Student Loan Reform

[Brentastic]

So, you are then agreeing that the government is giving the banks a pure subsidy of 1% of every student loan that they make.

No - the lender earns that 1% by originating and servicing these loans for 10+ years. The government does nothing to earn their 3.8% kickback. NOTHING other than demand it back because they want to cap the lenders profits.

 

How do you interpret that as a subsidy - the lenders are working for profit. The govt is doing nothing. They're not providing the funds, or the servicing or anything other than regulating compliance issues.

[Azazello1313]

Again, who is "taking over" an industry here? Are lenders barred from giving loans to students, or are they merely removed from receiving the benefits of being the middleman with guarantees from the government and subsidization of interest payments?

 

previously, the government gave these subsidies to students, regardless of who they chose to borrow from. now they are telling students, you can only get these subsidies (from the taxpayer) if you borrow through our government loan provider. the effect is, they take billions in taxpayer money to offer loans at terms private companies could never compete with, and therefore they basically just give themselves all the business by legislative fiat.

[Brentastic]

I am talking about the additional subsidy that is currently going to the banks.

What's this additional subsidy you've invented? Seriously, anyone with any type of reading comprehension skills should be able to understand this. The only subsidy is interest accrual while in school which is paid by the government on the student's behalf. That's it, nothing else.

[Azazello1313]

So, you are then agreeing that the government is giving the banks a pure subsidy of 1% of every student loan that they make.

 

isn't it the student paying that fee to originate the loan?

[Brentastic]

What's this additional subsidy you've invented? Seriously, anyone with any type of reading comprehension skills should be able to understand this. The only subsidy is interest accrual while in school which is paid by the government on the student's behalf. That's it, nothing else.

To clarify this point, here's what happens in the real world:

 

Student takes out a $5,000 stafford loan. Half of this is subsidized, the other half is unsubsidized. The entire loan has a rate of 6.8%. This loan accrues about $0.93 per day (on the full 5K) or about $28 per month. However, while the student is in school or in deferment, the govt pays the interest on the sub loan, which is approximately $14 per month. That is it - the subsidy is an entitlement to the student. The lender does not collect this in any way, other than to collect it from the govt to apply it to the student's account.

[Azazello1313]

To clarify this point, here's what happens in the real world:

 

Student takes out a $5,000 stafford loan. Half of this is subsidized, the other half is unsubsidized. The entire loan has a rate of 6.8%. This loan accrues about $0.93 per day (on the full 5K) or about $28 per month. However, while the student is in school or in deferment, the govt pays the interest on the sub loan, which is approximately $14 per month. That is it - the subsidy is an entitlement to the student. The lender does not collect this in any way, other than to collect it from the govt to apply it to the student's account.

 

what the lender gets out of it that they wouldn't otherwise is increased business due to government-stimulated demand in the form of really favorable loan terms offered to students.

[CaP'N GRuNGe]

No - the lender earns that 1% by originating and servicing these loans for 10+ years. The government does nothing to earn their 3.8% kickback. NOTHING other than demand it back because they want to cap the lenders profits.

 

How do you interpret that as a subsidy - the lenders are working for profit. The govt is doing nothing. They're not providing the funds, or the servicing or anything other than regulating compliance issues.

 

Correct me if i'm wrong, but aren't they guaranteeing the loans? Aren't they driving the business (or rather were driving it) that might not have been there without the subsidization of interest while the students are in school? I know i'm repeating myself over and over here, but I don't think anyone as yet has disputed this.

[Brentastic]

Correct me if i'm wrong, but aren't they guaranteeing the loans? Aren't they driving the business (or rather were driving it) that might not have been there without the subsidization of interest while the students are in school? I know i'm repeating myself over and over here, but I don't think anyone as yet has disputed this.

Yes, they guarantee the majority of the principal balance and if a student defaults they can then garnish wages or do whatever they please. It's a good model that helps all parties, most importantly, the students. They collect the majority of interest margin for doing nothing. In return, they guarantee the loans, and should a loan default, they have the power to garnish wages. The government keeps their hands out of the business end by letting private companies do what they do best and everybody wins. Don't forget, this 'subsidy' that everyone is hanging their mis-informed opinions on, still goes to the student (ie... paid by the tax payer) regardless of who the lender is (DOE included).

