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Education Department Records Student Loan Profit For First Time Since 2000

The federal government’s main college loan program made a profit last year for the first time in more than a decade, likely the start of a multi-year trend of government gains off student borrowers.

Government figures made public Wednesday show that the Department of Education generated a $176 million profit from borrowers in the Direct Loan program during the fiscal year ending Sept. 30, the first annual profit since 2000, according to the Department of the Treasury’s Bureau of the Fiscal Service. The profit in part reflects the unusually high rate of interest paid by student borrowers and their families relative to the government’s cost to borrow.

Reports of projected government profit from student borrowers caused an uproar earlier this year after Democratic lawmakers, including Sen. Elizabeth Warren (D-Mass.), seized on profit estimates by the Congressional Budget Office and the White House to criticize the Obama administration for making money on the backs of students and their families. The turmoil embarrassed the White House, led to new student loan legislation intended to reduce government profit and resulted in President Barack Obama declaring in August, “Our national mission is not to profit off student loans.”

Some lawmakers, including Sen. Tom Harkin (D-Iowa) said they still hope to revisit the profit issue in the coming months as Congress sets about reauthorizing the nearly 50-year-old Higher Education Act, the federal law governing how federal dollars are allocated to colleges and students. The act expires next year.

The Education Department profit is likely to arm critics such as Harkin and Warren as they attempt to reduce students’ borrowing costs in the face of a weak economy, stagnant wages and increasing tuition. Warren has said that it is “morally wrong” for the government to profit off student borrowers. The CBO forecast that student loan legislation enacted in August will generate $185 billion in profit over the next decade or so.

The Treasury profit report comes after senior Obama administration and Education Department officials, including Education Secretary Arne Duncan, repeatedly claimed earlier this year that the government’s student loan program does not generate a profit. They denied news reports and statements by lawmakers that it did.

At the heart of the dispute was the Education Department’s insistence that the government’s profit projections did not constitute actual profit, on the grounds that they were forecasts.

On a July 23 conference call with reporters organized by the White House, Duncan said, “It’s actually neither accurate nor fair to characterize the student loan program as making a profit.”

But the Treasury Department report on Wednesday appears to undermine that claim. Rather than relying on projections, Treasury’s figure was reported on a so-called cash basis, meaning it was based on actual outlays and receipts incurred during the fiscal year.

Messages left for Cameron French, Education Department spokesman, after normal business hours were not returned. In May, after The Huffington Post compared Education Department profit projections off federal student loans to those recorded by publicly-traded companies, a department spokesman responded by saying, “Projections of student loan collections over the 40-year loan lifetime window are in no way comparable to annual profit turning by corporations.”

Congress and the White House worked together to set student loan interest rates at recent levels. The rates were not updated to reflect the government’s record low cost of borrowing in the wake of the recession — another reason why Congress and the White House joined forces this year to approve new legislation that ties student loan interest rates to the government’s cost to borrow.

The profit figure excludes the bank-based Federal Family Education Loan program. Congress and Obama joined to end that program in 2010 because lenders were reaping unjustified taxpayer-provided profits off government-guaranteed loans. All federal loans are now made directly by the Education Department under the Direct Loan program.

Including the cost of the since-discontinued FFELP program, the Education Department spent $2.7 billion more on student loans than it received in the 2013 fiscal year. The last time the Education Department generated a profit off both programs combined occurred in 2001.

In 2000, the last time the government’s Direct Loan program generated an annual profit, the federal government reported a record budget surplus of nearly $237 billion — a figure worth even more today when taking inflation into account. The economy then was growing at an annual rate of more than 6 percent and the national unemployment rate was nearly half of today’s level.

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Common Private Student Loan Complaints

It seems private tyro loan borrowers have gifted poignant obstacles when perplexing to restructure and compensate down their debts, according to a annual report from a Consumer Financial Protection Bureau tyro loan ombudsman.

The news pronounced a CFPB perceived some-more complaints than expected: 3,800 private tyro loan complaints from Oct. 1, 2012, by Sept. 30, 2013. The business started collecting such complaints in Mar of final year, so this is a second news — and it’s a initial news that covers a 12-month period.

Though a complaints aren’t nationally representative, they give discernment into the frustrations borrowers encounter when rebellious tyro debt. Notably, a news highlights similarities between these complaints and a ones that flush among consumers in a debt marketplace following a financial crisis. Rohit Chopra, a ombudsman, remarkable that these parallels prove that student loan servicers are not holding actions required to equivocate a meltdown like a one gifted by a debt industry.

The Common Complaints

The many ordinarily reported emanate concerned borrowers attempting to refinance their tyro debt during times of financial hardship. Nearly half of a complaints came from unsettled consumers seeking options for reduce monthly payments.

Chopra also focused on reports of troops borrowers receiving crude treatment. The prior annual news also highlighted this discouraging trend, and while it seems to have improved, a 2013 news records that lenders continue to make crude final of active-duty servicemembers seeking assistance underneath a Servicemembers Civil Relief Act.

