Cashing in: Federal government makes billions on student loans
As student loan interest rates continue to grow this year, the federal government's profit has skyrocketed.
After the government turned a $41.3 billion profit on student loans last year, the market is larger than ever. Meanwhile, state-level funding cuts nationwide have forced colleges and universities to raise tuition prices on students.
Gov. Rick Snyder made no reference to higher education funding during his 2014 State of the State address, and State Rep. Kevin Cotter, R-Mount Pleasant, said it wasn't surprising he didn't address higher education, but more attention should be placed on students' troubles.
"Loans are given out mostly at the federal level, though, so there isn't much the state can do in regards to loans," Cotter said.
Cotter commended Central Michigan University for keeping tuition increases relatively modest over the past several years. Tuition for the 2013-14 academic year is set at $374 per credit hour, up 2.47 percent from last year.
Tuition at CMU is the highest it has ever been in large part thanks to decreased state funding. Appropriations account for less than 20 percent of CMU's revenue, compared to about 60 percent 20 years ago.
A call placed to garner response from the CMU Government Relations Office was not returned in time for publication.
More students than ever – about 41 percent of all undergraduate students – are taking out student loans, according to the U.S. Department of Education. In fact, students took out about $1 trillion in loans in 2012, according to the Federal Reserve Bank of New York.
Housing feels impact
For subsidized and unsubsidized Stafford loans, interest rates are set at 2.05 percent, plus the Treasury bond rate. As the economy continues to slowly recover from the Great Recession, loan rates could rise annually before being capped at 8.25 percent.
Not only will the federal government bring in around $175 billion in profits from student loans over the next several years, but the Consumer Financial Protection Bureau, a federal watchdog group, warned last year's rising student debt levels could linger over the housing market for years to come.
“Three-fourths of the fall in household formation (from 1.4 million new households annually prior to the recession to around 700,000 today) can be directly correlated to student debt,” said Rohit Chopra, student loan ombudsman at the Consumer Financial Protection Bureau, at an October news conference.
As loan borrowing rates rise along with tuition, the CFPB said it will go after private lenders who mislead students about their loans.
“Repaying a student loan should be simple,” CFPB Director Richard Cordray said. “When servicers process payments to maximize fees and penalties, they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability.”