The last thing anyone expects the government to do is make money. Every day congressional lawmakers lament budget deficits, and the inability of the federal government to cover its spending with tax revenue is a perennial issue. But while Washington continues to struggle with the debt, there are a few government-affiliated organizations that are actually surprisingly profitable. Fannie Mae and Freddie Mac, since being rescued during the financial crisis, have used the low interest rates and a recovering housing market to make record profits, $7.6 billion and $4.6 billion respectively. The Federal Reserve last year, as a side effect of its massive monetary stimulus programs, pulled in a profit of over $77 billion, more than the profits of the top five American banks combined.
And then there’s the Federal Student Loan Program, which is projected to make a profit of more than $50 billion this year, more than the $44 billion than Exxon Mobil made as the country’s most profitable corporation last year. While it’s hard to connect the dots between the profits of the Fed and the average American citizen, it’s easy to see the direct connection between the profits of the student loans program and the payments made by students around the country, who are currently laden with over $1 trillion in debt.
Most people are fine with the government taxing its citizens because tax revenues are used to directly fund public goods, like the military, which the private sector wouldn’t otherwise provide. But the idea of governmental organizations behaving like for-profit institutions is a little unsettling, especially when the money comes from students struggling to pay for their education.
The record profits of programs like Federal Student Loans should raise serious questions. If government organizations can lower the amount of money they take from citizens while still covering costs, shouldn’t they? And are profits from government organizations an appropriate way to cut deficits?
These questions are particularly relevant now, as the interest rates for Student Loans are scheduled to double July 1st , from 3.4% to 6.8%. Both the House Republicans and President Obama have proposed plans that would allow student loan rates to vary with market rates. Variable rates would probably save students money in the long run, but what is more interesting is that both proposals guarantee by law that student loans would continue to make the government money. Both bills would fix student loan rates to the interest rate the government borrows at plus some percentage. If the government loans money to students at rates higher than it borrows at then it will turn a profit, and when you consider the fact that students can’t legally default on their debt, student loans are not only profitable for the government but are virtually risk-free.
Currently the policy debate centers around what the appropriate level of interest rates for student loans is, or whether interest rates should be fixed or variable. I’d like to argue that we should look deeper and question the for-profit nature of federal student loans. Student loan debt is a trillion dollar problem, one that some think might be equivalent to the housing bubble in 2008. We should be seriously questioning whether or not the government should continue to profit while millions of students remain strangled by debt.