Even for consumers who are means to make timely payments, a routine has clearly been messy. The complaints submitted to a CFPB note a treacherous online platforms and poor customer use supposing by loan servicers.

Borrowers looking to pay down their debt some-more quickly found it formidable to request their payments a approach they wanted — like profitable off a loan with a top seductiveness rate faster — and many encountered issues when their loans were eliminated to new servicers. Sometimes, these struggles resulted in some-more late fees than necessary, presumably translating to some-more delinquencies on a consumer’s credit report.

What Does It Mean?

All these roadblocks can spin into negative hits on consumer credit, heading to problem accessing other forms of credit and decent seductiveness rates for mortgages, automobile loans and other products.

The complaints mostly targeted a same servicers, that a news pronounced isn’t surprising, given a loans are strong among a tiny organisation of servicers. Sallie Mae, that has a largest share of private tyro loans, was a theme of 49% of a complaints, and 87% of a complaints were widespread among a same 8 institutions: Sallie Mae, American Education Services/PHEAA, Wells Fargo, Discover, JPMorgan Chase, ACS Education Services, Citibank and KeyBank.

While a representation wasn’t deputy of a tyro borrower population, a complaints prove that consumers have critical issues handling their debts in a ways they wish to.

Seeing a settlement of complaints common by debt borrowers, credit label holders and tyro loan borrowers, a ombudsman endorsed policymakers demeanour during a measures taken to residence debt and credit label consumer difficulty and see if identical solutions can be practical to tyro loans.

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Student debt crisis? No, expectations crisis

Student debt in Canada is crushing – at least, that’s what we’re led to believe.

Soaring tuition fees and an iffy job market mean that many graduates will be paying off their student loans for years to come, we’re told. Today’s graduates say they’re delaying major life milestones (marriage, house, family) in order to pay back their debts. As one news story put it: “With ever-increasing tuition fees … some students are starting to question whether a degree is an affordable option.”

I’m not unsympathetic. My niece will graduate next spring with a five-figure loan and no prospect of a teaching job this side of Nunavut. But the notion that this generation is uniquely disadvantaged simply isn’t true. The real problem isn’t student debt. It’s student expectation – the idea that a young person should be rewarded with a fulfilling, well-paying job and a middle-class lifestyle as soon as they hit the job market.

It doesn’t work that way and never did, even for those irritating boomers.

I graduated debt-free, thanks to low tuition, scholarships, family help and my incredible waitressing skills. But it was a long time before I stopped living like a student. My first job paid $5,000 a year (the equivalent of about $28,000 today). I was hired to alphabetize the backlist catalogue for a publishing company. (This was well before the computer age, needless to say.) With my English lit MA and extensive knowledge of Jacobean theatre, I was seriously underemployed. But after six or seven jobs in six or seven years, I was finally able to move out of my rented attic and ditch my futon bed.

“Student debt appears crushing to a lot of people in the first two years after they graduate,” says Alex Usher, who is president of Higher Education Strategy Associates and an expert in student financial aid. “But after two years, they’re making pretty good money.”

Mr. Usher is a mythbuster on the subject of student debt. Here are some facts: Student debt hasn’t grown in the past few years – it’s held steady. The average debt for students graduating from four-year programs who have borrowed money is around $25,000. And because of interest rates, the average payments on that debt – about $276 a month – are lower than ever.

But the real news is affordability. Contrary to popular belief, tuition fees aren’t soaring. When you factor in tax credits and rebates, net tuition as a percentage of family income has increased by just 3 per cent (in real terms) over the past decade. Compared to the United States, where tuition really has gone through the roof, Canadians get an incredible deal. On top of that, there’s no evidence that rising fees affect access. Ontario’s tuition fees are higher than Quebec’s, but Ontario has higher graduation rates – especially among people from lower-income backgrounds.

“It’s not that I want to minimize the problems,” Mr. Usher says, “but people who want to maximize the problems don’t acknowledge how much [public] money is going into this.”

It’s true that the job market is far more competitive than it used to be. But the main reason is that there are lot more graduates than there used to be. When we talk about the boomers, maybe we should remember how few of them went to university. As for the income premium, it’s still real. It’s just smaller than it used to be.

In Canada, Mr. Usher notes, the fact that graduates might have to postpone buying stuff is taken as evidence that student loan debt is out of control. But in other cultures, it’s taken as a given. In Asia, university graduates are expected to repay their student loans in four to six years. Many of them have to fork over a quarter to a third of their incomes and live at home. But no one thinks they’re deprived. The attitude is: Pay it off fast and move on.

As for the privileged folks who allegedly came before them, the idea that people ever achieved secure and stable lives with ease is largely a myth. My grandparents weathered the Depression. My folks lived with them until having their third child. My dad had health problems in middle age and lost his business. That’s life. Fortunately, I’m pretty sure that most of today’s up-to-their-necks-in-debt graduates will be fine.

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Student Loan Grace Period Almost Over? Get Ready

For many who graduated college in May, November is the start of something big: student loan repayment.

