The recent recession has merged with rising college costs to create an all-time high of outstanding student loan debt. Presently, of the more than $1 trillion in student loans, an estimated 17 percent of all borrowers are exceptionally delinquent, meaning 7 million Americans have gone at least one year without making a repayment.
Surprisingly, the U.S. Department of Education (DOE) is expected to raise student loan rates yet again. This means DOE stands to gain more profit than the cost for it to fund student loans and administer the program, despite a potential repayment crisis. According to the Congressional Budget Office (CBO), with continued increases in interest rates and current lending practices, DOE stands to make $127 billion in profit over the next decade. All while most borrowers go deeper and deeper into debt.
According to Chris Hicks, head of Debt-Free Future, “The student loan program isn’t about helping students or borrowers — it’s about making profits for the federal government.” He contends that, like the private sector, the public sector and U.S. banking system is more concerned about the billions of dollars to be made than the educational and societal gains from higher education.
Student Loans Are Big Business
Because of the number of transactions that occur each year and the amount of money transferred, student loan lending has become a big business, with rapid growth in the private sector. Not only is there money to be made on interest rates of borrowed money, but refinancing and consolidating public and private loans have created new industries. For example, Social Finance (SoFi), a merit-based lending platform, is now consolidating and refinancing personal loans, with more than $1.3 billion loans issued by late 2014. After only three short years in existence, SoFi also recently closed a $303 million deal, backed by $336 million in collateral just for graduate school borrowers.
Banks have also joined the student loan game on multiple fronts. Whereas banks used to lend money to students, they now also purchase collection companies that obtain student loan repayments. With more than $1 trillion in outstanding student loans and a slow job market, Wall Street believes higher student loan default rates are inevitable and companies that collect on this debt will be a good investment for years to come, especially since fees and profits are based on a percentage of the loan’s total balance, as opposed to a fee based on simply servicing the loan.
On December 11, 2014, LendingClub became the first peer-to-peer (P2P) lending company to go IPO, with a debut $870 million initial public offering, making it too large for a bank to purchase in a traditional manner. This further indicates there is no shortage or slowing of the mounting student loan demand and debt in the United States.
Puffing Into the College Loan Bubble
Of the other distribution and collection agencies in the market—there are about two dozen—four collection agencies are publically traded and three are subsidiaries of huge corporations such as Sallie Mae and JPMorgan Chase.
Student loan giant Sallie Mae generated almost $4 billion in revenue and $1.3 billion in net income (a 14 percent and 40 percent increase respectively) over the last year by originating, servicing, and collecting loans to students or their parents to finance their education.
The saddest part of this, is that according to the DOE, most Americans in default owe little, with a median of $9,000. However, those who attend for-profit schools are not only disproportionately minorities, but account for a disproportionate segment of defaults.
So long as the United States places a heavy importance on the attendance of college, and costs to attend continue to rise, the student loan bubble will grow. However, based on the number of students in debt, poor job offerings of the last five years, and ease of financial loans for post-secondary education, Americans should question the motives of the lenders, the cost of an education, and the potential crisis that will result from trillions of dollars of debt.