[wiegie]

No - the lender earns that 1% by originating and servicing these loans for 10+ years.

If that is the case, then why the hell did you write this earlier?:

The lender collects 3% of the 6.8% (2% to cover their cost and the additional 1% for profit)

 

(If the extra 1% is to cover the costs of originating and servicing these loans, then it isn't profit to begin with. That then also begs the question, what are the other 2% of costs covering?)

[wiegie]

a quick google news search found this interesting article:

 

Foes of student aid bill remain

The student loan reform package that had loomed in Congress since last summer returned to life last week and cleared the House late Sunday.

 

The bill would eliminate the Federal Family Education Loan program, through which the government guarantees loans issued by private lenders, leaving a greatly expanded Federal Direct Student Loan program, loans directly from the government to students.

 

Proponents say FFEL is wasteful, and the independent Congressional Budget Office estimates its elimination would yield $61 billion in savings over the next 10 years. More than half of the savings would go toward shoring up the Pell grant program, which offers need-based federal loans to 6 million low-income students. Pell is deep in the red; without an infusion of cash, the maximun grant might be reduced to 1980s levels and a half-million students dropped from the program.

 

Private lenders have already been backing away from subsidized loans, partly because of the coming sea change but also because the sector has not, apparently, been very profitable of late.

 

But the lending industry and Republicans in Congress remain firm in opposition. Lobbying efforts have now moved to the Senate.

 

Opponents have argued that eliminating the loan subsidies would mean thousands of lost jobs. Proponents say there's little, if any, net loss of jobs, because private lenders would still service federally issued loans. Opponents have also warned that student lending would become another bloated federal bureaucracy, with attendant customer-service horrors.

 

Here are some sound bytes from both sides.

 

America's Student Loan Providers, representing the lending industry: "This is not the final chapter. The Senate now has the historic opportunity to pass health reform -- without eliminating thousands of jobs and critical student services. It is not too late for the Senate to adopt the alternative community proposal, which would generate billions for Pell Grants without causing massive job losses or service deterioration."

 

Martha Holler, spokeswoman for Sallie Mae, the leading private student lender: "The student loan provisions buried in the health care legislation intentionally eliminate private sector jobs at a time we can least afford to lose them. On behalf of the thousands of student loan originators soon to lose their jobs to a new government monopoly, we are profoundly disappointed."

 

U.S. Rep. George Miller (D-CA), the chairman of the House Education Committee: "Sallie Mae has a history of using scare tactics to hold on to their excessive taxpayer subsidies, bloated CEO salaries and perks, and well paid cadre of Washington lobbyists. Judging by their statements today, it is clear that Sallie Mae will continue to do or say anything in a last-ditch effort to save their sweetheart deal - billions of dollars that we think would be better spent directly helping students pay for college."

 

United States Student Association President Gregory Cendana: "The student aid reform legislation saves the Pell grant from massive funding reductions that would force millions of low-income students to drop out or take on multiple jobs to pay for college. Additionally, the bill invests billions of dollars in community colleges and Minority-Serving Institutions."

http://voices.washingtonpost.com/college-i...inst_the_s.html

 

and another one from America's favorite lesbian financial advisor: http://www.cnbc.com/id/36001132/

Edited March 24, 2010 by wiegie

[Brentastic]

If that is the case, then why the hell did you write this earlier?:

 

 

(If the extra 1% is to cover the costs of originating and servicing these loans, then it isn't profit to begin with. That then also begs the question, what are the other 2% of costs covering?)

Are you really an economist? Like, do you actually have a college degree in anything business related? You seem really confused by basic business structure and it seems obvious you don't read entire posts. I'm not going to keep explaining the same thing over and over if you're only going to skim for the gist. Get out of your little box, stop linking other people's opinions and create your own thoughts and ideas. Where do you think the revenue comes from in this industry? I'd predict your answer to be the govt - if that's what you believe, then you need to go back to the drawing board on this topic before posting anymore.

 

Honestly, after reading many of your posts in recent months, and especially your overly one-sided 'articles', I refuse to believe you are anything more than a new college grad that has zero ability to think for himself - a true student in every sense of the word. Maybe those are common traits of economists, I don't really know. What I do know is when I read about topics I would presume you to know much about, I never read anything useful or logical from you. It's usually just one-sided dribble with little or no creative thinking involved. That's no way to go through life, man. Maybe, just maybe, there is another explanation out there not supported by the Suze Orman's of your world (btw, the fact that you even linked her to support anything is not laughable, just plain sad). Maybe I'm being harsh, but man, I can't imagine being that close-minded about everything.

