April 14, 2013
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‚Äôs 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.