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Should the Federal Government Make a Profit on Student Loans?

Steven J. Richardson
Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.
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There has been quite a bit of talk lately about how the federal government should not make a profit on student loans. The whole program should be revenue neutral to the student (or his/her parents) and the government. I disagree with this position, and believe that this "profit" is necessary for the following reasons:

The Government Often Loses Money on Loans

There are many instances in which the government loses money on student loans, and as such, it is necessary that a profit be made on others in order to offset that loss. These losses come about for two main reasons:

  • Administrative Discharge of the Loan. A federal student loan can be discharged for the disability or death of the student (and many times parent, with a Parent PLUS loan). An unpaid balance can also be discharged where a borrower completes the Public Service Loan Forgiveness Program.
  • Income Driven Repayment Plans. People in income driven repayment plans like IBR, PAYE, ICR, or REPAYE, may not ultimately pay off the principal and interest on the loan after the applicable repayment period (20 or 25 years, depending on the program), and the balance gets discharged. This may not be felt for decades, but the government needs to start accumulating the income now for that eventual offset.

The Interest is Often Tax Deductible

The government may make some money on the interest in any given year, but if the borrower deducts the interest on his or her tax return, there is an offsetting loss of tax revenue. This needs to be taken into account in determining how much of a "profit" there really is in light of the loss due to discharge as discussed above.

The Money Is Needed for Future Students

This "profit" should also be seen as each student borrower "paying it forward" for future generations of students. Costs of education go up, so the moneys available for loans and grants have to increase as well.

Also, with so much talk of a "free" post-high school education, the more revenue that comes in to fund that initiative the better. The money has to come from somewhere, and shouldn't those that benefited from this financial aid reach back and help those that follow?

Society Ultimately Benefits

The bottom line is that revenue generated from the financial aid programs of the U.S. Department of Education helps society as a whole. Profits can be used to help others and provide an additional revenue stream to taxes to make sure that there is always money for the future.

This "profit" also comes at a lower price to the taxpayer, as interest rates for federal loans are much lower than those in the private sector.

For example, an undergraduate direct loan is currently at 4.29%, while private loans start at 8% and go up from there! The same is also true for Parent PLUS loans and loans for graduate or professional school, which are currently at 5.84%.

So the student gets the benefit of a lower interest rate, and the government gets a revenue stream to offset losses and provide funds for future programs. Under those circumstances, doesn't everyone win?

So what do you think? Do you think the government should make a profit on financial aid programs or should it be completely revenue neutral? Please leave your thoughts in the comments!

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