Does the government make a profit on student loans? It’s complicated

The question of whether the federal government profits from student loans has come up recently in discussions about the various proposals to prevent the scheduled Stafford subsidized loan rates from doubling to 6.8% on July 1.  This question puzzled me when I wrote about it last November.  At that time I found conflicting accounts, which frankly made my brain hurt.  Since I was left with a lingering curiosity about these illusive profits, the recent discussions on the topic caught my attention.

On May 16  the Huffington Post reported of projected federal profits exceeding those of Exxon, Apple, and other corporate giants.

Figures made public Tuesday by the Congressional Budget Office show that the nonpartisan agency increased its 2013 fiscal year profit forecast for the Department of Education by 43 percent to $50.6 billion from its February estimate of $35.5 billion.…

The Education Department has generated nearly $120 billion in profit off student borrowers over the last five fiscal years, budget documents show, thanks to record relative interest rates on loans as well as the agency’s aggressive efforts to collect defaulted debt.

But that rate is set to double to 6.8 percent, the rate for unsubsidized loans (for richer students, or poor students with debt above the subsidized loan program’s limits), on July 1.

The Washington Post, in reporting on the political disagreements in Congress, referenced the DOE’s $51 billion projected profit.

Democrats … objected to increasing the rates within a program that generates vast income for the federal government. The Congressional Budget Office this week revised its figures this week, reporting that federal loans will generate almost $51 billion this year. Over the last five years, that sum is almost $120 billion.

“That $51 billion is more than Exxon,” Miller said.

“It’s time we stop using federal student loans as a profit center,” added Rep. John Tierney, D-Mass.

Writing for Yahoo Finance, Jason Delisle disputes this notion of student loan profits, pointing out that the high risk of default must be considered.

What about Senator Warren’s claim that the government makes money off loans to low-income students? Senator Warren is not telling the whole story here either. She points to figures that the non-partisan Congressional Budget Office says “do not provide a comprehensive measure of what federal credit programs actually cost the government and, by extension, taxpayers.” In fact, when the budget office “accounts more fully… for the cost of the risk the government takes on when issuing loans,” it reports that Subsidized Stafford loans – those made to low-income students – cost taxpayers $12 for every $100 lent out, or $3.5 billion per year….

The claim that the government makes money on these loans is even more dubious given that the Department of Education estimates that 23 percent of the Subsidized Stafford loans it makes this year will default. That puts it among the riskiest loan programs that the federal government runs. By comparison, about 7 percent of the loans under the Federal Housing Administration mortgage program are expected to default. That program provides loans to high-risk borrowers who do not qualify for a traditional mortgage because they lack the savings, income or credit history.

Finally, in the May 20 Washington Post WonkBlog Dylan Matthews concludes that the “federal government does not profit off student loans”, at least not “in some years”.

Matthews reiterates that the interest rates do not reflect market risk.

… they set the interest rate on student loans below the market rate. And because they’re below the market rate, that costs the federal government money. Contrary to popular belief, and many a breathless article, the government does not, in fact, book a profit on student loans. As New America’s Jason Delisle has explained, that’s because the Congressional Budget Office is required by law to use a bizarre and faulty method for determining the cost of government loans.

Matthews goes on to explain what is essentially an unresolved dispute on the profitability of government student loans.  Additional details complicate the picture.  For example, even according to the CBO’s “bizarre and faulty” calculations, some years with higher subsidies actually show a loss.

I suspect there’s no profit.

After reading all these explanations, the most definitive statement I will accept is that it appears the government does not make a profit on student loans, but it might depend on the level of subsidies for any given year.  As the headline says, it’s complicated.

Getting answers to essential questions about a college’s financial aid policies

College financial aid policies can vary significantly, so be sure to check with each school.

The CollegeBoard suggests an interested student or parent “schedule a phone meeting or an interview with a member of the financial aid staff“ to get answers to any questions that are not answered by information on the college website.

A list of 12 questions to get you started on gathering information is provided.  In my experience, the answers to most of these questions can usually be found on college websites, so be sure to check there before you make a call.

