Student Loan Debt Continues To Make News Over Summer

When the bell rings to start a new school year, college students, especially the 70 percent using loans to pay for expenses, need to catch up on a few news items that surfaced during the summer break.

Here is the quick summary of what happened while you were away:

  • You will pay a higher interest rate for student loans this year, albeit only slightly. Rates are rising from 3.9 percent to 4.66 percent for undergraduates and 5.4 percent to 6.21 for graduate students.
  • Private loans could be cheaper than federal loans for the first time in a decade, though only if you have a high credit score.
  • If you took out a loan after July 1, you are eligible for the Income-Based Repayment program that caps repayment at no more than 10 percent of your income and you could have the balance forgiven after 20 years.
  • College graduates from households with no student loan debt are decidedly better off than those who graduated with student loan debt.
  • Households headed by a college graduate earn significantly more than those without a college degree.

Interest Rate Changing On Student Loan Debt

The first two bullet items are related in that the choice between federal and private loans overwhelmingly has favored federal for most of the last decade. That could be changing as banks quickly recover from the Great Recession and more money is available for lending.

The latter three bullet items are not surprising, but the disparity between graduates with loan debt and those without is shockingly high and so is the pay difference in pay between college graduates and those without a degree.

Congress spent most of the summer ignoring several proposals to ease the strain on people with student loans, then settled on a middle-of-the-road answer by tying interest rates for student loans to the 10-year Treasury index rate. Loans for undergraduates will be the Treasury index rate, plus 2.05 percent. Graduate students and parents PLUS loans add 3.6 percent to the Treasury Index Rate.

The good news with this system is that Treasury index rates are at historical lows and the rate you receive this year is fixed for the life of the loan. The bad news is that, if you need another loan for next year, the interest rate likely will change, and even more likely, go up.

The new legislation mercifully caps interest rates at 8.25 for undergraduates, 9.5 percent for graduate students and 10.5 for parents who take out PLUS loans.

Private Loans Getting More Affordable

Students with credit scores over 800, and parents who will to co-sign for the loan, might have alternatives to consider at private lending institutions.

Some private lenders have lowered rates for their most creditworthy customers because borrowers have been very good about paying the money back. MeasureOne, a California company focused exclusively on student loan data, says that serious delinquent loan repayments (90-plus days past due) have declined to just 2.55 percent from their peak of 7.33 percent in 2009.

That has encouraged the top six private lending institutions – Sallie Mae, Discover, PNC, Navient, Citizens and Wells Fargo – to drop rates to between four and six percent for their best customers. Sun Trust is offering the 4.0 interest rate, while Sallie Mae’s best customers get a rate of 5.74.

The major drawback to private loans is that there is little flexibility if you fall behind on repayment. Federal loans offer things like loan consolidation, income-based repayment, deferment and other avenues to assist borrowers who lose their job or suffer an unforeseen financial hardship.

College Degree Does Pay Off

Students who do have borrow for college, owe an average of $30,000 when they graduate. According to Pew Center Research, a non-partisan think tank in Washington, D.C., that creates a notable financial gap between them and their peers.

Though the median income for college educated households is $57,941, the median net worth of households with no student loan debt is $64,700, or more than seven times higher than households with student loan debt, whose net worth is a paltry $8,700.

The Pew Center report did reinforce the fact that earning a college degree pays off over the long haul. The median salary for workers with a college degree is $57,941 compared to a median salary of $31,512 for those without a degree. That is a difference of 83.9 percent.

One more positive fact worth noting before you start school: The increased interest rate is only going to add about $4 a month to your payment. Skip lunch once a month and you should be able to handle it.

For-Profit Student Loan Debt and School Closure

Corinthian Colleges Announces Closure

For profit students with high student loan debt should review their school’s record before enrolling in another semester. This month, large for-profit Corinthian Colleges announced that it is filing for bankruptcy. Corinthian currently manages schools under the names: Everest, WyoTech and Heald,

Battling investigations from the Department of Education and others, Corinthian represents one of the worst offenders in the for-profit education category.

