Budget Outlook Sees Long-Term Profits on Federal Student Loans

February 05, 2014

The federal government will continue to profit from student lending through at least 2024, though recent changes in how interest rates are set will shrink those profits in the short term, according to budget estimates released on Tuesday by the Congressional Budget Office.

Meanwhile, the Pell Grant program, which had been expected to face a shortfall in 2015, will remain in the black until 2016, the office projects.

According to the CBO, last summer’s changes in student-loan interest rates will cost the government $24-billion from 2014 to 2016, but will increase its interest revenue in later years, resulting in an additional $9-billion in profit over 10 years. Recent cuts in payments to loan guarantors will save the government $2-billion more in projected costs.

In July, Congress passed legislation that tied student-loan interest rates to the financial markets, lowering the rates temporarily. Rates could rise to as high as 8.25 percent for undergraduates and 10.5 percent for their parents if the economy improves and it becomes more expensive for the government to borrow.

According to the unpublished Pell projections, the program’s costs will be less than expected in the coming years. If Congress continues to support the program at current levels, it won’t face a funding cliff until 2016, and the shortfall will be much smaller than originally feared: $1-billion rather than $5.8-billion.

That’s good news for Congressional appropriators, who would have had to come up with additional money to plug the hole at a time when nondefense discretionary spending will be essentially frozen. It’s good news for students and colleges, too, because the money to cover the shortfall could have come from other student-aid programs.

The budget estimates don’t explain the decline in the program’s projected costs, but it is probably due to declining college enrollments, as Congress hasn’t changed the program’s eligibility criteria since the last CBO estimate was published, in May.

This is the third time in a year that the budget office has revised its Pell cost estimates downward. At the start of 2013, the program was projected to face a budget shortfall of $5.7-billion in 2014.