How The Government Profits From Student Loans, To The Tune Of $40 Billion A Year

Career College Central Summary:

  • Several bills have been proposed to fix the student loan problem.
  • Just last week, Massachusetts Sen. Elizabeth Warren filed a bill that would have allowed 25 million debtors to refinance their loans at lower interest rates.
  • The bill didn’t even make it to the floor, marking the second time it failed in Congress. Calling it a political move, Republicans opposed the bill because it included the so-called “Buffett Rule” which would pay for the loss of revenue from the interest the federal government earns by increasing taxes on the wealthy.
  • Democrats, meanwhile, “want an issue to campaign on to save their own hides this November,” argued Senate Minority Leader Mitch McConnell. Regardless of moral imperatives, it will be difficult for the federal government to give up the income provided by student loan interest.
  • Further, the Congressional Budget Office expects the profit to increase, with the government raking in as much as $127 billion over the next 10 years.
  • “The Department of Education has become dependent on student loan interest,” a Senate staffer who works on education issues told MintPress. In a press conference last year, Secretary of Education Arne Duncan argued that categorizing student loan interest as a “profit” is a mischaracterization, noting that the funds go toward subsidizing other education programs.
  • Yet little of that revenue benefits the people who spend decades paying off their college tuition. Students are charged 6.8 percent interest for unsubsidized loans, which constitute most loans.
  • Parents who take out loans to pay for some of their childrens’ education pay 7.2 percent. Last year, the interest rate cap on federally-subsidized student loans was set to expire.
  • Long set at 3.4 percent, the expiration of the law that set the cap meant the interest rate would jump to 6.8 percent — the same as the rate on unsubsidized loans.
  • However, outcry resulted in Congress settling on a market-based interest rate, which varies year to year with the market but is fixed for the life of the loan.
  • A student matriculating this fall would be taking subsidized loans with interest rates of 4.66 percent and that rate will remain in place through 2015. “After that, we expect the interest rates to continue to rise,” Wang warned.

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