Corinthian students rely heavily on Federal student loans and face high student debt. Corinthian grads face difficulty finding employment in their field and consequently suffer from high default rates.

Corinthian College has been charged with false advertising, promoting high rates of employment after graduation.  Students find themselves with a pile of student loan debt they can’t pay back and a degree that doesn’t make them more employable.

The New York Times reports that graduates from Everest College’s Newport News, VA Medical Assistant Certificate program earned, on average, $12,533 per year in 2011. This data suggests that graduates were unable to find employment in their intended field, which has an average annual salary of $21,080. The training program costs about $20,000.

What does Corinthian’s bankruptcy mean for the rest of the for profit industry and for students currently enrolled at for-profit universities?

Students enrolled at for-profit universities should review their institution’s record, before taking on additional student loan debt. This includes visiting the Department of Education’s default rate tables.

An institution’s default rate is the percentage of students who could not make their student loan payment after graduation. The Department of Education tracks default rates by institution. The national average for defaults is 13.8%, 3 years after graduation. This means for every 100 graduates, around 14 default on their student loan debt within 3 years of graduation.

For-profit institutions average 22.7%, though some have default rates higher than 50%. If your school has a high default rate, you may want to look into switching to a non-profit community college or state university. These schools typically charge less for tuition and have higher graduation rates. Nonprofit schools also have higher rates of employment upon graduation than for-profits.

While many non-profit colleges will not give credit for courses taken at for-profits, it may be better to start over than to continue with a degree that delivers low employability.

If you’re struggling to make your monthly student loan payments, find out how Debt.org can help.

Administration Proposes Student Loan Debt Relief

Student Loan Debt Relief – Needed by Millions

President Obama issued an executive order to provide student loan debt relief to struggling Americans, but couldn’t convince members of Congress to follow his lead.

Obama’s executive order, issued June 9, allows about five million borrowers to cap their student loan payments at 10 percent of their monthly earnings. It also directs loan providers to offer financial incentives to borrowers who pay loans on time. The order isn’t expected to go into effect until late 2015.

Student loan debt has reached $1.2 trillion and an estimated seven million of the 40 million borrowers have defaulted on their loans.

“We’re seeing too big a debt load on too many young people,” Obama said at the ceremony announcing the executive order. “More young people are earning college degrees than ever before and that’s something we should be proud of, something we should celebrate.

“But a large majority of today’s college seniors have taken out loans to pay for school and Americans now owe more on student loans than they do on credit cards. That’s an outrage.”

Two days after the executive order, the Senate stopped a bill that would have allowed people with student loans issued before 2010 to refinance their loans at today’s lower rates.

Bank on Students Emergency Loan Refinancing Act Proposed

Sen. Elizabeth Warren (D-Mass.) presented the Bank on Students Emergency Loan Refinancing Act to help people – some paying interest rates as high as 7-9 percent – refinance at 3.86 percent. The measure fell four votes short (56-38) of the 60 needed to bring it to Senate floor for debate.

The sticking point for Republican opponents was that the bill would have been paid for by closing tax loopholes and assessing minimum tax rates for people making over $1 million.

“This raises the fundamental question of who does Washington work for?” Warren told reporters at a news conference after the vote. ”This was a really good day for billionaires. For the 40 million people dealing with student loan debt, it wasn’t such a good day.

“Homeowners are refinancing, small businesses are refinancing and we just want young people who got an education to have their shot at refinancing,”

Republicans complained that the bill did nothing to reduce borrowing or the cost of a college education.

“The Senate Democrats’ bill isn’t really about students at all,” Minority Leader Mitch McConnell (R-Ky) said on the Senate floor. “It’s really all about Senate Democrats. They want an issue to campaign on to save their own hides this November.”

Three Republican senators, Susan Collins (Maine), Bob Corker (Tenn.) and Lisa Murkowski (AK) did join Democrats in voting to move the bill on to debate. Warren said that the bipartisan support encourages her to keep the fight going for the bill, but even if it got past the Senate, House Republicans, always opposed to anything that raises taxes, have promised a dead end when it reaches their chambers.