A dozen questions to get you started:

1. What’s the average total cost — including tuition and fees, books and supplies, room and board, travel, and other personal expenses — for the first year
2. How much have your costs increased over the last three years?
3. Does financial need have an effect on admission decisions?
4. What is the priority deadline to apply for financial aid and when am I notified about financial aid award decisions?
5. How is financial aid affected if I apply under an early decision or early action program?
6. Does the college offer need-based and merit-based financial aid?
7. Are there scholarships available that aren’t based on financial need and do I need to complete a separate application for them?
8. If the financial aid package the college offers isn’t enough, are there any conditions under which it can be reconsidered, such as changes in my family’s financial situation or my enrollment status (or that of a family member)?
9. How does the aid package change from year to year?
10. What are the terms of the programs included in the aid package?
11. What are the academic requirements or other conditions for the renewal of financial aid, including scholarships?
12. When can I expect to receive bills from the college and is there an option to spread the yearly payment over equal monthly installments?

If you want to be super organized, you can create a spreadsheet with all relevant data.

Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

A…
Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

Quick Links – College grade inflation; understating federal cost of student loans; trends in physical education

College grade inflation

Forty years ago, only 10 percent of grades awarded by Yale College were in the A-range. Last spring, that percentage was 62.

Yale is reviewing its grading policy.

“If B-plus is being kept for bad work, and virtually everyone is getting A or A-minus, this eliminates any genuine feedback,” Kagan said. “I’ve always thought this is a disservice to undergraduates.”

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The federal government systematically undercounts the cost of student loans by ignoring market risk.

… the federal government’s accounting practices systematically understate the cost of student loans by failing to account for market risk. A superior method called “fair value accounting,” which is the strong preference of academic economists and the Congressional Budget Office (CBO), would show considerably greater costs due to the risk associated with expecting loan repayments….

However, almost all economists believe that the way the federal government accounts for student loan costs is simply wrong. Under the principles of “fair value” accounting, which the CBO endorses, the discount rate applied to the revenue from students’ repayments should be much higher than the rate on U.S. Treasuries. A higher discount rate would reduce the present value of those repayments, thus increasing the cost of the student loan program to the government.

The reason the discount rate is higher is because it incorporates the price of market risk into cost estimates, while current accounting practices ignore that risk. Students might pay back what the government predicts they will, but taxpayers must cover the full cost of the loan regardless. Since defaults tend to occur when the economy is weak, taxpayers face the risk of losing expected funds at a time when budgets are least flexible.

Thus, the government’s budgetary estimate reflects only part of the fair value cost of offering a student loan. Additional cost comes from the risk that loan repayments will be lower than expected.[6] The federal government should use a higher discount rate to reflect the risk that expected loan repayments will not materialize.[7]

This reminds me of how state governments consistently underfund pension obligations, inflating discount rates to hide true taxpayer liability.

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High school PE classes focus more on activities that will continue through to adulthood, including work-outs at fitness centers.

High schools are installing gyms for PE.

Forget dodge ball, squat thrusts and being picked last for the team. Today’s high-schoolers are more likely to get a workout in what’s becoming a must-have tool in physical education: a state-of-the-art fitness center.

Less focus on team sports and more emphasis on developing fitness habits that will last a lifetime

“There’s a lot of people who aren’t on the Scarsdale High School football team, and yet they want to be healthy,” he said. “I would anticipate using the treadmill and the machines for gaining muscles.”

There’s a new crop of physical education teachers coming out of college who are preparing to reach students, such as Gale, who don’t just want to learn to play a sport, said Robert Schmidlein, a professor of physical education at Manhattanville College.

“It’s a paradigm shift,” Schmidlein said. “People don’t play team sports when they get older. Less than 1 percent of the adult population plays team sports. Seventy percent of kids drop out of youth sports by age 13. No one should be teaching team sports at the high school.”

“Fit for Life”
Our local high school offers PE students a choice between two options for each class unit, with one usually involving a team sport and the other involving a fitness activity like yoga or running.  While we don’t have a Scarsdale-level fitness center, we do have a small selection of treadmills and elliptical machines.

‘Pell Grants Shouldn’t Pay for Remedial College’

Michael Petrilli argues that Pell Grants should not be used to pay for remedial college courses.

 … A huge proportion of this $40 billion annual federal investment is flowing to people who simply aren’t prepared to do college-level work. And this is perverting higher education’s mission, suppressing completion rates and warping the country’s K-12 system.

