According to Congressional Budget Office, it’s estimated that the government will make as much as $135 billion over the next decade on student loans. While some people argue the method used to come up with that $135 billion figure doesn’t properly take into account the risk of economic turmoil, there is a good chance that if the economy does well in the next ten years the government will end up making large profits off the backs of student loan borrowers.
So, the question everyone is current asking is should they be profiting off these loans?
The Election Has People Talking About Interest Rates
Whether the government should make a profit on student loans is a question that has been talked about frequently by presidential candidates this election.
Hillary Clinton and Bernie Sanders have both stated that they don't believe that the government should be turning a profit by collecting student loan payments and have committed to reducing student loan interest rates if elected. Meanwhile, Donald Trump has not released his platform on student loans yet but he has indicated on Twitter in the past that he also takes issue with the government making money on student loans.
Whatever happens come November, it looks like the national conversation on student loan interest rates has come to a head with many people feeling like it’s time to change how the government manages the federal student loan programs.
Why The Government Shouldn’t Make Money On Loans
The federal government currently has a budget deficit of $552 billion and $19.3 trillion in debt. So, why shouldn't the government make money on student loans?
There are a number of reasons why it is in the best interest of the federal government to charge lower interest rates, but the most compelling reason is the argument that student loans provide financial benefits to the government in a number of important indirect ways.
One big way they do so, according to a report by the Economic Policy Institute, is that an educated workforce directly correlates with higher average wages which leads to the government collecting more taxes over the course of an educated taxpayer’s life. The Centre for American Progress also claims that in addition to generating more tax revenue, educated Americans create a more productive workforce, are better consumers, and are less likely to rely on government support.
That means that by making money off of student loan borrowers, the federal government is reaping profits from their loan repayments and then subsequently making more money off those borrowers than other taxpayers.
I believe that’s unfair. I also think that by making student loans more difficult to pay back, it disincentivizes students from going to college or completing their degrees. Which means that the government is working against its own interests.
Another reason that the government shouldn’t make money off student loans is to help alleviate the problems that the student debt crisis is creating. Borrowers are graduating with an average of $28,000 in student loan debt. That is an enormous financial burden and the effects of that debt ripple through the economy since new graduates have reduced spending capacity.
In fact, because they are servicing their debt, many millennials are still living at home and putting off things like getting married and having children. This has led to low levels of household formation. Because a significant amount of spending occurs when a new household is created, lowering student loan interest rates could be an important economic stimulant. In the absence of this economic activity, the economy can potentially slow and stagnant over the long-term.
Since Millennials are also not in the financial position to be doing other things that stimulate the economy like buying cars or having children, lack of spending ripples through the economic system. That means that it doesn’t just affect the florist who won’t be supplying flowers to the wedding they aren’t having, but it also affects the car dealership that the florist might have bought a new car at if she had made more money last year and the person who would have manufactured that car.
Lowering interest rates is potentially a great way to allow graduates to accelerate their student loan repayment and help them pay off their student debt faster. This would give them more disposable income which would allow them to start purchasing more and could help jumpstart economic activity. Increased economic activity is good for government coffers since it results in the government collecting more taxes.
Another way that lower interest rates could help the government is that it could increase the likelihood that low-income students go to college and complete their degrees. Low income students are more debt adverse than other types of students. They are also more likely to drop out of school in order to avoid increasing their student loan debt. By reducing student loan interest rates and decreasing the impact that debt will have on their lives, the federal government would encourage more low-income students to complete their degrees. That would result in a better educated workforce and allow for greater economic mobility.
The Bottom Line
Federal student loans are currently available for relatively low interest rates, but they are still causing problems for students. This isn't even considering the problems that private student loan interest rates can cause. Unfortunately, those problems are only going to get worse for future student since the interest rate that the government can borrow money at - which helps determine the interest rate of student loans - is currently at a low point and will only go up in the next few years. If the government works now to pre-emptively reduce the cost of borrowing for college, they can help current students more easily afford to go to college and ensure that future student loan interest increases will have less of an impact on students.
Ultimately, it is in the government’s best interest to decrease interest rates since it benefits, in a number of important ways, from low student loan interest rates. Hopefully, with all the conversations that have been going on about whether the government should make money off student loans, the government will take action to help relieve the debt burden of America’s educated future workforce.