Obama’s executive order doesn’t need congressional approval, but will not take effect for more than a year while the Department of Education rewrites regulations governing student loans.

In the meantime, the New America Foundation says that 6.8 million Americans have defaulted on $96 billion in student loans. They owe an average of $14,103 and many aren’t aware of alternative programs that could keep them from defaulting.

Anyone with a federal loan is eligible for forbearance or deferment benefits, which allow borrowers to postpone payments without penalties or default.  Income-contingent and Income-Based repayment plans are other alternatives that could be explored by anyone in jeopardy of default.

 

Here’s What You Need to Know About Taking out Student Loans

It’s no secret the cost of education is rapidly increasing, far faster than even the pace of inflation. The College Board shows the average cost of undergraduate tuition and fees for the 2013–2014 school year was $30,094 at private institutions. Meanwhile, state residents paid $8,893 at public colleges; and out-of-state residents paid around $22,203 at public universities.

Those figures don’t include the costs of room and board and additional expenses such as books, supplies and travel back home. Plus, these numbers are just averages, meaning certain schools can surpass even those numbers. And then you have to consider that these costs will likely be multiplied by four years!

It’s not surprising that student loans are becoming a part of more and more young people’s lives. If your child or you are considering using student loans to finance an education — either in whole or in part — here are some important things you need to know about them.

Government vs. Private

Student loans mainly come in two forms: Government or private. For U.S. citizens, the U.S. Department of Education manages loans funded by the federal government. These can be subsidized or unsubsidized and are explained below in more detail.

Private loans are usually used when government loans don’t offer enough financial support for a student’s particular situation. In this case, the lender is a private institution, like a bank, and the interest rates on the loans are determined based on the borrower’s creditworthiness. Rates are typically higher than those for government loans.

Government Loans – Subsidized vs. Unsubsidized

A subsidized loan is only available to undergraduate students with demonstrated financial need. While the student is in school, and during the six months after graduation, the government pays the interest on the loan on the student’s behalf.

Unsubsidized loans are available to both undergraduate and graduate students, regardless of financial need, and the interest due on the loan must be paid by the student borrower. The interest can either be paid while the student is in school or it can accrue on the loan until the borrower starts paying it back after graduation.

The amount of money you can borrow via federal government loans is determined by both your school and by the limits imposed on these loans by the Department of Education. To determine the maximum amount for which you are eligible to borrow each year, as well as current interest rates, explore the chart at studentaid.ed.gov. (Interest rates on government loans are independent of a student’s credit history.)

The FAFSA

The Free Application for Federal Student Aid, commonly known as the FAFSA, is a form that students must fill out in order to be eligible for government loans. Most schools also use information on the FAFSA to determine eligibility for their own scholarships, grants and loans. In order to fill this form out, it’s best to have the recent tax returns of both the student and his parents, if he is claimed as a dependent on their paperwork.

What if I Can’t Repay?

Student loans must be repaid and are among the most difficult loans to have discharged, even if you declare bankruptcy. You take extreme care when borrowing to pay for school. Only borrow as much money as you need and have a solid plan for repayment in place far in advance of when your payments come due. Student loans can follow you for a long time, hindering your future financial security, so be sure that decisions you make in your younger years don’t negatively impact your adult life.

CFPB Sues ITT for Allegedly Exploiting Students with Predatory Loans

The Consumer Financial Protection Bureau sent a jolt through the for-profit college industry this week when the federal agency sued ITT Educational Services Inc. for predatory lending practices, saying it would seek restitution for victims, a civil fine and injunctions against the company.

The CFPB accused ITT, which owns and operates ITT Technical Institute, of exploiting its students by pushing them into high-cost private loans the school knew likely would end up in default. Colleges are the beneficiaries of much of the loan money paid out for tuition, fees, books and other expenses. Schools receive the money, regardless of whether the student succeeds at school and graduates.

“ITT marketed itself as improving consumers’ lives, but it was really just improving its bottom line,” CFPB Director Richard Corday said in a statement. “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default.”