Current Pell Grant spending is wasteful.

About two-thirds of low-income community-college students — and one-third of poor students at four-year colleges — need remedial (aka “developmental”) education, according to Complete College America, a nonprofit group. But it’s not working: Less than 10 percent of students who start in remedial education graduate from community college within three years, and just 35 percent of remedial students earn a four-year degree within six years.

A proposed solution

What if the government decreed that three years hence, students would only be eligible for Pell aid if enrolled in credit-bearing college courses, thus disqualifying remedial education for support?

Possible positive effects:

• More resources could go to ambitious students, giving them an incentive to work hard to prepare for college-level work.
• K-12 schools would become more accountable if they knew their graduates would only received college assistance if they were ready for college.
• Colleges would become more selective, rasing their standards of learning.
• Pell Grant money could be focused on the most qualified students, improving their chances of graduation.

In sum, disqualifying the use of Pell grants for remedial education would substantially reduce the gap between the number of students entering higher education and the number completing degrees.

Possible negative effects:

Yes, there are obvious downsides. Most significantly, many students wouldn’t be able to afford remedial education and thus would never go to college in the first place. Millions of potential Pell recipients — many of them minorities — might be discouraged from even entering the higher-education pipeline. Such an outcome seems unfair and cuts against the American tradition of open access, as well as second and third chances.

Then again, it’s not so certain that these individuals are better off trying college in the first place. Most don’t make it to graduation….

Perhaps the greatest risk is that colleges would respond to the new rules in a perverse manner: by giving credit for courses that used to be considered “remedial.”  …  would further dilute the value of a college degree.

Petrilli suggests the potential upside is sufficiently compelling to warrant a pilot program that would limit Pell Grants only to students ready to do college-level work.  

Perhaps offer the deal to an entire state. Study what happens. My guess is that it would have a salutary effect on the K-12 system, on higher education and on college-completion rates. Let’s find out.

Related:

• ‘Sending the wrong students to college’ (Cost of College)
• We spend $40 billion yearly on Pell Grants, but we have no idea about results (Cost of College)

Career and money advice for new college graduates

If you’re a millennial, do these things, or else risk remaining unemployed for a long time.

1. Wake up early. Job seeking is a full-time job.
2. Don’t pass on everything. No entry-level job is ideal.
3. Stop relying on mom and dad.

Career advice from Aol Jobs, summarized by FINS Morning Coffee

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With two out of three college graduates averaging more than $24,000 in student loans, Fox Business steps in with this financial advice.

Step 1: Create a Budget

Even if grads don’t have a concrete post-grad plan just yet, creating a budget of projected expenses such as bills, rent and discretionary spending can help them better understand their cash flow situation, suggests John Bucsek, managing director with MetLife Solutions Group. …

Making a budget doesn’t have to be an overwhelming prospect—grads can easily keep up with their expenses using sites like Mint.com or creating a simple spreadsheet….

Step 2: Figure Out Student Loan Terms

Grads typically only have a six-month grace period before having to start repaying student loans, making it essential to secure a job and stay on top of other expenses.

Unemployed or financially-strapped grads should consult with their lender to determine repayment options available to them such as deferment, forbearance, and Income Based Repayment plans should they have issues making payments on time….

Step 3: Get High Interest Debt in Check

Whether grads are an authorized or co-signed user on a parent’s card or have their own account, they should  focus on getting the debt with the highest interest rate paid down first.

Understanding how debt impacts future goals and how credit score plays into every major purchase can help them stay on top of making steady payments and monitoring credit history health, says Bucsek.

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A variation on the expert’s advice

Since the percentage of young adults living with their parents has risen to 22% today, from 11% in 1980, it appears the recommendation to “stop relying on mom and dad” is being ignored by many.  Here’s my variation on the preceding advice.

1. Get up early every day to find a job, or to hone your skills to make yourself more employable.
2. Even if you can’t find a job in your field, work somewhere, even if it’s part-time.  Earn some money.
3. If you’re living at home, use the opportunity to save aggressively and/or pay down student loans.

 Related:  Parents have lower expectations for kids becoming financially independent (Cost of College)

Tuition discounting grows to all-time high at private colleges

Tuition discounts continue to climb at private colleges.

