The U.S. Department of Education says it has been working to help borrowers who are struggling under the weight of crushing student loan debt. But as Washington focuses on reducing annual federal budget deficits, the huge profits off those same borrowers may prove too alluring for Education Secretary Arne Duncan.
In the fiscal year ending Sept. 30, his department reaped more than $42.5 billion in profit from federal student loans, according to federal budget documents. That total was roughly a third higher than in 2012 and the agency’s second-highest ever profit haul after a $47.9 billion gain in 2011, according to a Huffington Post analysis. The Education Department confirmed the 2013 profit figure.
Had Congress and President Barack Obama not agreed over the summer to temporarily lower student loan interest rates, the Education Department’s 2013 profits would have been about $8 billion higher, according to the Congressional Budget Office, and they would have set a new record.
In a sign of just how important student loan profits have become for the Education Department’s bottom line, its reported gains off lending to students and their families over the last year comprised nearly half of the agency’s total outlays, the biggest share since at least 1997.
By effectively subsidizing half of the department's total operations -- spending that encompasses programs ranging from early childhood learning to aid for colleges -- the profits have enabled Duncan to reduce his agency’s total cost to U.S. taxpayers to the smallest amount since 2001.
The department spent $40.9 billion in the fiscal year ending Sept. 30, nearly a third less than the previous year and the lowest reported amount since the first year of George W. Bush’s presidency, according to Treasury Department data.
Student loan profits, the difference between what the U.S. government pays to borrow and what it charges students and their families, last year exceeded the amount of money provided to low-income college students in the form of federal Pell Grants, budget documents show.
The Obama administration has increased the amount of Pell Grant funding available to students thanks in part to the reduced cost of federal student loans, making the arrangement appear as if one group of students is subsidizing another.
That’s fueled concern by top Democrats like Senate Majority Leader Harry Reid (D-Nev.), who said in June that members of his caucus “don’t think there should be deficit reduction based on the backs of these young men and women who are trying to go to college.”
“This is fundamentally about our values and what kind of country we want to be,” said Sen. Elizabeth Warren (D-Mass.). “With college costs exploding and students being crushed by more than a trillion dollars in debt, I believe we should invest in our students -- not make obscene profits off them.”
The Education Department’s extraordinary gains come as the Obama administration faces scrutiny over its lackluster debt-relief initiatives, and top bankers and financial regulators have warned that the nation’s $1.2 trillion in unpaid student debt risks depressing economic growth, as Americans curtail borrowing, spending, investment and savings to pay down their college loans.
“Student loan debt … is a burden which is affecting, for example, the ability of many young people to buy a first home, affecting other purchasing decisions they might make, affecting obviously their overall financial condition,” Federal Reserve chairman Ben Bernanke said this month, echoing recent research from the Federal Reserve Bank of New York. “To the extent that there’s a lot of student debt held by people who are not working, it's obviously yet another drag on recovery.”
The Education Department’s profits off student loans may be fueling what Richard Cordray, the head of the Consumer Financial Protection Bureau, this month referred to as the “domino effect” of student debt on the broader U.S. economy. Cordray said that student debt is affecting the housing market, for example, since overly indebted borrowers are less able to purchase houses or secure home mortgages.
Federal student loan profits are largely the result of big payments, due to relatively high interest rates and under-utilized debt-relief programs, meaning that after borrowers pay their student loan bills, they have less cash to devote to other financial activities.
Rohit Chopra, the CFPB’s top student loan official, said in a speech last year that “excessive student debt can slow the recovery of the housing market [because] student loan borrowers are sending big payments every month to their loan servicers, rather than becoming first-time homebuyers.”
The profit figures have previously been disputed by the Education Department. On a July 23 conference call with reporters organized by the White House, after reports of student loan profits inflamed Senate Democrats, Duncan said, “It’s actually neither accurate nor fair to characterize the student loan program as making a profit."
But Duncan's claim did little to calm outraged legislators, prompting Obama to declare the next month, "Our national mission is not to profit off student loans.”
Meanwhile, Jason Delisle, director of the federal education budget project at the New America Foundation, a Washington policy group, is among a leading group of experts who have criticized the figures for not accurately capturing the cost of extending loans to student borrowers. The profit figures are recorded under a government accounting scheme that excludes certain risks that would be borne by private-sector lenders, thus minimizing costs and inflating the net gain in Delisle’s view.
But the accounting move has been embraced by the Obama administration, most notably in the White House’s budget for the 2013 fiscal year.
“They have gone out of their way to defend it,” Delisle said. “That’s essentially why those [student loan] profits are there.”
The profit totals also exclude administrative costs, though experts reckon the costs of administering the student loan program are minimal.
New York Fed researchers, the CFPB, the Treasury Department and senior officials at the Federal Reserve have warned that student debt burdens risk sapping economic growth as borrowers who devote bigger shares of their incomes to repaying their loans may reduce borrowing, investments and purchases of big-ticket items.