The suit marks the first time the CFPB has taken action against a college in the for-profit business. The action comes one month after 13 states sent subpoenas to ITT and three other for-profit colleges, demanding documents about recruiting practices and financing.

An ITT spokeswoman declined to comment on the pending CFPB lawsuit, but told Reuters “we believe that the Bureau’s claims are without merit.”

ITT Considered a National Leader

ITT, based in Carmel, Ind., is considered one of the leaders in the for-profit college industry with more than 70,000 students spread across 140 schools in 35 states. The school’s website shows it predominantly offers career-focused degrees in seven areas, ranging from information technology to nursing.

Tuition at ITT is among the highest in the country in the for-profit industry, Corday said. A four-year degree from ITT can cost $88,000 and a two-year degree $44,000. The U.S. Department of Education said that 75 percent of students at for-profit schools borrowed money to pay the tab.

Students from for-profit colleges receive about $30 billion in federal loans every year. The problem at ITT is that federal loans don’t cover full tuition at the school. The CFPB’s suit claims that ITT enticed students to close the tuition gap with a zero-interest loan the school called “Temporary Credit.”

It was temporary because the loan terms said it had to be repaid by the end of the school year, even though ITT knew that wouldn’t happen, CFPB officials said. The CFPB said that when the students couldn’t repay the loan, they were pushed to convert it to high-cost, long-term loans. The CFPB accused ITT CEO Denise Ramos of telling investors that was the company’s plan all along.

Students Destined to Fail

Specifically, the suit alleges ITT acted improperly in four major areas:

  • Financial aid staff pressured students into predatory loans.
  • Threatening expulsion as a way to coerce students into taking out private loans and finishing their degrees at ITT. Since credits don’t transfer to most non-profit schools, transferring is not an option.
  • Misleading students into thinking they would land a high salary job after graduating that could help repay the student loans.
  • Pushing loans, despite its own projection of a 64 percent default rate for its students, far above the national average of 14.7 percent.

Although for-profit schools enroll just 13 percent of the students, they accounted for 46 percent of the student loan defaults over the last three years.

The Department of Education estimates that over the next 20 years, the average default rate for all for-profit colleges will be 49 percent.

“Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics,” Corday said.

Ironically, ITT Tech’s corporate philosophy posted on the school’s website reads: “Long-term integrity is worth far more than short-term profit.”

State Lawmakers Are Seeking Solutions to Rising Student Loan Debt

There is help available for some of the 40 million Americans dealing with $1 trillion in student loan debt, but the aid comes with a catch.

You have to move to Maine, or maybe Michigan or Wisconsin.

Those are the only states actively pursuing solutions for student loan debt problems, though each state would require you to go to school there and stay to work after graduation. That’s a little bit of a reach, but at least it’s an attempt to address a problem that is growing to epic proportions.

Student loan debt has soared 362 percent in the last decade (from $260 billion to $1.2 trillion), and 70 percent of college students graduate in debt. The average college graduate owes $26,600 and 10 percent have more than $40,000 in loan debt. The Consumer Financial Protection Bureau reports that 7 million borrowers are in default and half the student loans have been deferred.

Politicians and economists agree this is a complete drag on the economy, affecting choices like marriage, starting a new business, purchasing cars or homes and relocating to new jobs.

Not Washington’s Problem

Yet in Washington, the federal government is doing all it can to ignore the issue. Members of Congress have introduced five bills in the last year that might provide some relief, but not one has made it out of committee — let alone been put to a vote.

“We’ve given up on waiting for solutions from Washington,” said state Sen. Glenn Anderson, D-Westland, sponsor of student debt relief legislation in Michigan. “There is so much paralysis going on there that it doesn’t seem like anything is ever going to get done.”

“I don’t think anyone can figure out how they make things work in Washington,” Rep. Catherine Nadeau, D-Winslow of Maine said. “The student loan problem has reached a crisis level in our state and we know we’re going to have to solve it on the local level.”

