Are the Feds Reaping Windfall Profits From Student Loans?

By:  Charles Scaliger
12/02/2013
       
Are the Feds Reaping Windfall Profits From Student Loans?

The Federal Government made $41.3 billion on its subsidized student-loan program in fiscal 2013. Or did it? It has been argued that if more realistic accounting methods were applied to the student loan situation, the government would post significant losses over the long term instead of the claimed profits.

When President Obama signed the Student Aid and Fiscal Responsibility Act (SAFRA) into law in 2010, the response in the media, inside the Beltway, and on college campuses across the land was overwhelmingly positive. After all, SAFRA did away with the old system of using commercial banks as middlemen in the issuing of college loans that were backed by the U.S. government. Under the new legislation, the government was empowered to lend money directly to students, a piece of bureaucratic sleight of hand projected to save the government (and, it was believed at the time, students and taxpayers as well) tens if not hundreds of billions of dollars in the fairly near future.

But what seemed like a reasonable if inadequate response to the burgeoning student loan crisis (a crisis that, over the ensuing three years, has continued to worsen) has created an entirely new controversy. It turns out that allowing the government to issue student loans directly has led to an apparent conflict of interest in which — according to critics — the Federal Government is reaping tremendous profits on student loans, while college costs continue to soar and hard-pressed students are more indebted than ever.

As the Detroit Free Press’ David Jesse reported on November 26:

The federal government made enough money on student loans over the last year that, if it wanted, it could provide maximum-level Pell Grants of $5,645 to 7.3 million college students.

The $41.3-billion profit for the 2013 fiscal year is down $3.6 billion from the previous year but still enough to pay for one year of tuition at the University of Michigan for 2,955,426 Michigan residents.

It’s a higher profit level than all but two companies in the world: Exxon Mobil cleared $44.9 billion in 2012, and Apple cleared $41.7 billion.

If the figures are correct, they mean that the Federal Government — now in the business of issuing student loans directly to consumers, just like a commercial bank — is reaping windfall profits just like one of those giant private corporations that Big Government liberals are so quick to malign.

The bottom-line reality is a bit more complicated. It has been argued — somewhat cogently — that if more realistic accounting methods were applied to the student loan situation, the government would post significant losses over the long term instead of the profits claimed by detractors. As National Review’s Jason Richwine explained it:

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