As if the news out of the financial and political sectors wasn’t bad enough, on Wednesday, we learned that even as millions struggle to pay down their debts, the federal government is enjoying student loan profits from the interest rates. Make no mistake, they’re much to be added to the coffers from this particular sector.
Massive Student Loan Profits
A new report shows that the Department of Education is hauling in massive profits from those interest rates while also sending aggressive debt collectors to those who are in default. The Congressional Budget Office reports that the profits from just student loan interest payments is at $51 billion a year and that number is rising every day. This is much higher than most companies in the private sector. Think the oil companies are getting rich? Consider this: the Department of Education’s profits of $51 billion are easily eclipsing Exxon’s profits of $45 billion and Apple profits of nearly $42 billion.
Remember, this time last year, Congress was trying to ensure the subsidized student loan interest rates that the feds make available to financially needy students were addressed. Those opposed to the lower rates argued it costs taxpayers some $6 billion annually. To prevent the rates from doubling, the billions were pulled from the same families that the program was intended to assist in the first place. It eliminated the six month interest free grace period following graduation before the first payment was due. What wasn’t known then, though is now, is the profitability this provided.
The profits for the Department of Education surged 43 percent to $50.6 billion last year – even as previous numbers from the year before were coming in at less than $35 billion. Remember, once again, as we barrel towards August, lawmakers are trying to avert the automatic doubling of annual interest rates in Stafford federal loans. It barely hit its deadline last year and the promises were that a permanent solution would be found before this August. That hasn’t happened yet, though. It’s becoming difficult to understand the many ulterior motives behind these considerations.
2 Political Proposals
Today, Republicans have time blocked off to consider amendments for their proposed legislation that would cease interest rates to the 10 year Treasury note. You may recall just how similar this is to the proposal made by President Obama in his fiscal year 2014 budget plan. For his part, Representative John Kline, R-Minnesota, who is the chairman of the House Committee on Education and the Workforce said,
As I’ve said time and again, we’ve got to stop kicking the can down the road with short-term fixes to this interest rate problem. The Smarter Solutions for Students Act is a lasting solution that will serve the best interests of students and taxpayers.
Only problem is, no one knows anything about that act.
It was just introduced in the past couple of days and there’s also a Democratic version of the law, titled Student Loan Affordability Act. It’s being pushed by Majority Leader Harry Reid, Senator Patty Murray, Senator Jack Reed and Senator Tom Harkin. Its purpose is to extend the current low rate for federally subsidized loans for two years instead of one. The 3.4% interest rate would remain unchanged. Tiffany Edwards, a spokesperson for the Dems on House Education and Workforce Committee said the CBO numbers released by the Fed today was disconcerting but that the Democrat act would keep the burdens lighter for college students and their families.
Credit Cards but No Jobs
The problems, though, go far beyond the interest rates. There still remain too many jobs available for those coming out of college. Add credit card debt into the mix and it becomes clear that today’s college students are facing problems like none ever before. It’s really a vicious cycle because once these young adults graduate college, realize they’re not going to be able to find a job to pay back student loans and credit card debt, many will move back in with their parents. The goal will be to ensure they can cover their expenses while waiting for the right position to open up. If their credit is in trouble as a result of these circumstances, there’s a good chance they won’t be offered these positions they went to college to pursue. Many companies run routine credit checks. If their credit prevents them from getting better paying jobs, they continue struggling to pay their debts, which will continue to affect their credit too.
We’ve already seen trends that twenty – somethings are delaying marriage and buying homes. They can’t afford it and frankly, they’re leery. Everything they were raised to believe has been disproved. The college education doesn’t always guarantee a high paying job. Graduating college does sometimes mean moving back home and not paying your bills on time can indeed affect your chances of getting a job – any job, really. Of course, trends are just that: trends. They too will wax and wane, but for now, it’s a way of life that’s quite real.
The Obama Administration has said it will explore the grants, coupled with a new way the numbers are calculated. It wants to freeze the interest rates for 10 year student loans to the yield of the 10 year Treasury note. But this comes with one caveat – an upcharge of 0.93% for subsidized Stafford loans, 2.93% for unsubsidized loans and 3.93% for parent and graduate student PLUS loans. That means if the Treasury note yields 1.75%, then the Stafford loans would run 2.68%, unsubsidized Stafford’s 4.68% and PLUS loans 5.68%. Doesn’t take a genius to see how much better that works out than what is currently in place.
Already critics are saying these new calculation formulas are woefully short and definitely misleading. Specifically, they argue this isn’t “real world” calculations. For a group of young adults who are getting a dose of the real world in all of its cruelty, the last thing they need is someone defining the term for them. They live it every day.
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