
Bernie,
You say that there are severe consequences for anyone who borrows and can’t pay back. But if a student declares bankruptcy, debts are erased-except for student loans.
The NY Times did a series on student loan debt. Here is one article http://www.nytimes.com/2012/09/01/business/shedding-student-loans-in-bankruptcy-is-an-uphill-battle.html?_r=0
A:
Yes, I know that you cannot use bankruptcy to void a Government backed student loan. That does not seem to me to be particularly fair or equitable. Declaring bankruptcy still has severe consequences.
The problem is that the easier it is to renege on a promise, the less likely it is that someone will give you money based on your word that you will pay it back.
TE:
It raises an interesting issue of whether the exclusion of the bankruptcy option is the only way to put some security behind what is otherwise an unsecured loan. The whole student loan market strikes me as suffering from insufficient information. What do you think it does to the shape of the demand and supply curves?
If students could discharge their student loan debt through bankruptcy, there would be fewer loans made by private entities. The ability to make a credible promise that you will pay the money back means that more people will believe you and more would be willing to give you a loan.
Hey, more money to shell out to TFA
Or more money to expand education grants that go to the poorest students.