Loans and the Deficit

For much of the last decade, the federal student loan programs served as a piggy bank as Congress looked for money to cut or redistribute for other purposes.

The "profits" from lending existed mainly because the revenues produced (as borrowers with high interest rates repaid their loans) significantly exceeded what it cost the banks and the government to make the loans.

But because significant proportions of the programs’ profits flowed to banks and other lenders, slashing them — to increase spending on grants to students, or even to pay down the federal deficit — was often portrayed as taking money from "fat cat" companies to give to needy students, as Congress did when it poured tens of billions of dollars into the Pell Grant Program in 2010.

Today, the federal student loan program still produces significant profits – and as politicians here scour the federal budget for ways to cut the deficit as part of negotiations over increasing the federal debt limit, the student loan program is once again on the hit list. But now that the government itself is the sole provider of federal student loans, those revenues are flowing into the federal treasury, and it is clearer than ever before that the “profits” that would be redirected to deficit reduction and other purposes are coming from the borrowers themselves. And that gives the proposed transfer a slightly different look than it had when the profits that were being tapped were being taken away from banks and other lenders.

"The federal government is making a lot of money on students and on parents," says Becky Timmons, assistant vice president for government relations at the American Council on Education. "There’s a risk of almost treating students like an ATM machine."

For decades, the federal government has made loans to students to encourage college-going. Students (or parents) borrow government funds and repay them over time with interest — some with the government covering the interest payments while the students are in college, others not.

For many years, the government used a system of banks, other financial institutions, and state and nonprofit agencies to lend and guarantee the loans. Beginning in 1993, the government began making and servicing some of the loans itself; in 2010, the entire system became government-run.

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