Is the federal government making a huge profit on student loans? Are students going broke sending hard-earned cash to the Department of Education? That’s the allegation made by many pundits in reaction to Congressional Budget Office report.
As Mandi Woodruff over at Business Insider puts it:
Student loan debt is now one of the Obama Administration’s biggest cash cows.
The government is poised to pocket a record $51 billion profit from federal student loan borrowers this year . That’s roughly 40% higher than the CBO’s original forecast in February, $35.5 billion.
Well technically, yes, but it’s not a revelation of some huge government scam. The federal government is supposed to make money off student loan interest; that’s how it can keep loaning out money to allow students to pay for college. The reason the government is taking in more money in student loans than the CBO projected is probably because more former students are making payments on their loans than projected, because the economy improved.
Part of the reason government appears to make such an awesome profit, Andrew Kelly at The Atlantic points out, is that the federal government has to take on substantial risk in loaning out money for education. That’s because it must loan to everyone, regardless of his ability to pay.
So sure, the federal government is making a huge profit lately, but that’s because it also has the potential to take such a huge loss.
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