How Uncle Sam made $100 billion on student debt

The government has been borrowing money on the cheap and lending it out at a premium, reaping huge profits.

By Jason Notte Apr 11, 2013 7:12AM
Uncle Sam tucking cash into vest (copyright Mike Kemp/Rubberball/Getty Images)Worried about student loan debt? Uncle Sam isn't.

The Huffington Post reported Wednesday that the combination of low borrowing costs for the government and fixed interest rates for students generated $101.8 billion in profit for the Education Department over the last five years.

The department was expected to take in $33.5 billion from student loans made during the 2013 fiscal year, according to budget documents. The agency's Direct Loan program delivered a $24 billion profit on loans made in 2012 and nearly $27.5 billion on 2011 loans.

How does that work out? Simple. The government's funding costs, measured in the yield on 10-year U.S. Treasurys, has averaged less than 2% since the summer of 2011, thanks in no small part to the Federal Reserve's attempts to stimulate the economy. 

At the same time, laws have kept the rates on Stafford loans made by the Education Department to undergraduate borrowers from middle-class households fixed at 6.8% since 2006. Students from low-income households can qualify for small loans at 3.4%, but the majority of government borrowers pay the higher rate.

The difference between Treasury and Stafford loan rates has drifted from 4.5 percentage points to 5.27 percentage points since August 2011. It's hardly the kind of lending markup enjoyed by Visa (V) or Mastercard (MA), but it's enough to make people notice. The White House is considering a variable rate for student loans that moves with the market, but it's still in the developmental stages.

Right now, both art school students and MBAs alike are being crushed by student debt. Deeply indebted doctorate recipients are seeking food stamps in increasing numbers. Roughly 284,000 college graduates are making minimum wage.

Even when graduates get a job, their debt doesn't get any less onerous. The Center For College Affordability and Productivity reported that nearly half of the college graduates from the class of 2010 are in jobs that don't require a bachelor's degree. A full 38% have taken jobs that don't even require a high school education. According to the Associated Press, that has dropped the median wage for college graduates significantly since 2000.

With all student debt adding up to $1.1 trillion, it's likely a good time to start discussing some solutions. In the meantime, the government has no problem watching the money roll in.

More on moneyNOW

Apr 11, 2013 10:04AM
The problem with the student debt load is pretty clear in the article.  It's not the amount of debt in and of itself, but rather the job prospects for graduates in their chosen fields of study.  When nearly half of all graduates 3 years out of school are in a job that doesn't require a bachelors's degree, and about 3/4 of those don't even require a high school diploma either, there is little question as to why they have difficulty with student debt. 
Apr 11, 2013 10:55AM
They should give the money back in the form of lower interest rates, or shut the hell up about the high cost of education. The federal government is the biggest reason of why the cost is so high.
Apr 11, 2013 9:59AM
So....Obama pushes student loans, so students will go into debt, to make minimum wage, and go on food stamps, as the government rakes in the dough, while proposing to cut social security, and raise taxes?  This guy is brilliant!
Apr 11, 2013 11:18AM
A recent graduate of 2009. My Government student loans (20K) are at 6.5% (2K in interest when I started repayment) while my Private student loans (7K) are at 2.7%. Now with the prime and LIBOR rates at all time lows tell me who in their right mind prefers government to be in control over Education over the private market. I am currently putting all of my resources in paying off my student loans and have been over the past 3-4 years. I would love to buy a home and help stimulate the economy but I won't do that until I pay off my student loans. I have 2 more years of excelerated payment until completion. I bet you that I could have entered the housing market a lot earlier had my government student loan rate not been so high. When you give the government this type of power they can put the rate at whatever they so desire which is unamerican but then again we don't have an american president right now anyways.
Apr 11, 2013 9:26AM
Apr 11, 2013 12:25PM

Lets hear it for our Great and Caring Government. You silly people believed that the President and the Democrats wanted to protect the middle class. The President, the Democrats and the Republicans all want our money.


Apr 11, 2013 8:52PM

people say don't borrow money to go into low paying fields but refuse to support things like higher taxes to pay teachers more. The world needs teachers so there are two choices pay them more or lower college costs. HOWEVER that will never happen because then the colleges will complain that they cant pay their employees, etc.



Be happy that people are willing to go 100k in debt to make 30k teaching YOUR kids

Apr 11, 2013 12:50PM

These lending programs can be great source of revenue for federal, state and local governments. and should be a model for implementing services across the board. This will effectively and ultimately eliminate taxation as a form of revenue. Public services should always be competitive and profitable.

Apr 11, 2013 1:10PM
People should not bite off more than they can chew. DO NOT LIVE OVER YOUR MEANS. Any loan should be evaluated prior to taking it. I feel bad for people with 100k in student loans @6.5% so they can have a masters degree in teaching and start making 30k a year. You should have taken a Finance or Math class because that does not add up...
Apr 11, 2013 1:39PM

 My sympathy for those having difficulties with student loans is about non existent.  When they signed the loan documents, they KNEW what the interest rate was.  They also KNEW what their chosen career fields typically pay entry level employees.  Only a fool would assume $20k in debt to get a degree where the starting pay is $30k a year....

 Government -backed loans should be granted based on the applicant's field of study, the projected demand for people those skills, and the earnings potential in the career field.

 The economy did tank, which just adds to the difficulties, but unmanageable debt is the result of poor choices.

Apr 11, 2013 9:24AM
Profits mean they can make even more loans without adding debt, that's a good thing.  I'd rather the US government  make the profit instead of a bank.  
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