One of the big potential costs to U.S. taxpayers over the years to come is an enterprise that’s currently estimated to be even a bit profitable for them: financing student loans.
As Bloomberg reports, the federal government currently borrows money at interest rates that are lower than the rates it charges students. That means the U.S. makes about 14 cents on every dollar lent, according to the Congressional Budget Office.
It’s a win-win for the government—make a little cash while helping young Americans pursue an education so they can earn more down the road. But there’s no guarantee this arrangement will remain if more students start to delay or renege on their obligations. While the CBO expects the government to continue to make money on the business until at least 2025, gains are forecasted to shrink.
On subsidized student loans, the most basic kind, the government is forecast to start losing money as early as next year. The CBO already revised up its estimate of how much the loans will cost the government between 2016 and 2025 by 30%, citing higher estimates of the number of loans in default (which in turn would mean the government won’t be able to collect on as many payments as initially thought).
Almost $800 billion in student loans are already directly on the government’s balance sheet, according to Wall Street experts who advise the U.S. Treasury on its borrowing strategy. And that represents a ballooning share of the debt that the government has issued. Student loans in February were worth more than half the value of outstanding Treasury debt, with a maturity of 10 years or more.
“If you were fairly confident that all those loans are going to be paid back, then it wouldn’t be that big of an issue,” Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut, tells Bloomberg. “But I think the problem is that we’ve got double-digit delinquencies on student loans, and the problem only seems to be getting worse.”
Data from the Federal Reserve Bank of New York show that 11.3% of student loans were delinquent in the final three months of 2014, up from 11.1% in the prior quarter.
