NEW YORK (MainStreet) — Is the Department of Education mainly carrying out mandates to establish and administer federal assistance to education while enforcing educational laws on privacy and civil rights?
Or is it a business that is pulling in huge amounts of cash?
According to reports in Monday's Detroit Free Press and USA Today, the ED made enough on student loans last year to hand out Pell Grants of $5,645 each to 7.3 million college students.
These reports claim that being a government entity didn't prevent the ED from acting like a for-profit operation. While the $41.3 billion profit for the 2013 fiscal year reported by these publications is down $3.6 billion from the previous year, it's a higher profit level than all but two companies in the world: Exxon Mobil, which cleared $44.9 billion in 2012 and Apple, which made $41.7 billion.
Arne Duncan, Secretary of Education, having been down this road before, has begged to differ.
"It's actually neither accurate nor fair to characterize the student loan program as making a profit," Duncan said during a July conference call with reporters after the Free Press and other news organizations reported on profits made from student loans.
Duncan has a point. Similar numbers were heard last August about the money the ED makes from Senator Elizabeth Warren (D-Mass.), who suggested that the ED was turning a $51 billion profit, a number that was shot down—although not to everyone's satisfaction--by Washington Post blogger Glenn Kessler.
Predicting the value of the loans and how much the Department makes from them is tricky; opacity does indeed reign. The 1990 Credit Reform Act determines how the government accounts for student loans. The ED counts the cash outflows as the loan payout—the disbursement of the loan. Cash inflows are the loan payback including principal plus interest and fees, less any amount that the borrower stiffs Uncle Sam. Delinquencies and defaults can be wildest of wild cards.
Then there are those who say that this is not how you get to bean counter heaven. The Congressional Budget Office has been making the case for replacing the current ED accounting method with what it calls "fair-value accounting."
The March 2013 Harvard Business Review described the practice as measuring assets and liabilities as estimates of their current value. It is supposed to more adequately take the collection of delinquent or defaulted loans into account, greatly reducing anything that could be called a profit. Whether or not ED is living large is another matter, but any comparisons with a Fortune 100 company seem, at first blush, to be specious.
A more comprehensible metric—especially compared to the debate over dueling accounting standards--is the amount of student debt: $1.2 trillion at the end of the 2013 fiscal year, which closed on September 30. That's a number that nearly everyone agrees on, and it's more than the total outstanding balances of credit cards in the United States. It's also a public relations nightmare for the ED that won't go away.
Congress may be tarred again by the student loan brush if it doesn't move on this issue. The Senate kicked off the first of 13 hearings on September 18 that should lead to the reauthorization of the 1965 Higher Education Act set to expire at the end of this year, although a draft reauthorization probably won't appear until early January. Allison Preiss, Senator Tom Harkin's press secretary, has said that student loans will be on the agenda. Harkin heads the reauthorization committee.
--Written by John Sandman for MainStreet