Feds Profit Off Student Aid

By Staff


The federal government is making huge profits when it lends money to college students and their parents. According to a recent Congressional Budget Office report, the government pockets a tidy sum for each student loan dollar you borrow. For each dollar lent, the U.S. government makes:

  • Subsidized Stafford Loan: 12.49 cents per dollar lent
  • Unsubsidized Stafford Loan: 33 cents per dollar lent
  • Parent PLUS Loan: 49 cents per dollar lent
  • GradPLUS Loan: 54.84 cents per dollar lent
  • According to CBS Moneywatch, the CBO report attracted surprisingly little attention. Meanwhile, the press is up in arms over the prospective doubling of the interest rate for subsidized Stafford Loans on July 1. After a lot of backing-and-forthing during the 2012 election year, Congress managed to forestall the looming increase until this year. If you’ve listened to/read media accounts of this scheduled rate hike, you might mistakenly assume that this is the biggest problem facing college loan borrowers today. CBS MoneyWatch reporter Lynne O’Shaughnessy and Mark Kantrowitz, a nationally recognized financial aid expert, report that the rate hike would cost a borrower an extra $760 over a 10-year repayment period, which amounts to just $6 a week.

    Congress is in blinders with respect to the issue, focusing narrowly on whether the impending rate hike will happen. In reality, what Congress should be doing is taking a broader perspective of how the financial aid system could be fixed. One issue in particular should draw their attention: why aren’t the rates on federal college loans market-based? Currently, Congress sets the rates (the unsubsidized Stafford rate is 6.8%), which explains why these rates are arbitrary and attract too much political posturing.

    Solutions anyone?
    In an attempt to encourage in-depth examination of federal student aid programs, the Bill and Melinda Gates Foundation awarded grants to organizations that could suggest solutions. Organizations that submitted papers included the College Board, The Education Trust, the New America Foundation and the U.S. Chamber of Commerce. This is actually an excellent time to be generating these proposals because Congress is scheduled to renew the federal Higher Education Opportunity Actnext year. This is when Congress is supposed to take the long view and go beyond enacting piece-meal legislation.

    One significant change that emerged from the last renewal was the requirement that all colleges and universities post net price calculators on their websites. This is a big deal for families: now any parent can use an institution’s net price calculator to get a personalized estimate of what that school will cost long before a child sends in an application.

    Some of the Gates’ grantees are urging Congress to move to market-based rates rather than letting Congress continue to arbitrarily set them. Student groups want any market-based system to include salary caps. Two other areas that attracted a great deal of attention from the Gates participants were focused on loan repayment and tax credits.

    Automatic repayment based on income
    Under current law, borrowers with federal student loans can choose several repayment plans and some qualify for the income-based repayment plan. The IBRessentially allows students who are unemployed or underemployed to repay their student debts based on what they can afford rather than what they owe. Some groups have suggested that graduates with federal student loans be automatically enrolled in the IBR program.

    Tax credits
    Eleven of the 16 Gates-funded proposals called for consolidating, shrinking or killing off education tax credits, which are controversial because they are regressive. The tax credits chiefly benefit more affluent families whose children will be heading off to college with or without these credits. Money saved from curtailing the tax credits could be sunk into Pell Grants that benefit needy families. As a political reality, however, eliminating the tax credits is unlikely to happen. If you want to learn more about the proposals to revamp the federal financial aid behemoth, the National Association of Student Financial Aid Administrators has summarized the recommendations in a summary matrix.