Does the Government Profit from Student Loans?

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If you're struggling to repay student loans even as you work a job that doesn't require a college degree and earn a fraction of the money that you paid just for your on-campus meal plan last year, you can take comfort in know that at least your monthly payments are going to a worthy cause. You're helping the U.S. government turn a profit. That shouldn't at all make you feel cheated or resentful.

The Student Loan Racket

If you've read on the subject here at TBS or anywhere else that finds the whole thing pretty messed up, you know that America's student loan program has gone completely off the rails. You know that, depending on the last date you checked, Americans have a collective student loan debt of more than $1.3 trillion dollars. You know that the rate of default, depending on the year you last checked, could range anywhere from 11% to 14% of borrowers.

And you know that in a general sense, graduates are finding it harder to channel a Bachelor's Degree into a job that requires the skills and pays the expected salary of a heavily invested college graduate. And if you've been reading lately, you know that all of this is contributing directly to a decline in college enrollment numbers across the boards as students consider other paths to education, certification, and occupation.

So all in all, you know this situation is sort of grim. It's not working out for the students. It's not working out for the colleges. It's not working out for employers.

Who is it working out for?

Well, depending on how you do the math (and you're on your own with that), the federal government comes out of this sitting pretty. A Brookings report from spring of 2015 relays the figures from a recent Congressional Budget Office (CBO) analysis showing that the federal government may have profited in the order of $135 billion over the prior ten years from student loan repayment.

I say “may have profited” because this is, in fact, a matter up for some pretty significant semantical debate. According to Brookings, how you assess the profitability of the student loan racket will depend substantially on the accounting method you use, whether you employ the method of calculation required of congressional budget officers under the terms of the Federal Credit Reform Act (FCRA) or you employ an alternative method called “fair value.”

Did your eyes just glaze over that whole last sentence? I know. I was bored just writing it. But here's the thing, that boring discrepancy is at the root of some pretty dramatic points of divergence. The same CBO report that identified a $135 billion government profit using FCRA methods showed, instead, an $88 billion loss using “fair value” methods.

Accounting method discrepancies...pretty dry stuff. No offense to those of you who came here looking for raw, hardcore government accounting minutia. You'll just have to get your jollies elsewhere. Try this Washington Post article, where two wonky accounting enthusiasts go at it on the subject.

Most of you, I assume, are only really interested in the basic question, am I getting fleeced by the government while I bust my woolly hump just to break even on college?

Am I Getting Fleeced?

So the Washington Post article referenced above, from 2013, begins from the premise that accurate accounting methods should lead to the conclusion that the federal government actually loses money on student loans. In essence, the interest rates imposed upon repayment of subsidized and unsubsidized loans, the fair use method says, are below market value when you consider the high risk of default. This, some experts say, doesn't even account for administrative costs.

As I said, the Washington Post article only begins with this premise, supported by a policy expert named Jason Delisle from a think thank called New America. However, an observant reader chimed in and observed that “the CBO's fair-value accounting analysis finds no subsidy for PLUS loans and unsubsidized Stafford loans, but a big one for subsidized Stafford loans, where rates are rising. Overall, there's a negative subsidy - profit. That's a way the government could be making a profit even under other accounting specifications.”

This point ultimately forced Delisle to concede that, yes, in some individual years, even using the softest of assessments, the federal government has turned a profit off of students. The discussion even ultimately forced an update to the article's title. What originally began as an article intended to dispute a flurry of new claims about government profiteering ultimately became an article entitled “No, the federal government does not profit off student loans (in some years—see update).”

So to recap, this article about how the government doesn't profit off of student loans was forced to concede that yes, yes it does.

What's Wrong With This Picture

So let's just step away from the procedural accounting tedium and instead address the idea behind “fair value.” The whole debate arises from the fact that students are, when it comes down to it, kind of a crummy investment.

In the Washington Post, Delisle argues that in order for the government to effectively mitigate the exceptionally high risk of default posed by this type of borrower, the interest rate should actually be something in the range of 12-18%. But because there are broader perceived sociological gains from investing in the nation's education, Stafford Loans, for one, are pegged to a repayment rate of 4.45%.

As you graduate, struggle to gain a foothold in the working world, and begin repaying your student loans, I trust that you won't find 4.45% interest to be a modest or insignificant number. In fact, odds are good that this interest rate will only compound the difficulty you face in getting out from behind the 8-Ball. And that's actually the whole point of this tangled, rhetorical mess.

