Even as the economy struggles to recover from the bursting of the sub-prime mortgage debt bubble in 2008 a new debt crisis over student loans looms on the horizon, and this time the federal government is actually profiting off of debtors. If a coming interest rate increase is not averted by Congress, millions of student borrowers could be thrown into default, with devastating consequences not only for themselves but for the economy as a whole.

At present, student loan debt stands at $1.1 trillion, more than all other consumer debt except for home mortgages. Some experts, including those at the Treasury Department’s Office of Financial Research, warn that student debt is a potential threat to financial stability that could depress demand for home mortgages and reduce consumption.

Meanwhile, the federal Department of Education is making big money from student loan payments. Its direct loan program yielded a $27.5 billion profit on loans made in 2011, $24 billion on loans made in 2012, and is expected to earn $33.5 billion on loans made in 2013. All told, over the last five years the government has earned $101.8 billion in profit from student borrowers, thanks to differences between the government's low borrowing costs and students' fixed interest rates.

If a doubling of the student loan interest rate scheduled for July 1, 2013, goes into effect, the rate will go from 3.4% to 6.8%, which would add thousands of dollars to the average student borrower's payments every year. The Obama administration has proposed making the interest rate variable, which would likely keep it low for several more years, and some in Congress have proposed simply keeping the 3.4% rate for another year. Nevertheless, a legislative fix is not inevitable, and the rate increase may go into effect.

“Higher education loans are meant to subsidize the cost of higher education, not profit from them, especially at a time when students are facing record debt,” argued Ethan Senack, higher education advocate at the U.S. Public Interest Research Group (USPIRG), which released an issue brief on the subject.

The amount of profit being made by the Education Department on student loans surprised even those who follow higher education closely, including Terry Hartle, senior vice president of the American Council on Education, who told The New York Times that “If the numbers are accurate, the government will make more money on student loans than Ford makes on automobiles. Using student loans to create a profit center is not what anybody intended.”

-Matt Bewig

To Learn More:

Student Loan Rates Boost Government Profit As Debt Damps Economy (by Shahien Nasiripour, Huffington Post)

Student Loan Rate Set to Rise, Despite Lack of Support (by Tamar Lewin, New York Times)

Don’t Double Our Rates (U.S. PIRG) (pdf)

Fastest Growing Group of Student Loan Borrowers…Parents Older than 60 (by Noel Brinkerhoff, AllGov)