Subsidized and unsubsidized federal Direct and Stafford loans have a six-month grace period following graduation, meaning it’s time for May 2013 grads to pay up. (The grace period starts upon a student’s graduation, dropping below full-time student status or leaving school.)

Ideally, graduates are well-prepared for this financial responsibility, because this day has been coming since they took out the loans. Mitchell Weiss, a finance professor at the University of Hartford and a Credit.com contributor, says student borrowers need to have a handle on their loan payments before leaving school, so there is plenty of time to arrange an affordable payment structure, if necessary.

It’s nearly November, so there’s no use fretting over what you should have done (but students and parents of future borrowers, take note: This should be dealt with long before October).

For borrowers entering repayment, here’s what needs to happen.

Determine Your Monthly Payment

You can look at your federal student loan information through the National Student Loan Data System, and you’ll be able to find your student loan servicers there. If for some reason you’re not already in contact with your servicers, reach out and confirm your monthly payments. Check your mail and email to be sure you haven’t missed any correspondence.

Figure Out How to Pay

The next step is to make sure you can afford the payments. If you haven’t yet found a job or are earning less than you anticipated, you may want to look into loan repayment plans that will make the payments affordable. Once again, this is where it is important to do the work well in advance.

“A good rule of thumb is their student loan payment should not exceed 10% of their prospective gross salary,” Weiss said. If it does, “they should really look at trying to get those things adjusted.”

The Department of Education offers a Pay As You Earn plan for eligible borrowers, so those concerned by high student loan payments should see if they qualify. Even if a borrower has procrastinated on making loan payments, the last thing to do is miss a payment.

Loan delinquencies leave a black mark on consumers’ credit reports, which can make it more difficult to access other forms of credit, like home and auto loans or credit cards. Especially for those with little credit history, delinquency is a fast track to poor credit scores.

What to Do If Your Payments Are Too High

Borrowers have to find a way to pay student loans. If your student loan payments don’t fit your budget, it’s your spending that has to change. Maybe you need to sideline that plan to move out of Mom and Dad’s, or split the rent among more roommates. The payments have to come from somewhere.

Even after corners have been cut, the payments can be too much. Concerned borrowers should talk to their loan servicers about consolidation, deferment or forbearance, keeping in mind that such measures could cost more money in the long run.

“You may have to do some things you don’t want to do,” Weiss said. “Debt will own you if you let it get away from you.”

Kids improved with credit than we competence think

As a result, a series of people underneath 21 with a credit label has forsaken by 18 percent, a news found. That competence seem to be a good thing, though this investigate suggests it might not be, as early entrance to a credit label is associated to reduce risk of disastrous financial consequences, a clever credit story and home tenure during an progressing age.

(Read more: Paying money costs Americans $200 billion a year)

“We found that credit cards can be dangerous for anybody,” Ghent said. “Lots of people get into difficulty with their credit cards, though there’s never been a law due to anathema everybody from carrying a credit card.”

The authors indicate out that their commentary differ from a widely hold perspective that immature people who request for a credit label do so in response to assertive marketing. They trust a kids who get cards are mostly some-more financially lettered and wish to start building a credit history. Their relatives might even inspire them.

“I don’t wish each 19-year-old to go get a card, since a lot of immature people do get into difficulty with them,” Ghent said. “But relatives don’t need to be overly disturbed about it—depending on their kid, of course.”

What’s a primogenitor to do?

It’s critical to learn your kids how to use credit wisely. Personal financial experts contend a best time to do this is while they are still vital during home.

John Ulzheimer, consumer credit consultant during CreditSesame.com, advises relatives to make a child “an certified user” on one of their credit label accounts when he or she is between 15 and 17. He calls it “a credit label with training wheels.”

Your child gets a opposite label number, though it’s related to your account. You are still in control since their charges uncover adult on your monthly statement.

(Read more: Employers can’t force withdraw cards on their workers)

“This way, your child can know how to use a label and what happens when they do, as good as learn a drawbacks if they injustice it,” Ulzheimer said. “As an certified user, they’re building a credit story during a immature age.”

In this arrangement, primary comment holders (parents) see all charges from a certified user listed on a their monthly statement. If a child abuses a privilege, a label can be canceled during any time.

Remember, withdraw cards (whether prepaid or a normal form related to a checking account) are not credit products, so they do not assistance your child build credit.

Gerri Detweiler, executive of consumer preparation during Credit.com, agrees that it creates clarity for immature people to settle credit before they connoisseur from college, so prolonged as they conduct it well.

“The problem is that even one ‘minor delinquency,’ such as a singular late payment, can stay on your credit reports for 7 years,” she said. “When we also have a slim, newly determined credit story and afterwards we compensate late, a impact to your credit scores can be significant. For that reason, someone in this age organisation should try to stay squeaky purify and make certain all is paid on time.”

—By CNBC writer Herb Weisbaum. Follow him on Facebook and Twitter @TheConsumerman or revisit The ConsumerMan website.