The average “tuition discount rate”—the reduction off list price afforded by grants and scholarships given by these schools—hit an all-time high of 45% last fall for incoming freshmen, according to a survey being released Monday by the National Association of College and University Business Officers.

Rising discounts along with the smallest sticker price increases in years have combined to make college more affordable for many families.

“It’s a buyer’s market” for most colleges ”as more families focus on cost and value”.

Some facts and figures:

• 65% of private colleges increased their discount rate in the fall of 2012.
• About one in eight U.S. undergraduates is enrolled at a private nonprofit college, which provided 70% of all grant aid to undergraduates in 2009.
• “The average discount rate at private colleges has climbed for seven years in a row.”
• The median sticker price at about 280 private schools rose 3.9% last year, the smallest increase in about 12 years.
• At four-year public colleges and universities, in-state tuition and fees rose 4.8% last year, also the smallest increase in about 12 years.
• “The discount rate for public universities fell modestly in 2012 … after rising from 2007 to 2011.”
• Last fall, enrollment fell at about half of 400 private colleges surveyed as the number of high school graduates dropped.

Both need- and merit-based aid appear to be part of this trend of growing discounts.

The economic downturn boosted the number of families who qualify for aid. In addition, even those earning too much to demonstrate need under aid formulas “expect to see some sort of merit aid,” unless the school is highly selective, said Trey Chappell, a college adviser in Scottsdale, Ariz.

Is it a “fundamental shift”, or simply the result of a weak economy?

The question of whether the revenue problems facing colleges and universities are a result of a fundamental shift in the country’s attitude toward paying for college – the so called “college bubble” – or whether it’s simply the result of several years of weak economic growth will only be answered if families begin to experience the kind of economic growth they were accustomed to prior to the recession.

Related:  Tuition Discounting: Not Just a Private College Practice (CollegeBoard)

‘Rich’ families get a sweet financial aid deal at the most selective universities

For students who win the college admissions lottery and get in to the most selective universities, high income may not be a barrier to receiving financial aid.  Here are some examples.

HARVARD

2011-12 School Year:  About 240 families earning $180,000-200,00 received financial aid.

Beginning with the Class of 2016, families with incomes between $65,000 and $150,000 will contribute from zero to ten percent of income, and those with incomes above $150,000 will be asked to pay proportionately more than 10%, based on their individual circumstances. Families at all income levels who have significant assets will continue to pay more than those in less fortunate circumstances.

PRINCETON

2011-12 School Year:  99% of families earning $180,000-200,000 who applied for financial aid received grants that averaged $23,600.

Applicants receive aid based on their families’ financial need. We do not use income cutoffs when determining whether to award aid.  Any student whose family feels unable to afford the full cost of attendance is encouraged to apply for aid.

YALE

2011-12 School Year:  99% of families earning $150-200,00 who applied for financial aid were approved.  Grants for those 505 families averaged $26,500 each.

• Families whose total gross income is less than $65,000 are not expected to make any financial contribution towards their child’s Yale education. 100% of the student’s total cost of attendance will be financed with a Yale Financial Aid Award.
• Families earning between $65,000 and $200,000 (with typical assets) annually contribute a percentage of their yearly income towards their child’s Yale education, on a sliding scale that begins at 1% just above $65,000 and moves toward 20% at the $200,000 level.
• There is no strict income cutoff for financial aid awards. Many families with over $200,000 in annual income receive need-based aid from Yale.

UNIVERSITY OF CHICAGO

2012-13 School Year:  59% of families with incomes above $120,000 who applied received financial aid.

The average University of Chicago aid applicant receives $37,500 in scholarships each year.

$160,000 income puts you in the top 10% of families in the United States.

Related:

• Can rich families qualify for college financial aid? (Cost of College)
• Berkeley will offer financial aid to ‘middle-class’ families (Cost of College)

Quick Links – Best and worst areas for job growth; women have a duty to keep working; Cooper Union will charge tuition

Best and worst metropolitan areas for 2012 job growth

The South seems to be enjoying better job growth.

Top five metro areas for job growth, showing number of jobs:

Bottom five:

Check out the complete list.

