Student Loan Reform

[Brentastic]

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?

Really? Because they are spinning the numbers to justify the bill.

[Azazello1313]

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?

 

I would characterize it as the government giving certain individuals (higher education students) a subsidy at taxpayers' expense because they want to incentivize what they are doing. then the individuals use that subsidy, and their own credit, to borrow money in the market. it's the same as, say, taking that homebuyer subsidy in the stimulus bill of $8000 or whatever. now, we can assume that a number of home purchases were made as a result of that subsidy that may not have been otherwise. of course, we can also look at the larger and more general federal subsidy of home buying, the mrotgage interest deduction. if someone were so ideologically inclined, they might even try to characterize those subsidies as the government "paying realtors and mortgage lenders billions of dollars" to do something. now, if you asked the CBO, could the government save itself some money by "eliminating the middle man" and taking over the entire mortgage lending industry, the CBO would say, well, yeah. doesn't necessarily make it a wise idea for them to do so.

 

I guess in a sense, it is fitting that this thing is in the health care bill, because it shows pretty clearly how this sort of thing develops. first, the government subsidizes something it thinks is important. they don't take over the industry, at least not initially, because that would be politically untenable. then comes the "public option". and when nobody chooses the public option when it has to compete on a level playing field, they say hey, this isn't working right, the private profiteers are fouling things up by making a profit off of our largesse, the government needs to take over the whole shebang -- and we have to do it to save YOU money, joe taxpayer

[wiegie]

I would characterize it as the government giving certain individuals (higher education students) a subsidy at taxpayers' expense because they want to incentivize what they are doing. then the individuals use that subsidy, and their own credit, to borrow money in the market. it's the same as, say, taking that homebuyer subsidy in the stimulus bill of $8000 or whatever. now, we can assume that a number of home purchases were made as a result of that subsidy that may not have been otherwise. of course, we can also look at the larger and more general federal subsidy of home buying, the mrotgage interest deduction. if someone were so ideologically inclined, they might even try to characterize those subsidies as the government "paying realtors and mortgage lenders billions of dollars" to do something. now, if you asked the CBO, could the government save itself some money by "eliminating the middle man" and taking over the entire mortgage lending industry, the CBO would say, well, yeah. doesn't necessarily make it a wise idea for them to do so.

 

I guess in a sense, it is fitting that this thing is in the health care bill, because it shows pretty clearly how this sort of thing develops. first, the government subsidizes something it thinks is important. they don't take over the industry, at least not initially, because that would be politically untenable. then comes the "public option". and when nobody chooses the public option when it has to compete on a level playing field, they say hey, this isn't working right, the private profiteers are fouling things up by making a profit off of our largesse, the government needs to take over the whole shebang -- and we have to do it to save YOU money, joe taxpayer

oh dear Lord:

 

This whole thing is a two-step process:

1) Should we subsidize student loans to make it easier for kids to go to college?

If the answer is no, then we are done.

If the answer is yes, then we ask:

2) Should we deliberately subsidize student loans in such a way that it costs the government tens of billions of dollars more than another way?

Most normal human beings would say no.

Brent would say "yes, because my job depends on it"

Az would say, "yes, because I am ideologically opposed to the government involving itself in the economy".

[CaP'N GRuNGe]

oh dear Lord:

 

This whole thing is a two-step process:

1) Should we subsidize student loans to make it easier for kids to go to college?

If the answer is no, then we are done.

If the answer is yes, then we ask:

2) Should we deliberately subsidize student loans in such a way that it costs the government tens of billions of dollars more than another way?

Most normal human beings would say no.

Brent would say "yes, because my job depends on it"

Az would say, "yes, because I am ideologically opposed to the government involving itself in the economy".

 

Except, you know, by subsidizing it at all the government is involving itself in the economy.

[wiegie]

Except, you know, by subsidizing it at all the government is involving itself in the economy.

yes, I know... I was trying to point out that the only logical conclusion you can take from Az's ramblings is that student loans should not be subsidized. (of course, that opens a whole nother can of worms)

[CaP'N GRuNGe]

yes, I know... I was trying to point out that the only logical conclusion you can take from Az's ramblings is that student loans should not be subsidized. (of course, that opens a whole nother can of worms)

 

I know you know, I was just piling on Az and Brent.

[Brentastic]

oh dear Lord:

 

This whole thing is a two-step process:

1) Should we subsidize student loans to make it easier for kids to go to college?

If the answer is no, then we are done.

If the answer is yes, then we ask:

2) Should we deliberately subsidize student loans in such a way that it costs the government tens of billions of dollars more than another way?

Most normal human beings would say no.

Brent would say "yes, because my job depends on it"

Az would say, "yes, because I am ideologically opposed to the government involving itself in the economy".

My views have nothing to do with my job as I am looking elsewhere anyways.

 

You keep regurgitating that the government is wasting billions of dollars and you assume the new bill will 'save' money... You should be a spokesperson for the government because you clearly lack your own ideas.

