Student Loans Make Money for Taxpayers

The profit margins of 5.5 to 30 percent will fund other student loan programs.

Student loan paperwork.
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The PLUS parent loans made by banks and companies like Sallie Mae cost taxpayers 2.7 percent three years ago, the CBO estimated. Taxpayers will earn 17 percent back on the total amount of PLUS loans banks and other lenders make next year, according to the CBO. In the same period, taxpayer returns from parent PLUS loans made directly by the federal government—without going through middlemen—will have jumped from 9 percent to about 30 percent. The OMB is a little more conservative, estimating that PLUS loans made by banks next year will return to taxpayers about 5.5 percent, while loans made directly will return about 10 percent.

Part of the improvement is due to the 2006 switch from variable to fixed interest rates. But taxpayers are also benefiting from the same one-two punch that is pushing lenders like Student Loan Xpress to stop making education loans altogether. The Wall Street credit crunch drove up the costs of borrowing for companies, while Congress slashed the profit it guaranteed banks and other lenders who made Stafford or PLUS loans. The combination of higher costs and lower payments from the government has turned education loans into such money losers that a growing number of lenders have gotten out of the educational loan business entirely.

The companies' loss has been the taxpayers' gain—at least for now. The government is sending less money to lenders, and investors clamoring for a safe place to park their money have driven down the yields on treasury bonds, reducing the government's interest costs.

The interest rates on 10-year treasury bonds, for example, have fallen from 4.8 percent last May to about 3.8 percent today. The CBO estimates that administering the loan program and absorbing the costs of defaults adds 3 percentage points or so. That's why the 6.8 percent, 10-year Stafford loans are about break-even for the government these days. That's also why PLUS loans, which charge higher rates, are so profitable for taxpayers.

Unfortunately for taxpayers, the economic cycle that has reduced government expenditures on student loans may be nearing an end. The Federal Reserve has signaled it won't be cutting interest rates any more for a while, and it may even start raising them to rein in inflation. In addition, a few lenders have managed to persuade investors to buy student loan bonds, which could put further upward pressure on treasury rates. It might take a movement of only a couple of percentage points to turn even PLUS loans into a drag on the federal budget.