Who makes money with your student loans? You might be surprised
Making money with the student loan business is no longer just for the big banks. Thanks to new lending rules and historically low interest rates, the federal government is now taking a significant part of the action.
Commercial banks like Sallie Mae, a former government agency that became the nation’s largest private student loan lender, continue to make huge profits (Sallie Mae reported $ 939 million in profit for 2012).
But today, nearly three years after the government removed commercial banks from the federal student loan market, banks aren’t the only ones taking advantage of those seeking a degree. Now that the education ministry is responsible for lending directly to students, the government is making a lot of money with academics across the country.
Current students and recent graduates currently have $ 1.1 trillion in unpaid debt, more than the country’s combined credit card debt.
The Congressional Budget Office estimated in February that the Education Department will realize $ 35.5 billion in profit in 2013 from student loan programs. But that number has just been revised this month to $ 50.6 billion in profits—An increase of 43 percent for the year.
“Who makes the most money right now is the federal government,” Tobin Van Ostern, deputy director of the student advocacy group Campus Progress, told Yahoo News.
It should be noted that the $ 50.6 billion is only an estimate – loans are unlikely to be repaid at the estimated rate, and other factors are subject to change, such as the cost of servicing the loans. And profits are expected to decline in the coming years – in 2019, government profits are expected to be around $ 4.85 billion according to the CBO.
But the 2013 projection places the Department of Education’s student loan profits above those of last year’s top-grossing company, Exxon Mobil, which made $ 41 billion. according to the Forbes ranking.
So how did this happen?
The federal government is borrowing at interest rates that have been kept exceptionally low since the recession in order to stimulate the still lame economy. The Ministry of Education then grants loans at higher rates.
Even student loan advocates in disgruntled organizations – Campus Progress and US PIRG – say nothing bad is behind the federal government pulling money from student loans.
“No one knew we would be in this really bizarre economic malaise that created this ultra-low interest rate environment,” said Christine Lindstrom, director of the higher education program at US PIRG, who advocated that the government is excluding the big banks from the federal student loan equation. .
But advocates say the situation is unfair and must be changed.
While homeowners, businesses, local governments and other entities are busy refinancing their loans to take advantage of current interest rates, which average around 3.5% for a fixed rate mortgage. 30-year-old university graduates receiving federal student loans are stranded for rates of 6.8% or more, previously set by Congress. Rates specifically for federally subsidized Stafford loans (of which there are more than 7 million borrowers each year) are expected to double on July 1, from 3.4% to 6.8%, unless Congress intervenes.
Members of Congress, interest groups, the White House and others have come up with solutions to offer lower rates to students in today’s market and many have opposed the increase in the Stafford loan. But during this time, the money goes back to the government.
“This is our main complaint – the federal student loan program is a public good and should be managed as such and should not be managed with a high profit margin,” Lindstrom said.
The government also effectively collects student debt, allowing it to make even more profit.
Education Department press secretary Daren Briscoe wrote in an email exchange with Yahoo News that government profits are largely a function of the increase in student loan rates set by the Congress. And he noted that the department supported the president’s student loan reform proposal, which would tie rates to the Treasury’s cost of borrowing, fix those rates for the life of the loan, and extend the “Pay as You Earn” repayment option. “to link repayment plans. to income levels.
“An affordable, high-quality college education is still one of the best investments you can make, and federal student loans are an important part of that equation,” Briscoe wrote. “That said, it is important that students are not struggling with unmanageable debt, and that is why the President’s Budget proposal for fiscal 2014 offers a long-term, deficit-free solution with affordable rates and market-based. “
Although the government reaps the vast majority of profits from the student loan industry, private lenders still reap the benefits. Private loans represent a fraction of the $ 1.1 trillion student loan debt, but it’s still a significant amount – over $ 150 billion in 2012, according to the Bureau of Consumer Financial Protection.
The fact that private lenders, such as Sallie Mae and Wells Fargo, have been excluded from the federal program means they no longer have the government oversight they once had. But they’re still collecting federal loans they made before 2010, and establishing new private loans and other money-making ways related to the lending industry.
The CFPB’s 2012 annual report found that banks make even more money from loans because there are fewer affordable repayment options for private borrowers than for those with direct federal loans. The income-based repayment plans offered to federal loan borrowers, for example, are much less available to those with private loans.
Private loans also often have higher interest rates, are always difficult to refinance, and come under less consumer protection than federal loans, making them all more profitable for lenders, according to the CFPB report.
The group expressed concern about the potential domino effect that private debt could have on the economy.
“Many student loan borrowers are unable to find affordable repayment options for their private student loans, and it can have a greater impact on the economy if they spend a large portion of their income on student loan repayments. rather than retirement or a down payment on a house, ”said Rohit Chopra, student loans ombudsman for CFPB.
Debt collectors also take advantage of the student loan business.
Some student advocacy groups have raised concerns about lenders who also serve as debt collectors. It is more profitable for them if the students default, which creates an unfair situation for the students.
“The more penalties someone accumulates, the more risk capital you can achieve,” said Van Ostern.
Some borrowers have both federal and private loans. This is a profitable situation for loan managers because the government treats them as separate entities and will pay twice to outside companies to maintain them.
Student loan providers even derive profits from credit and debit cards on college campuses.
Some groups dispute that Sallie Mae offers debit cards to students on campus. “It sounds like academic backing from this company,” said Chris Hicks, the student debt campaign organizer for Jobs With Justice.
Sallie Mae remains a trusted source for many Americans for loans, even some who are unaware that they no longer provide federal loans.
Hicks said that when he graduated from college in 2010, his mother finished paying off her own loans to Sallie Mae that same year.
“She said to me, ‘Chris, be smart, take a government loan,” Hicks said, and she suggested to Sallie Mae, completely unaware that Sallie Mae was no longer giving government loans.
Her mother ended up borrowing credit cards to pay for her school fees.
Correction: The CFPB is a government agency and has not commented on the federal government’s profits on student loans.