No matter how you do the math, students are struggling to repay their loans. Where “fair value” advocates are concerned, student lending is risky, which means the government has a credible right to preemptively calculate for risk. And when you look at it that way, sure, they stand to lose money.

FCRA advocates are bit more optimistic. David Marron of the Urban Institute explains the dichotomy thusly: “FCRA counts the government's fiscal chickens before they hatch, and fair value assumes they never hatch.”

Of course, regardless of whether these eggs hatch or simply get scrambled into an omelet, it's not a great time to be a chicken.

Government Mule

If it feels like your hauling for the U.S. government, it's because the economic arrangement underlying the student loan business gives them a bigger cushion than it gives you. Generally speaking, your rate of interest is two or more percentage points higher than the Treasury rate for repayment on 10-year loans. Brookings explains that “The government currently draws much of its 'profits' from the difference between student loan interest rates and its (lower) cost of borrowing.”

If only your employment prospects offered a similar guarantee. Indeed, you'd have no cause to resent he government's ability to profit off of your loan if you felt like you were getting your money's worth, which should include stronger prospects of being able to afford repayment. But with enough students presenting a risk of default that methods of calculation can produce a greater than $200 billion accounting discrepancy, we know that far too many aren't getting their money's worth and can't afford repayment.

To wit, consider that countless Americans near or even past retirement age are still struggling to repay their student loans. According to an article in Fortune, the U.S. government now garnishes the Social Security wages of many older Americans who have defaulted on their ancient student loans. Since 2001, the government has collected more than $1.1 billion dollars by carving out a portion of Social Security income from aging defaulters. And the number of people who fit this description is not insignificant.

Fortune says that as of September 2015, 114,000 Americans over the age of 50 saw their Social Security benefits reduced to offset defaulted student loan debts. An increase of 440% since 2002, this forced repayment strategy is plunging a number of retirees below the poverty line. Stated simply, these are individuals who have arrived at the end of a career only to find that their investment in education has followed them like a wraith, waiting to collect at every turn. With the greater part of their earning potential now in the rear view, these are Americans who must formally acknowledge that they never recouped their investment in a higher education.

This underscores the notion that perhaps it wasn't such a great investment, either for the student or the government lender.

Delisle makes one compelling point that, contrary to any other type of borrower, the student borrower is not subject to the kinds of credit reviews and fiscal scrutiny extended to other borrowers. The student loan is an inherently riskier proposition.

This means that at the root of this discussion—as with most others on the subject of higher education—is in both the ever-growing cost of college and the failing proposition of the costly college degree. The federal government, one could argue, only turns a profit as a byproduct of measures taken to protect against default. Such is to say that when you do well, the government does well. When you struggle to repay your loans, so does the government. And all of this liability will ultimately be passed along to the U.S. taxpayer.

Sticker Shock

So where does all of this leave us? The same place it always does—at the doorstep of yet another conversation about how college costs too much; how many liberal arts degrees indicate skills for which the labor market has no need; how the investment in a college degree isn't what it once was; and how student loan repayment can often become an albatross around the neck of a young, underemployed graduate.

This is compounded by the fact that interest is too high, pegged to rates that have far more to do with protecting the government's bottom line than yours. An article in CNN Money references the oft-discussed idea of instead tying interest rates directly to income, creating an equation that allows each borrower to comfortably repay a loan based on individual circumstances. Though complex in its implementation, this is the type of reform that could marginally improve the value of a college investment, but more importantly for the purposes of this discussion, bring equanimity to the government's student loan balance sheet.

By staking interest rates to readily measurable earnings indicators, we could remove the $200 billion gray area between two distinct CBO accounting methods. And once we do remove that enormous gray area, the federal government really would have no excuse to profit off of your loans. This means that your loan repayment plan would not only be tailored to your economic situation, but also that you wouldn't have to feel that twinge of anti-establishment resentment every time you submitted a monthly payment.

But to date, that's not the case. The case is that the government requires you to repay your loans at a rate that compensates for the expected failure of others to do so. This doesn't mean that the government will profit off of you every year, but on some years, it most definitely will.

So to the broad and general question of whether or not the U.S. government profits from student loans, the answer is yes. If that makes you mad, there's a suggestion box somewhere in Washington where you can deposit your complaint. Actually, it's a trash receptacle outside the capitol building. Your suggestion will be incinerated in the order in which it is received.

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