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By Lucy Stratton
April 14, 2015
Caption : According to the Federal Reserve, at least $876.1 billion of outstanding student debt is currently held by the federal government.     

The U.S. government is banking on students to repay their student loans more than ever. According to the Federal Reserve, at least $876.1 billion of outstanding student debt is currently held by the federal government. This striking statistic, which leapt from $150 billion to nearly $900 billion in only five years, is the largest amount of outstanding loans the Fed has ever recorded.

Federal student loans are at the outset mutually beneficial. The Congressional Budget Office reports that the U.S. government earns 14 cents for every dollar lent, allowing the government to receive a healthy profit while funding the educations of the nation’s youth. Moreover, federal student loans offer lower interest rates and more flexible payment plans than private lenders, making it easier for students to manage and pay their loans on time. With 40 million Americans currently responsible for at least one outstanding student loan, the spike in federal borrowing is expected to increase.

In practice, this system is hampered by student defaults and dodgy loan servicer practices. When the government has $876.1 billion in loans on its balance, it hinges on graduates paying off their loans in a timely manner. The student default rate has improved in recent years, but it still hovers around 13.7 percent. Under the Department of Education’s new methodology for calculating student loan delinquencies, the same data is as high as 38 percent for individual borrowers.

“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, told Bloomberg. “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.”

In addition to the threat of default, students are left at the mercy of third-party loan servicers while paying back their loans. The Department of Education recently fired five companies for engaging in unlawful debt collection, including Navient Corp. These companies inflated minimum payments, misled borrowers about default rehabilitation, and charged illegal late fees. Cracking down on rogue debt collectors may help alleviate default rates and loan delinquencies, but the precedent of predatory lenders makes the Fed’s $876.1 billion bet even shakier.

While federal borrowing continues to climb, the government’s $876.1 billion of outstanding loans is only a fraction of total borrowing. According to CNN, total student debt in the United States now amounts to $1.2 trillion, an 84 percent increase since 2008. The remainder of student loans are funded by private companies.

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