Government Cashes In On Defaulted Student Loans

Defaulting on student loans can be a nightmare for borrowers but, according to the Wall Street Journal, the practice is a boon to the national bank account.

Every time a student defaults on a loan, the government can earn thousands of dollars more in interest than if the loan had been paid in earnest over time -- and one expert says this gives the government a "perverted incentive" to watch as loans default.

Mark Kantrowitz, the publisher of FinAid.org, provided the Journal with an example of how the government profits from defaults:

According to Kantrowitz, the government stands to earn $2,010.44 more in interest from a $10,000 loan that defaulted than if it had been paid in full over a 20-year term, and $6,522.00 more than if it had been paid back in 10 years.

Recent Education Department data revealed that 46.3 percent of loans paid to for-profit colleges in 2008 would go into default. The default rate on student loans overall stands at 15.8 percent. (Click here for a list of colleges with the highest loan default rates.)

Defaulting on student loans carries severe consequences for borrowers, including ineligibility for future federal aid. The loans are are almost never discharged, even in the event of a borrower's death.

What's your take on this? Are you struggling with student loans? Share your thoughts in the comments section.