The future cost of the federal student-loan program is uncertain, a U.S. Government Accountability Office report released on Friday has found.
The report does estimate that the government expects to generate about $66-billion in income from loans paid out from 2007 to 2012.
But because it is difficult to predict what cost of future student loans will allow the government to break even on its loan program, the report could not determine if the income will generate a profit or not be enough to avoid actually costing the government money.
Therefore, the report, required by the Bipartisan Student Loan Certainty Act of 2013, could not determine how much interest borrowers should be charged.
The report continues a two-year debate about how the government should set the interest rates of student loans, and whether current policies allow it to profit from students through its loan program. Depending on how the numbers are crunched, the government either makes tens of billions of dollars through student-loan interest or breaks even.
Last year the Congressional Budget Office estimated that the federal government will bring in $185-billion in profits on new student loans made in the next decade. As student-loan debt escalates, so does the amount the U.S. Department of Education is spending to administer the loans, an amount that jumped from $314-million in 2007 to $864-million in 2012, following changes that shifted lending from banks to the federal government.
Fluctuations in the actual and expected costs of the student-loan program over time make it challenging to set a particular interest rate that would consistently break even, according to the report. The report’s authors also determined that frequent changes in the interest rate could help align program costs with revenues in the short term but would be confusing and would complicate efforts to be transparent to students.
Reigniting the Debate
President Obama signed legislation last year that tied federal student-loan interest rates to the 10-year Treasury note. The new law set interest rates for undergraduate students at 3.9 percent and 5.4 percent for graduate students.
Jason Delisle, director of the New America Foundation’s Federal Education Budget Project, said the government’s current system to determine interest rates is about as good as it can get if its goal is to break even while still providing a “a significant level of benefit to students.”
Mr. Delisle related the current student-loan interest rate to a mortgage on a home. If the interest rate on federal student loans were applied to a mortgage, he said, it would be given only to a person with perfect credit and a 20-percent down payment; it is also a far better deal than the interest rates on private student loans.
But the interest rate on federal student loans could always be better, Mr. Delisle said, adding that the student-loan program would cost the government more money if the interest rates were set closer to zero.
“The question becomes, is that the best use of taxpayer money, is that the best use of our money in higher education?” he said. In a joint statement, Rep. John P. Kline Jr., Republican of Minnesota, and Sen. Lamar Alexander, Republican of Tennessee, said Congress was right to tie student-loan interest rates to market rates “because that is the fairest way to ensure the loans don’t overcharge either students or taxpayers.”
Others close to the issue were less optimistic, however.
Rep. George Miller, Democrat of California, said in a written statement that a question remains of how best to deal with the “excessive profits” generated by student-loan interest rates, “which pose an increasing and unnecessary burden on borrowers already struggling in a recovering economy.”
While federal student-loan interest rates are lower than those offered by private lenders, Ethan Senack, a higher-education advocate with the Public Interest Research Group, said the government should further lower interest rates to ensure a profit is not being made. He said that because the estimated $66-billion income off interest rates exceeds the government’s cost to operate the program, considerable profits will most likely be generated.
“The report tells me that our job is far from done,” Mr. Senack said. “There are still many, many more questions we have to answer about interest rates, ones that we have to address in the upcoming reauthorization of the Higher Education Act.”