In September, a group of bank chief executives who advise the Fed warned its seven-member Board of Governors that “too many students are graduating (or dropping out of school) with an unsustainable level of federal student debt,” according to a summary of their meeting.
The fast rise in student debt -- outstanding federal student loans have nearly doubled since 2007 -- has senior bankers worried that the industry could see fewer revenues in the future “as creditworthiness deteriorates and borrowing capacity and consumer demand for auto, home, and other purchases declines.”
“A generation of college graduates with a lack of expendable income could negatively impact the overall economy for years to come,” the bankers told the Fed.
Last month at a public meeting hosted by the Treasury Department, Treasury Secretary Jack Lew said, “This debt is hampering our economy by keeping young people from buying homes, creating businesses and saving for retirement. At the same time, loan default rates are rising.”
Data on borrowers with student loans or the state of the debt are scant. Of the roughly $1.2 trillion in outstanding student loan debt, nearly $1.1 trillion is guaranteed by U.S. taxpayers, according to the CFPB and Education Department.
The average borrower with federal student loans now carries more than $26,000 in debt, a nearly 43 percent increase from 2007.
But the share of loans at least 60 days delinquent and the number of unemployed borrowers are unknown, a source of frustration to federal policymakers outside the Education Department who have complained about the lack of reliable data.
Defaults on federal student loans provide a rough measure of how student borrowers are coping with their debt. Recent data suggest that more borrowers are falling behind, despite increased attention by the White House to their plight.
Some $93.5 billion in federal student loans, or about 9.1 percent of outstanding debt from the Education Department’s Direct Loan and Federal Family Education Loan programs, were more than 360 days late as of Sept. 30, according to the most recent available federal data.
That compares with $89.3 billion, or 8.9 percent of outstanding federal student loans, that were in default as of June 30.
Recent college students are defaulting on federal loans at the highest rate in nearly two decades, Education Department data show. One in 10 recent borrowers defaulted on their federal student loans within the first two years, the highest default rate since 1995 and double what it was in 2005. A separate gauge, measuring defaults occurring within the first three years of required payments, showed that more than one in seven borrowers with federal student loans went into default.
Defaults have ticked up even as Obama has likened the nation’s student debt to a “crisis” and has pledged to help borrowers manage their obligations.
“Our economy can’t afford the trillion dollars in outstanding student loan debt, much of which may not get repaid because students don't have the capacity to pay it,” Obama said in an Aug. 22 speech at the State University of New York in Buffalo.
The White House has prodded the Education Department to improve its debt-relief measures, and Obama has introduced new programs to aid distressed borrowers unable to manage their debt loads. They consist of three separate but similar plans, called Income Contingent Repayment, Income Based Repayment, and Pay As You Earn, that cap monthly payments relative to borrowers’ incomes.
But those programs have underperformed, Obama and Duncan have acknowledged, failing to enroll a sizeable number of borrowers and casting doubt on the Education Department’s commitment to helping current borrowers manage their debt.
Jen Mishory, deputy director of Young Invincibles, an advocacy group representing 18- to 34-year-olds, told Congress on Wednesday that her organization recently held roundtables with students, and “none of the students we talked to had ever heard of Income Based Repayment.”
“That's a problem,” Mishory said.
In October, Duncan said of his department’s debt-relief initiatives, “Candidly, I think we haven't always done the best job of getting the word out. We think there are many young people who could benefit from some of those opportunities who don't know about them, don't have the information they need.”
“And so we want to challenge ourselves across the administration to figure out how to help that trillion dollars in debt that's out there, how to help young people manage that as best they can,” Duncan added.
In a bright spot for Duncan’s department, enrollment in the three income-linked initiatives among borrowers with debt from the Direct Loan program increased during the quarter ending Sept. 30, federal data show.
Some 1.7 million borrowers carrying $79.1 billion in debt were enrolled in the income-driven plans, a small jump from the 1.6 million borrowers who had $72.3 billion in debt that were in the plans as of June 30.
But the increase in the number of borrowers in the income plans -- about 100,000 -- matches the increase in the number of borrowers with Direct Loans who entered default.
About 60 percent of outstanding federal student debt is from the Direct Loan program. The Education Department does not make public enrollment figures in the income-driven plans for borrowers with loans from the since-discontinued Federal Family Education Loan program.
Beyond already announced programs, there’s little else planned to help existing borrowers struggling with their student debt. Instead, the Education Department appears to be focusing its efforts on ensuring future students leave school with less debt.
“The administration has taken steps to improve college affordability, and thanks to collective efforts, students and families are paying lower rates on their loans today than they would have otherwise,” Education Department spokesman Stephen Spector said in an emailed statement. “More must be done to bring down the cost of college, and we look forward to continuing to work with Congress, institutions, borrowers, and other stakeholders to make college more affordable.”
Chopra of the CFPB told Congress earlier this year that it was understandable that federal policymakers “are seeking to address some of the underlying drivers of growing student loan debt, including the rising cost of tuition.”
“However,” he cautioned, “it will also be prudent to address the large pool of existing debt owed by millions of Americans.”