This Is Part of the Reason Federal Student Loans Are a Mess

The College Guide has long been concerned with basic structural problems in the funding of American higher education. The low public support for American colleges, in particular, is probably responsible for the vast increase in the cost of student loans in this country over the last few decades.

But student loans are not like owing $500 to your parents or something, where you just pay them small amounts until it’s all paid off. No, the actual cost of administering and servicing student loans is expensive. Very expensive.

According to a piece by Jason Delisle over at the New America Foundation:

The administrative cost of a federal student loan is 1.7 percent of the amount lent. That is the total lifetime cost of administering the loan in today’s dollars. For example, the government will incur $17 in total administrative costs (in today’s dollars) on a $1,000 loan over the entire duration of the loan.

Bureaucracy

What this means is that the student loan system is going to cost a lot more in the future.

When the government disburses over $100 billion annually and over $1 trillion in a 10-year budget window, administrative costs can be measured in billions of dollars. But the administrative costs are important for another reason. The table below shows that, with administrative costs factored in, federal loans to undergraduates over the next five and 10 years will cost $5.1 billion and $16.7 billion, respectively, and almost all of those costs are due to administrative expenses. Yet when journalists, lawmakers and even budget agencies cite the cost of the federal student loan program, they aren’t including those administrative expenses.

They’re really expensive to administer.

This discussion begins up another one of those strange financial features exclusive to America: our health care system. Much like with student loans, there’s the cost of the actual service, the health care or the education, and then vast costs added on to bill, charge, send out, collect on, these payments. That’s part of the reason these payments are so damn high.

Like with health care, of course, the major reason for the high cost is structural: limited public funding means the citizens have to bear these costs on their own. But part of the reason private funding for large-scale systems is so expensive is because the administration of that payment makes everything way less efficient.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer