One of the big potential costs to U.S. taxpayers over the next years is an enterprise that's currently estimated to be even a bit profitable for them: financing student loans.
Right now, the federal government 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.
There's no guarantee this will stay this way, however, 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 for 2016-2025 by 30 percent, citinghigher 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).
There's already almost $800 billion in student loans that's 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 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," said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut. "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 percent of student loans were delinquent in the final three months of 2014, up from 11.1 percent in the prior quarter. The federal student loan default rate declined to 13.7 percent for borrowers who would have begun paying in 2011, the Education Department said in September. The rate was 14.7 percent a year before.
"If there are a lot of defaults, that would impact the fiscal situation, because the taxpayer would lose money in that deal," Stanley said.
Student debt will probably continue to grow because of the country's soaring cost of college tuition. Treasury's Wall Street advisers point to estimates of additional $1 trillion in direct student debt over the next decade.
The U.S. Treasury and the Fed are now encouraging both the public and private sectors to boost research and collect more data on education financing. The goal is to stay on top of emerging trends and be ready for upticks in potential defaults and other cash flow troubles. Deputy Treasury Secretary Sarah Bloom Raskin hosted a round-table discussion on servicing and collection of student loans on Monday.For more on the global economy, check out Benchmark: