Profit or loss?
That’s not a huge profit when you consider that the program lends out about $100 billion a year. But the CBO also projects that it would keep making money each year over the next decade.
That’s the official calculation that government budget analysts are required — by law — to use when estimating the cost of the federal loan program.
But the CBO itself says there is a better way to calculate the money coming in and out of the loan program, which accounts for the risk that more students will fall behind or default on their loans than originally thought. So while the official estimate goes in the federal budget, the agency publishes both projections.
By that measure, the loan program would result in a loss for Uncle Sam — and not an insignificant amount. It shows the government would lose about $20.6 billion this year, and would continue to lose money over the next decade.
The two estimates are so widely different because there’s no way to know the exact cost of loans given out in one year until it’s fully paid off — and that could take 40 years, according to a report from the Government Accountability Office.
That means they have to make guesses about how fast students can pay back the loans, how many will defer payments while they go to grad school or look for work, and how many will default.
The CBO’s favored estimate — the one that predicts a loss — takes into account the risk that those guesses are wrong.
There’s a lot of risk in student loans, said Jason Delisle, an expert on student loan programs and Fellow at the American Enterprise Institute, a conservative think tank. The government offers loans to students at accredited colleges, with very few questions asked. It doesn’t check on your credit score, there’s no collateral, and there’s a 25% default rate, Delisle said.
Undergraduate loans always lose money.
No matter which way you do the math, the loans offered to undergraduate borrowers do not make money for the government. Any profit comes from loans made to graduate students and parents, which charge higher interest rates.
The interest rates on undergrad loans are usually low, plus the government also pays the interest on subsidized loans for some low-income undergraduates while they’re in school.
If you borrow a student loan from the government this year, you’ll be charged a fairly low interest rate. Undergraduates currently pay 3.76%, while graduates pay 5.31% and parents pay 6.31%.
The Obama Administration has tied the interest rate to the 10-year Treasury note, plus a margin, which varies depending on the loan type. That rate is locked in for the lifetime of the loan.
How much money is lost on the undergraduate student loan program? It is expected to lose 3% on money it lends over the next four years, according to Delisle’s report, which is based on CBO data.
But it would earn a 14% profit off the loans for graduate students and parents over the same time period, according to Delisle Wyoming quick cash reviews. (He uses the official calculation method. When accounting for more risk, the CBO finds that government would lose money on all loans except for those that go to parents.)
Are interest rates too high?
The real problem is for those who have already graduated and are struggling to pay down their debt. The government does not currently allow them to refinance their federal loans to the current, lower rate. And interest rates have been much higher in the past — as high as 6.8% for undergraduates who borrowed between 2006 and 2008.