The Government Accountability Office released a report on Friday stating that it is impossible to precisely set borrowing interest rates in advance on federal student loans. As a result, the federal government has earned an estimated $66 billion in profits from loans originated from 2007 to 2012.
“Because Direct Loan costs fluctuate with changes in certain variables, borrower interest rates cannot be set in advance to balance government revenue with costs consistently over the life of the loans,” the report stated. “In a simulation of how loan costs respond to changes in selected variables, the costs were highly sensitive to changes in the government’s cost of borrowing. This, coupled with cost estimates regularly updated to reflect loan performance data, means the total costs associated with Direct Loans are in flux until updates are recorded through the end of the loans’ life cycle, which takes several decades.”
The GAO report was ordered as a part of a compromise on student loan rates last year. The “Bipartisan Student Loan Certainty Act” of 2013 ended months of cantankerous debate and replaced a sunsetted provision that set federal loans rate at 3.4 percent. The new bill tied the interest rates to the rate of the 10-year Treasury notes plus 2.05 percent, with maximum rate caps established. The Direct Loan rate is currently at 4.65 percent.
‘‘This is obscene. The government should not be making $66 billion in profits off the backs of our students,’’ Sen. Elizabeth Warren said in a statement in response to the report.
Warren is part of a committee of nine senators committed to addressing the $1.2 trillion outstanding student loan debt.
‘‘This report reinforces what we already knew — instead of investing in our children and their futures, the government is squeezing profits out of our young people and adding to the mountain of debt they will spend their lives struggling to repay.
‘‘We cannot bury our heads in the sand and pretend the profits don’t exist, or use accounting tricks to make them disappear,’’ Warren continued. ‘‘It’s time to end the practice of profiting from young people who are trying to get an education and refinance existing loans.’’
The GAO report cautioned that the $66 billion estimate is dependent on the repayment of the loans, which could take as long as 40 years. Per the Consumer Financial Protection Bureau, over 7 million student loan borrowers are currently in default and roughly a third of all Federal Direct Loan Program borrowers have chosen an alternative repayment scheme.
The GAO report was ordered due to reports from the summer of 2013 indicating that the Education Department was prepared to pocket a $41.3 billion profit from its fiscal year 2013 loans — a decrease from fiscal year’s 2012 profit by $3.6 billion, but enough to make the Department of Education the third most-profitable corporation in the world if the agency was a for-profit organization. The Department of Education called the allegation misleading, as it does not acknowledge market conditions, borrowers’ willingness to repay the debt (market risk) or administrative costs.
The report found that administrative costs have grown from $314 million to $864 million from 2007 to 2012. However, the cost per borrower has stayed steady and the growth came from a 300 percent growth in the number of Direct Loans serviced due to the federal government’s termination of the private lender program in 2009.