Maine is the only state to take definitive steps to relieve the anxiety associated with student loan debt. The state passed the Education Opportunity Tax Credit bill three years ago that provides as much as a $4,272 tax credit to graduates from Maine colleges and universities. The one hitch is you must stay and work in Maine after graduation.

Michigan has a similar proposal that would offer a tax credit of up to 50 percent of the student’s loan repayment as long as they are employed in the state. The Michigan Senate is expected to pass the bill later this month and send it to the state House, where its future is up in the air.

Wisconsin’s bill, dubbed “Higher Ed, Lower Debt” has had public hearings in both the state Senate and House. It would allow graduates to refinance their student loans under a state authority at rates the sponsors hope would be under 4 percent.

Stemming the ‘Brain Drain’ in Michigan

Amazingly, only 1,157 graduates took advantages of Maine’s tax credit offer in 2012. Lawmakers say part of the reason is lack of a marketing campaign — students aren’t aware of the program — and the other part is that wages in the state are too low to keep graduates home.

“These kids are going to live where they can make enough money to pay back those loans, and our wages in Maine aren’t high enough to compete with that,” Nadeau said.

A 2011 survey showed that 50 percent of the 300,000 graduates from Michigan state universities leave after graduation. Anderson thinks his bill to assist graduates with student loan debt might reverse the trend he calls a “brain drain.”

“We spend a lot of money on the front end to fund top-notch facilities and great faculties at our schools, then, we let the kids leave the state and take what they learned with them,” he said. “That doesn’t make any sense for our economy. We can’t train these students and then let them take their talent somewhere else. We need it right here in Michigan.”

Politicians Scramble to Fix Broken Student Loan System as Write-Offs Soar

Americans are taking out more loans than ever to pay for college and defaulting on them in record numbers.

Politicians, most notably U.S. senators Dick Durbin, D-Ill., Jack Reed, D-R.I. and Elizabeth Warren, D-Mass., have introduced legislation to address the growing problems with student loans, but their efforts have stalled short of reaching the Senate floor for a vote.

The Consumer Financial Protection Bureau estimates that 7 million borrowers are in default, and that another 9 million have loan payments deferred or in forbearance, meaning they aren’t making payments because they are in financial distress, unemployed, in the military or have re-enrolled in school.

Those in deferral or forbearance are carrying about $212 billion of the estimated $1 trillion federal student loan debt. Private lenders are owed another $200 billion — bringing the total for student loan debt to $1.2 trillion.

Write-Offs Last Year: $4.27 Billion

Equifax, one of the three major U.S. credit reporting agencies, claims that lenders wrote off $13.6 billion in student loan debt from January to August of 2013. That is $4.27 billion more in write offs compared to the same period in 2012.

Like many other negative financial matters, the Great Recession is blamed for the bulging bubble of debt.

College enrollment surged 37 percent from 2000 to 2013, reaching a high of 21.8 million in 2011. Many of the students were older workers, who were laid off when the U.S. economy soured from 2007 to 2009. Most were hoping a diploma would help them find a new job or at least upgrade their skills at a time when few businesses were hiring.

As the economy improved, many of the older students returned to work, but took enormous debt back to the job site. Two-thirds of 2013 graduates left school owing money and the average loan debt was $29,400. Much of it attributed to soaring tuition and fees. The average cost for in-state tuition is up 86 percent from 2000 to 2012 ($4,650 to $8,600) and 36 percent ($21,310 to $29,060) for private schools.

Bills Lingering in Senate Committees

Economists say the burden of student loans, combined with fewer job opportunities and lower salaries, are two reasons the economic recovery is slow. They find that recent college graduates are reluctant to take on financial responsibilities, like mortgages, car loans or starting a business, because they already have too much debt.

Durbin, Reed and Warren recently introduced the Protect Student Borrowers Act of 2013 that would make colleges take on some of the risk when student default on loans. Colleges could face fines from 5 to 20 percent of the amount students owe. The fines could be reduced if the college offers one-on-one counseling to help students manage their loan debt.