[wiegie]

you didn't answer my question

[Brentastic]

you didn't answer my question

Read my other posts - it's all there.

[wiegie]

Read my other posts - it's all there.

my bad, I relooked saw it (what confused me was when you said that the bank earned 1% in profits--according to your analysis, the bank's profits should be about 0%.)

 

However, the fact remains that the FFEL is a transfer of money to the banking sector

 

Wall Street Journal

DECEMBER 17, 2009, 8:33 P.M. ET.

Banks Don't Belong in the Student Loan Business

They get billions in federal subsides that can provide financial aid to needy students..

By ARNE DUNCAN

 

Since I arrived in Washington, I've been looking at every line item in the budget of the U.S. Department of Education with two questions in mind: Is this program helping students learn? And is it a good use of taxpayer money? In the case of the Federal Family Education Loan (FFEL) program, the answer to both questions is no.

 

Under the current FFEL program, banks make loans to students. While those students remain in school, the federal government pays the interest on their loans; otherwise the interest accrues. Once the borrowers leave school or graduate, the lending agency collects on the loans. But if the student defaults, my department pays back the loan—plus the interest owed. The FFEL program, in short, is a great deal for bankers but a terrible one for taxpayers.

 

Over the next decade, according to the Congressional Budget Office, the Education Department is slated to subsidize banks to the tune of $87 billion to enable them to make federal student loans. All of this money would be put to better use providing financial aid directly to millions of needy students who want a college education. The Education Department will be able to accommodate the new loans through an existing federal public-private partnership, Through that partnership, the federal government makes loans directly to students and uses companies that will provide better service to borrowers at a lower cost to taxpayers

 

Critics contend that the government is trying to nationalize a private industry and do away with competition. Our real aim is to simply stop using banks as the middle man for student loans.

 

The banking industry would continue to compete in the marketplace to finance mortgages, business start-ups, and other forms of credit. But we are intent on stopping subsidies to bankers who make student loans at no risk because they know the federal government will bail them out in case of default.

 

By working with private sector companies with expertise in the field, we are prepared to initiate all new student loans in the existing federal Direct Loan program. Right now, the Education Department already owns and services 80% of the student loans made last year. It owns such a high volume of loans chiefly because it had to take emergency action in 2008 to ensure students had access to loans when lending in the nation's credit markets was frozen.

 

Our experience handling the bulk of student loans makes me confident in our capability. This year alone, an additional 500 colleges and universities joined the Direct Loan program. Just last month, the department's independent inspector general's office issued a report documenting that the Education Department had taken the right management steps so that all loans can be serviced by the Direct Loan program.

 

In a recent survey by the National Association of Student Financial Aid Administrators, schools that have made the switch to direct lending overwhelmingly reported the conversion was easy and quick. That is just one reason why that association of financial aid experts, along with organizations representing the nation's largest public and private universities, community colleges and college students, support the department's Direct Loan proposal.

 

The private sector would continue to play an important role in servicing loans. Last summer, the department's Federal Student Aid Office awarded contracts to four companies to service federal student loans, following an intense competition among the best companies in the loan servicing business. These companies are paid more when borrowers are in good standing, and those that keep defaults down and provide the best customer service will be given the most work.

 

We are preparing to make the switch to direct loans as easy as possible for colleges and universities. We appreciate their feedback, and their ideas will help us transition smoothly from FFEL to direct loans once Congress has passed a bill authorizing the switch to 100% direct loans

 

As for the $87 billion we'll save from ending the troubled FFEL program, the administration seeks to use that money for important programs that will improve our economic future. We propose to substantially increase scholarships in the Pell Grant program and other financial aid for low-income students. We would start new programs to raise college graduation rates and strengthen our community colleges. We will expand our investment in early childhood education. Plus, $10 billion would be set aside to reduce the deficit.

 

Now is the time to allocate resources to students—not to banks—so they have access to college and other educational opportunities. We cannot in good conscience let $87 billion in subsidies go to banks when our students desperately need financial help to realize the dream of getting a college education.