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‘Female Ivy League graduates have a duty to stay in the workforce‘

There’s nothing wrong with wanting to be a full-time mother, but you don’t need an elite degree to do it

I am not someone who believes that every woman should be made to feel as though they must choose between being committed to their children or committed to the sisterhood of women’s advancement. But I do consider any Harvard Law School degree obtained by a woman who then chooses not to use it in any sort of professional capacity throughout most of her life a wasted opportunity. That degree could have gone to a woman who does want to spend her entire life using it to advance the cause of women – or others in need of advancement – not simply advancing the lives of her own family at home, which is a noble cause, but not one requiring an elite degree….

… There’s nothing wrong with someone saying that her dream is to become a full-time mother by 30. That is an admirable goal. What is not admirable is for her to take a slot at Yale Law School that could have gone to a young woman whose dream is to be in the Senate by age 40 and in the White House by age 50.

The author of this commentary is Keli Goff, a 33-year-old political commentator and former Democratic strategist.

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‘Cooper Union to Start Charging Tuition in Fall 2014‘

Cooper Union only admits 7% of applicants, but that low admission rate may rise after it starts charging tuition.

Cooper Union said Tuesday it could no longer afford to foot the tuition bills for its entire student body, closing a wrenching year-and-a-half-long debate about how to balance economic woes against the school’s core mission to provide a top-notch higher education to talented students, no matter the cost.

The entering class of 2014 will be offered half scholarships to enroll in its prestigious program, putting the price of attendance at just under $20,000 a year….

Cooper Union — named after founder and industrialist Peter Cooper — was established in 1859 as a school for low-income students, offering access to the higher education necessary to participate in shaping public life. Since then, the promise of free education has been as central to the school’s identity as its rigorous programs in architecture, engineering, and the arts, as well as its motley collection of academic buildings — architectural marvels suggestive of the talent of the students inside.

But, like colleges and universities across the country, the college has hit hard financial times in recent years. While the school has relied largely on rent income from land beneath the Chrysler Building to fund its scholarships, that source has not kept pace with inflation rates, Epstein said in his statement.

How to get more high-achieving, poor students to attend selective colleges

Most high-achieving students from low-income families are not attending top colleges, and top colleges are not aggressively recruiting these students.

Only 34 percent of high-achieving high school seniors in the bottom fourth of income distribution attended any one of the country’s 238 most selective colleges, according to the analysis, conducted by Caroline M. Hoxby of Stanford and Christopher Avery of Harvard, two longtime education researchers. Among top students in the highest income quartile, that figure was 78 percent.

The findings underscore that elite public and private colleges, despite a stated desire to recruit an economically diverse group of students, have largely failed to do so.

Racial diversity is a higher priority than socioeconomic diversity in college recruiting efforts.

Colleges currently give little or no advantage in the admissions process to low-income students, compared with more affluent students of the same race, other research has found….

Among high-achieving, low-income students, 6 percent were black, 8 percent Latino, 15 percent Asian-American and 69 percent white, the study found.

The solution – inform students about their college options.

Sending basic information to low-income, high-achieving high school students increased their enrollment rate in top colleges.

Among a control group of low-income students with SAT scores good enough to attend top colleges — but who did not receive the information packets — only 30 percent gained admission to a college matching their academic qualifications. Among a similar group of students who did receive a packet, 54 percent gained admission, according to the researchers, Caroline M. Hoxby of Stanford and Sarah E. Turner of the University of Virginia.

College counseling on the cheap, with an emphasis on affordability

Ms. Hoxby and Ms. Turner designed the 40,000 information packets they mailed — as well as follow-up material — as a low-cost, customized version of the college counseling that upper-income students take for granted. The packets explained application deadlines and student qualifications at a range of colleges. Students also received coupons to waive application fees — which had a particularly big effect. “We wanted students to find schools for themselves,” Ms. Hoxby said.

The College Board may soon begin replicating this strategy as a way to match low-income students with colleges that match their academic profile.

A little more help may be needed
Based on some reader comments in the quoted articles and on my own limited experience working with low-income students, many of them also need a mentor to help handle the many details involved in the college application process.  This is something that affluent helicopter parents typically do for their own children.

Related:  Fewer poor students at top colleges (Cost of College)