“Ensuring hard-working graduates can retire their student debt in a reasonable fashion will unlock a great deal of economic potential and consumer demand,” Reed said in a conference call last month with reporters. “That will have a positive ripple effect throughout our economy.”

Warren added: “Our higher education system is broken, and we need to make fixing it a real priority. We can start by restoring consumer protections to student loans, which are crushing our families.”

Other bills that have been introduced include Student Loan Borrower Bill of Rights Act and Fairness for Struggling Students Act of 2013. None has made it to the Senate floor yet for a vote.

FTC’s Focus on the Student Loan Relief Industry

It’s hardly a surprise that loan consolidation is a popular option for people looking to lessen the burden of their student loan debt. Too many students today graduate with too much loan debt, and many of them need help. Debt.org – among others – has ways to help.

But with the increased popularity of debt services, comes the watchful eye of the Federal Trade Commission (FTC). Last week, FTC staff attorney Michelle Grajales presented an up-close compliance update to debt-service providers at the Association for Student Loan Relief Conference in Las Vegas.

Grajales said she believes there are three areas the FTC watches closely: False claims, telemarketing and credit repair services. Each area is particularly important because the FTC doesn’t want individuals or companies taking advantage of consumers looking for student debt relief.

False Claims

The first area of interest deals with preventing unfair and deceptive practices. In the past, core deception practices in debt relief involved misleading statements about a program being offered or sign-up fees.

For example, some debt relief companies falsely claim to have an affiliation with government entities, including the U.S. Department of Education. This false claim leads consumers to have more trust in the company when that trust may not be warranted.

Telemarketing

The FTC’s second area of interest is the Telemarketing Sales Rule, particularly for those companies operating across multiple states. When it comes to student loan consolidation, it is important the company offering the service over the phone be completely transparent about what they’re doing.

Specifically, companies should make any potential customers aware that the consolidation is being completed by the Department of Education, and the service being offered is that of preparing the documentation to achieve the consolidation.

Credit Repair Organizations Act

The last area of interest involves the Credit Repair Organizations Act. The purpose of this act is to ensure that prospective buyers of credit repair services receive all the necessary information needed to make an informed decision about the transaction.

Grajales says companies sometimes make promises they can’t keep just to enroll clients. For example, companies will say they can erase negative credit marks, but in actuality, they may not.

Consumers looking for student loan consolidation should pay particular attention to what a company promises and what they actually deliver.

Private Companies Can Help with Student Debt Relief

It is important to understand that the FTC believes there is nothing wrong with private companies providing student loan debt relief services. There is a high demand for the service, after all.

In addition, Grajales said there is room for growth in the industry if student loan relief companies operate in an honorable and compliant fashion.

But companies working in this industry need to pay particular attention to the laws laid out by the FTC. What’s more, they need to comply with them.

If done properly, student loan consolidation can provide vast relief for those in need.

Robert Jordan is a Marketing Associate at Debt.org. As a former Student Debt Advocate he knows the difficulties of dealing with student loans. He hopes his first-hand experience can help all those in need.

CFPB Will Oversee Largest Student Loan Servicers

The millions of Americans facing problems with the companies servicing their student loans now have an angel looking over their backs.

The Consumer Financial Protection Bureau (CFPB), a government watchdog agency, will start exercising its considerable oversight responsibilities on companies that collect payments on student loans to see if they are breaking any laws beginning March 1.

Specifically, the CFPB will monitor any nonbank companies that have 1 million or more student loan service accounts. There are seven major companies that fit that category, including Sallie Mae, Nelnet Inc., ACS Education Services and American Education Service. These companies service 49 million student loans — or close to 70 percent of the $1.2 trillion in student loan debt.

Late Fees Are a Big Problem

The CFPB already has oversight responsibility for the bank companies that service student loans.  The government is concerned that companies are trying to maximize late fees and are not properly crediting borrowers who try to pay off loans early.

“We have seen especially shameful examples of poor servicing when service members find themselves thwarted by burdensome paperwork and other obstacles,” CFPB Director Richard Cordray said in a prepared statement. “Many of these borrowers did everything right; they worked hard and made years of monthly payments, but still cannot find any help to get out of those high-rate loans.”

