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Student Loans Are a Good Deal for Students and the Government

November 21, 2013 at 4:22 PM

My new piece in The Huffington Post explains that, while the federal student loan program generates a profit for the federal government, it’s also a good deal for students.  Here’s the opening.

Shahien Nasiripour’s November 18 piece stated that reported profits from the federal student loan program offset a large part of the U.S. Department of Education’s budget, while noting that some experts disagree that the program actually generates a profit.  We’d like to add three points: 1) the federal budget’s accounting for student loans is correct — the government does make a profit on the program; 2) this doesn’t mean that the program is a bad deal for students; and 3) before making the program more generous, we should evaluate whether that’s the best use of new federal dollars, which are very hard to find these days.

Explaining why the student loan program is running a profit is complicated so we’ll save it for the end.  But the government’s profit does not mean that the program is necessarily a bad deal for students.  More than 10 million undergraduates per year borrow from the government precisely because it helps them pay for college and comes with favorable repayment options and consumer protections not offered by private lenders.

How can the government both run a profit and charge lower interest rates and provide better terms than the banks?  The key is that the Treasury borrows at lower cost than banks.  It also doesn’t pay dividends to stockholders, and it has more effective mechanisms for collecting overdue loans.

Advocates for students worry, understandably, that student indebtedness is growing too rapidly.  Why not reduce or eliminate the federal profit by, say, cutting the interest rates that students pay for federal loans or forgiving a slice of outstanding debt?  But making the student loan program more generous to students overall would raise total federal spending and deficits, since the program is part of the federal budget.  And it may not be the best use of additional budget dollars, which are scarce.

Policymakers would need to weigh the range of alternatives across the budget, such as expanding Pell Grants for low- and moderate-income students, reducing the deficit, or making other investments with a future pay-off, such as repairing and expanding public infrastructure.  If reducing the burden of student loans has merit, it is not simply because the federal program is running a profit but because many students need the relief and making college a bit cheaper is good for the nation’s future.

Click here for the full post, including why we agree with existing budget accounting.

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