Making money off the student loan industry isn’t just for big banks anymore. Thanks to new lending rules and historically low interest rates, the federal government is now getting a sizable piece of the action.
Commercial banks like Sallie Mae, a former government agency now the nation’s largest private student loan lender, continue to make an enormous profit (Sallie Mae reported $939 million in profit for 2012).
But today, nearly three years after the government cut commercial banks out of the federal student loan market, banks aren’t the only ones profiting from people seeking a degree. Now that the Department of Education is responsible for lending to students directly, the government is making big money off the nation’s scholars.
Current students and recent graduates currently carry $1.1 trillion in outstanding debt—more than the nation's combined credit card debt.
The Congressional Budget Office in February estimated that the Department of Education will make $35.5 billion in profit in 2013 from student loan programs. But that number was just revised this month to $50.6 billion in profits—a 43 percent increase for the year.
"Who's making the most money right now is the federal government," Tobin Van Ostern, deputy director of the student advocacy group Campus Progress, told Yahoo News.
It's worth noting that the $50.6 billion is just an estimate—loans are unlikely to be repaid at the estimated rate, and other factors are likely to change, like the cost of servicing loans. And profits are expected to decrease in coming years—in 2019, the government's profit is projected by CBO to be about $4.85 billion.
But the 2013 projection puts the Department of Education's student loan profits above those of last year's most profitable company, Exxon Mobil, which made $41 billion, according to Forbes' rankings.
So how did this happen?
The federal government is is borrowing at interest rates that have been kept unusually low since the recession in order to stimulate the still-limping economy. The Department of Education then makes loans at higher rates.
Even student loan advocates at organizations unhappy about the situation—Campus Progress and U.S. PIRG—say nothing nefarious is behind the federal government making money off student loans.
"Nobody knew we would be in this really quirky economic malaise which has created this ultralow interest rate environment," said Christine Lindstrom, higher education program director at U.S. PIRG, which advocated for the government to cut big banks out of the federal student loan equation.
But advocates say the situation is unfair and must be changed.
While homeowners, corporations, local governments and other entities are busy refinancing their loans to take advantage of current interest rates—which stand at about 3.5 percent average for a 30-year fixed-rate mortgage—college graduates with federal student loans are locked in to 6.8 percent rates or higher, previously established by Congress. Rates specifically for federally subsidized need-based Stafford loans (of which there are more than 7 million borrowers each year) are are set to double July 1 from 3.4 percent to 6.8 percent barring congressional intervention.
Members of Congress, interest groups, the White House and others have proposed solutions to offer lower rates to students in the current market and many have argued against the Stafford loan increase. But meanwhile, money is flowing back into the government.
“This is our major complaint—the federal student loan program is a public good and should be run as such and shouldn’t be run with a high profit margin baked into it," Lindstrom said.
The government is also effectively collecting the student debt, which allows it to turn even more profit.
Department of Education press secretary Daren Briscoe wrote in an email exchange with Yahoo News that the government's profit is largely a function of the increase in student loan rates set by Congress. And he noted that the department supports the president's student loan reform proposal, which would link rates to the Treasury's cost of borrowing, fix those rates for the life of the loan, and expand the "Pay as You Earn" repayment option to link repayment plans to income levels.
"An affordable, high-quality college education remains one of the best investments you can make, and federal student loans are an important part of that equation," Briscoe wrote. "That said, it's important that students aren't saddled with unmanageable debt, and that's why the proposal in the president's FY 2014 budget provides a long-term, deficit-neutral solution with affordable, market-based rates."
Though the government reaps the vast majority of the profits from the student loan industry, private lenders are still raking it in. Private loans make up a fraction of the $1.1 trillion student loan debt load, but it's still a sizable amount—more than $150 billion in 2012, according to the Consumer Financial Protection Bureau.
The fact that private lenders—such as Sallie Mae and Wells Fargo—have been barred from the federal program means they don't have the government oversight they once did. But they are still collecting on federal loans they made before 2010 and are establishing new private loans and other ways of making money related to the loan industry.
The 2012 annual report from the CFPB found that banks are making even more money from loans because there are fewer affordable repayment options for private borrowers than for those who hold direct federal loans. Income-based repayment plans offered to federal loan borrowers, for example, are much less available to those with private loans.
Private loans also often have higher interest rates, are still difficult to refinance, and are made under fewer consumer protections than federal loans, all making them more profitable to lenders, the CFPB report said.
The group has expressed concern over the potential domino effect that private loan debt may have on the economy.
"Many student loan borrowers are unable to find affordable repayment options on their private student loans, and this can have a broader impact on the economy if they’re devoting a large portion of their income to student loan repayment rather than for retirement or for a down payment on a home," said Rohit Chopra, student loan ombudsman for the CFPB.
Debt collectors are also reaping benefits from the student loan industry.
Some student advocacy groups have raised concerns over lenders who double as debt collectors. It's more profitable for them if students default—creating an unfair situation for students.
"The more penalties someone accrues, the more private equity you can make," Van Ostern said.
Some borrowers have both federal and private loans. That's a profitable situation for loan servicers, because the government treats them as separate entities and will pay twice to external companies to service them.
Student loan providers even reap profits from credit and debit cards on college campuses.
Some groups take issue with Sallie Mae offering debit cards to students on campus. "This seems like a university backing of this corporation," said Chris Hicks, the student debt campaign organizer for Jobs With Justice.
Sallie Mae remains a trusted source for many Americans for loans—even some who are unaware that they no longer provide federal loans.
Hicks said that when he graduated from college in 2010, his mother finished paying off her own Sallie Mae loans that same year.
"She told me, 'Chris be smart—take out a government loan," Hicks said, and she suggested Sallie Mae, completely unaware that Sallie Mae was no longer providing government loans.
His mother ended up taking out credit cards to pay for his tuition.
Correction: The CFPB is a government agency and has not commented on federal government profits from student loans.