The CFPB said the complaints from consumers about student loans are similar to ones the agency heard from homeowners who had problems with companies servicing their mortgages:  Lost paperwork, poor communication and processing errors that resulted in late fees.

“Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules,” Cordray said.

Oversight Throughout Loan Process

The new rule will allow the CFPB to subject loan servicers to formal examinations of internal procedures, data and other information. Cordray said his agency’s oversight will include all stages of the student loan process, from origination to servicing to debt collection and credit reporting.

The oversight will cover companies that service either federal or private student loans. Among the practices most closely monitored will be loan servicers misrepresenting or making false statements about repayment options or reneging on promises to discount interest rates.

The bureau could punish companies for conduct it deems unfair or deceptive.

“We know that student loan servicers can have a profound impact on borrowers and their families,” Cordray said. “We need to make sure they are complying with federal consumer financial laws.”

Default Rate Soaring

Estimates show that more than 7 million student loan borrowers are in default (failure to make payments for 270 consecutive days). That number is rising at the rate of about 600,000 a year, despite government efforts to offer ways out of default through various repayment plans.

Economists say that the rising levels of student loan debt are having a negative impact on the recovery. It is holding back the housing industry, limiting the mobility of college graduates and discouraging business start-ups.

Department of Education Nets $41.3B Profit in 2013 from Student Loans

A new government report shows the U.S. Department of Education generated $41.3 billion from federal student loans in the 2013 fiscal year, making it the third most profitable industry in the global economy behind Exxon and Apple.

The Congressional Budget Office (CBO) released the report in November. Its figures, which track the fiscal year that ended Sept. 30, show the department’s profit level trailed closely behind the 2012 profits of Exxon Mobile, estimated at $44 billion; and the iPhone and iPad maker, which cleared about $41.7 billion.

In true government fashion, the same CBO report shows the department’s numbers may be inflated dramatically because of the choice of accounting methods for student loans — an industry that is growing dramatically every year, and is dominated by the Department of Education. The CBO uses an accounting method mandated by the Federal Credit Reform Act of 1990.

The DOE funded approximately 12 million student loans for the 2012 school year, and the average student borrowed about $6,500. Students must start paying back their loans within six months of graduating, dipping below half-time status or dropping out of school.

Student loan debt passed the $1 trillion mark in 2012, moving ahead of the credit card industry in terms of money owed. Now, only homeowners have more debt than students, with the difference being that home loans can be dismissed in bankruptcy, while student loans can’t.

Effects of Student Loan on Economy

About 66 percent of college graduates leave school owing money. The average amount is now about $35,000 and that figure rises every year. Student debt in 2013 is four times what it was in 2003 and the number of people impacted has soared along with it.

The effect on the U.S. economy is noticeable already and could become staggering as more and more young buyers have their hands tied, paying back student loans. Money that could go toward purchases that fuel a thriving economy — homes, cars, major appliances — instead is being sent to the government to pay off student loans.

There are long-term ramifications as well. Students begin retirement savings much later in life and miss out on the compounding effect that is vital to accumulating a comfortable retirement account.  By the time they reach retirement age, the person who started saving at 25 will have twice as much in their account as the person who began putting money away at 35.

Is Accounting Method to Blame for Profit Amount?

The fact the government is making money — and raised rates on loans over the summer — has drawn the ire of many students and families, but Education Secretary Arne Duncan says the wrath is misguided.

“It’s actually neither accurate nor fair to characterize the student loan program as making a profit,” Duncan said during a conference call with reporters last summer.

Duncan is basing his statement on a method called “fair value accounting” used occasionally by the CBO, just not on student loans. That method acknowledges the market risk that accompanies lending money, and estimates its “discount rate” (the expected rate of return) based on loans with similar risks and returns.

If the CBO used the fair value accounting method for student loans, the government’s profit goes down to just above the $5 billion mark. Throw in administrative costs and proponents of that accounting method say the result would be no real profit, maybe even a loss on student loans.