Are Student Loans Profitable for the Government? Yes and No.

Jason Delisle revives the question of whether the government is making money on student loans.

The answer is complicated. To help make sense of it, we’ll use Table 3 from the CBO report Jason links to.

We’ll focus on 2010 for Direct Loan Program (the other program no longer exists). For government purposes, FCRA numbers are typically used to access the cost of programs. The -18 means that in present value terms, the government made 18 cents for every dollar it lent out in the Direct Loan Program in 2010. This would tend to lead us to conclude that the government does make a profit on student loans.

But not so fast. It turns out that FCRA numbers can be a little weird when it comes to student loans. The background and history is long and complicated, but for our purposes, just note that

FCRA subsidy estimates are not comprehensive measures of the costs of the federal student loan programs, for two main reasons: They do not take into account the cost of some of the risks that student loans impose on taxpayers, and they omit most administrative costs (which are recorded elsewhere in the budget).

Once you take these into account, we get the Fair Value Estimates, and the -18 becomes a +13, meaning that in present value terms, it costs the government 13 cents for every dollar lent out. Now the government doesn’t make money on student loans.

I would argue that the Fair Value Estimates do a better job of answering the question “Does the government make money on student loans?” and they indicate that no, the government does not make money on student loans.

But I suppose you could make the case for FCRA numbers depending on the context. For now, I’m mostly looking for consistency. Back during the loan brawls over FFEL, many who should have known better treated the FCRA numbers as gospel because they provided profits that ultimately ended up paying for part of the healthcare bill. Meanwhile some of us argued that we should be paying more attention to the Fair Value type numbers and that much of the FCRA savings would be imaginary.

Seeing as how the Fair Value side got steamrolled during the FFEL brawl, there are a lot of people who will have difficulty arguing that the government does not make money on student loans without explaining their rather convenient conversion from FCRA to Fair Value. Either FCRA is right, implying student loans are profitable and we used the savings for healthcare, or Fair Value is right, implying student loans are unprofitable and we were severely misled about the cost of the healthcare bill (killing FFEL still saved money under Fair Value, but not as much as they claimed and spent).