I haven’t really given much thought to the relative profitability of federal loans for the US government – I always assumed that they were just major losses; subsidizing the education of the populace. It turns out that that may not be the case – so says the Credit Slips Blog:
As student loan debt passed the $1 trillion mark, President Obama, speaking at Chapel Hill yesterday, called the upcoming interest rate hike on student loans a tax. He didn’t tell the half of it. Congress’ dirty secret is that the government makes a huge annual profit on student loans. According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.) The President’s current dispute with Congressional Republicans is about whether to increase this annual profit next year. The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.
But how can this be?
Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the yield spread just keeps on coming. Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.
What about the credit losses, you ask? While many loans go into default (about 10% projected for 2013 loans), credit losses are relatively modest. The Education Department assumes it will collect between 75% and 80% of defaulted loans (on a discounted NPV basis), using its supercreditor powers, especially wage garnishment and tax refund intercepts. There is no statute of limitations on student loans, and even bankruptcy discharge is difficult. The $37 billion Treasury profit for FY2012 is after allowing for estimated credit losses in the $5 billion range.
Check out the rest (and the comments) here.