 

Mr. Duncan is the U.S. secretary of education.

Edited March 24, 2010 by wiegie

[Azazello1313]

What I do know is when I read about topics I would presume you to know much about, I never read anything useful or logical from you. It's usually just one-sided dribble with little or no creative thinking involved.

 

I think wiegie just decided, "if it's good enough for paul krugman, it's good enough for me"...and then followed him off the cliff.

[Brentastic]

I think wiegie just decided, "if it's good enough for paul krugman, it's good enough for me"...and then followed him off the cliff.

That's what sheep do :oh no he di'int:

[wiegie]

I think wiegie just decided, "if it's good enough for paul krugman, it's good enough for me"...and then followed him off the cliff.

again, not biting

 

(Although I will ask you why you are against a program change that the CBO estimates will save the government tens of billions of dollars.)

[Azazello1313]

Wall Street Journal

DECEMBER MARCH 17, 2009 2010, 8:33 P.M. ET.

Banks Don't Belong in the Student Loan Business

They get billions in federal subsides that can provide financial aid to needy students.. be nationalized to help pay for the Grand Progressive Agenda

 

fixed headline to be more current

[Azazello1313]

again, not biting

 

(Although I will ask you why you are against a program change that the CBO estimates will save the government tens of billions of dollars.)

 

what I am against is nationalizing profitable industries to fund even more government intervention in the economy.

 

if you want to argue that the government should remove the subsidy, I would probably agree with you. but arguing that because they subsidize it, they should suck in all the profit themselves....well, I just hope we don't keep applying that logic to everything the government subsidizes, though it doesn't seem like you would have much of a problem with it.

 

edit again to add: and if the government WERE going to take over to suck in the profits, I'd sooner see those profits go back to the people at whose expense they are coming (students), as the WSJ article you link suggests, rather than to pay for a new entitlement, and essentially act as a wealth transfer from the young, healthy and poor, to the old, sick and relatively well-off.

Edited March 24, 2010 by Azazello1313

[Brentastic]

what I am against is nationalizing profitable industries to fund even more government intervention in the economy.

 

if you want to argue that the government should remove the subsidy, I would probably agree with you. but arguing that because they subsidize it, they should suck in all the profit themselves....well, I just hope we don't keep applying that logic to everything the government subsidizes, though it doesn't seem like you would have much of a problem with it.

This is my feelings exactly. It's important to remember the subsidy is for the student, not the lenders. The intention was to make college funding available to all students at a reasonable interest rate. If you want to take that away you will only hurt the students but to nationalize an entire industry is even worse, IMO. We now have a government that rejects capitalism in favor of it's own profitable interests - all the while dummying down the masses and subtley forcing people to only strive to 'just get by'. This is not progression my friends, it's regression in it's early form.

[wiegie]

what I am against is nationalizing profitable industries to fund even more government intervention in the economy.

only an idiot Ideologue would argue that the government should pay somebody, say, $100 billion to do something that the government itself could do for $40 billion

 

it just makes no sense

Edited March 24, 2010 by wiegie

[Brentastic]

only an idiot Ideologue would argue that the government should pay somebody, say, $100 billion to do something that the government itself could do for $40 billion

 

it just makes no sense

So you actually trust the government can be more efficient and cost-effective than private companies? That's going out on a large limb. And you also believe the role of government is to nationalize industries?

 

I am not for govt subsidizing lazy people who don't want to work with endless amounts of welfare etc... but I am in favor of subsidizing students who wish to enhance their education.

[CaP'N GRuNGe]

So you actually trust the government can be more efficient and cost-effective than private companies? That's going out on a large limb. And you also believe the role of government is to nationalize industries?

 

I am not for govt subsidizing lazy people who don't want to work with endless amounts of welfare etc... but I am in favor of subsidizing students who wish to enhance their education.

 

Not really. See the cost of US soldier compared to a Blackwater mercenary.

[Azazello1313]

only an idiot Ideologue would argue that the government should pay somebody, say, $100 billion to do something that the government itself could do for $40 billion

 

only an idiot ideologue would characterize the federal student loan program that way.

[wiegie]

only an idiot ideologue would characterize the federal student loan program that way.

then exactly how would you characterize it?

 

and why does the CBO say that by eliminating the middle-man, it will save the government about $60 billion?