Claremore Daily Progress

Community News Network

April 18, 2014

Biggest student loan profits come from grad students

NEW YORK — This week, the Congressional Budget Office projected that the federal government would earn roughly $127 billion from student lending during the next 10 years. That estimate is down a bit from previous figures but is surely high enough to infuriate liberals like Sen. Elizabeth Warren, D-Mass., who tend to regard the idea of a profitable student loan program as fundamentally indecent.

While browsing the CBO's data, however, I noticed something intriguing about those fat-sounding profits: Most of them don't come from undergraduate lending. The Department of Education is really making its killing by loaning money to grad students. And, with all due respect to any disgruntled J.D.s or Ph.D.s reading today, there's really nothing wrong with that.

First, the big picture. Through 2024, the CBO expects our government to rake in a $149 billion profit on new direct loans to students. Grad school lending will generate about three-quarters of those returns, which fall to $127 billion once you subtract administrative expenses and costs associated with the discontinued guaranteed lending program.

At the same time, the government will lose a small amount of money on direct loans to undergraduates, which make up more than half of its lending operation. While the Department of Education makes a profit on unsubsidized Stafford loans to college goers, it takes a hit on subsidized Staffords that go to low- and middle-income undergrads. When everything shakes out, the programs combine for a 10-year, $3 billion net loss.

Now back to those grad schoolers. Their loans, which now make up about one-third of the government's yearly lending portfolio, are expected to yield almost $113 billion over the 10-year window before admin costs. Once again, that's three-quarters of the government's direct lending profit. Graduate students are such lucrative customers because they pay higher interest rates than undergraduates and don't default all that often. For the government, they're low-risk, high-reward borrowers.

Here's where the government is expected to make a bit of money off of undergraduate students: lending to mom and dad. Parent PLUS loans, which are only available to the parents of undergrads, are expected to rake in a bit more than $42 billion over 10 years. Parent loans make up a mere tenth of the total undergraduate portfolio. But again, thanks to low default rates - unlike other student loans, they involve a light credit check - and high interest rates, they yield a nice return for the Department of Education.

               

     

 

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