[wiegie]

You keep regurgitating that the government is wasting billions of dollars and you assume the new bill will 'save' money... You should be a spokesperson for the government because you clearly lack your own ideas.

the CBO says that the changes will save money

 

(it appears that you are arguing that the CBO is lying as part of some sort of government conspiracy)

[CaP'N GRuNGe]

My views have nothing to do with my job as I am looking elsewhere anyways.

 

You keep regurgitating that the government is wasting billions of dollars and you assume the new bill will 'save' money... You should be a spokesperson for the government because you clearly lack your own ideas.

 

How will the government lose money by stopping giving a piece of it to the banks?

[Brentastic]

How will the government lose money by stopping giving a piece of it to the banks?

Because as you fail to realize, the govt is not giving any money to banks, it's giving it to students to cover accrued interest and will continue to do so (at least I hope for the student's sake). How will the govt fund all these loans? Will they bwr the money from the Fed?

 

Basically, the govt wants everyone to believe this will be good for students and reduce deficit blah, blah, blah. The reality, however, is that students will no longer have reductions in their rates provided by private lenders. Where is the savings? They will now be sending money to the FED for the interest accrual or receiving less money (equal to the subsidy) themselves.

[cre8tiff]

Because as you fail to realize, the govt is not giving any money to banks, it's giving it to students to cover accrued interest and will continue to do so (at least I hope for the student's sake). How will the govt fund all these loans? Will they bwr the money from the Fed?

 

Basically, the govt wants everyone to believe this will be good for students and reduce deficit blah, blah, blah. The reality, however, is that students will no longer have reductions in their rates provided by private lenders. Where is the savings? They will now be sending money to the FED for the interest accrual or receiving less money (equal to the subsidy) themselves.

 

Anyone else imagining Brentastic saying this in a faux English accent, looking down his nose and pontificating with a large Meerschaum pipe while wearing a tweed jacket with leather on the elbows?

[Azazello1313]

oh dear Lord:

 

This whole thing is a two-step process:

1) Should we subsidize student loans to make it easier for kids to go to college?

If the answer is no, then we are done.

If the answer is yes, then we ask:

2) Should we deliberately subsidize student loans in such a way that it costs the government tens of billions of dollars more than another way?

Most normal human beings would say no.

Brent would say "yes, because my job depends on it"

Az would say, "yes, because I am ideologically opposed to the government involving itself in the economy".

 

well, yeah, that's basically why I'm opposed. but the way you phrase your second question is disingenuous. or at the very least, you're not following it through to its logical conclusion. because anything the government subsidizes, it could probably subsidize cheaper by taking over completely and making sure that, you know, nobody else profits. cheaper, at least, until government mismanagement and the vaccuum of market forces turned it into a bloated, inefficient mess. which is one reason why I said from the beginning (apparently grunge wasn't paying attention) that I generally dislike these kinds of government subsidies.

 

wiegie is right though, fundamentally this is about philosophy. IF the government is going to subsidize behavior it approves of, should they just subsidize it and be done with it? that is one level of market distortion and government control. or should they send the money out and then follow behind taking control and lapping up every penny of associated transaction costs? that entails another level of market distortion and government control.

 

it's sorta like with the auto company bailouts. now obviously, I hated those bailouts on every level (and I believe wiegie did as well). but wiegie, I believe you were opposed because you saw them as failing companies that are unlikely to be saved by government intervention. I opposed them for that reason, and also on more philosophical grounds. but once those bailouts are made, the next question became, should they just be treated as a loan, which the government made because it's in the country's interest to prop up that industry? or should those loans be leveraged into the government basically owning those companies? now once the loan/subsidy has already been made (at significant taxpayer expense), there is a pretty good case to be made that the taxpayer gets a "better deal" if the government leapfrogs the other investors and takes over ownership of all the assets. BUT, it does involve a whole other level of government intervention and control (and for many, I am certain this is a feature, not a bug). first, it was just a loan or a subsidy to try and encourage a certain kind of economic behavior. but then it became a takeover.

 

point is, I am uneasy with the first kind of intervention. I am REALLY uneasy with the second kind.

Edited March 24, 2010 by Azazello1313

[CaP'N GRuNGe]

I think most of us would be happy if the government stepped in and broke up any businesses, financial or otherwise, that have become "too big too fail" and make bailouts unneccessary. Let the individual smaller institutions compete and the weak ones that make poor decisions die, the cream rising to the top. Bring back Teddy!

[wiegie]

well, yeah, that's basically why I'm opposed. but the way you phrase your second question is disingenuous. or at the very least, you're not following it through to its logical conclusion. because anything the government subsidizes, it could probably subsidize cheaper by taking over completely and making sure that, you know, nobody else profits. cheaper, at least, until government mismanagement and the vaccuum of market forces turned it into a bloated, inefficient mess.

This I can understand. And if it were an industry where innovation was important, I would be leery of a government take-over since the lack of competition could easily lead to dynamic inefficiencies. However, these loans are fairly standard and boring and the potential dynamic gains from privatization are small and, as the CBO says, do not overcome the efficiency gains that the government would obtain from "in-sourcing" the granting of these loans.

 

For what it's worth, this paper is my standard reference on this topic and it is one of the most important assigned readings in my Comparative Economics Systems course: http://www.economics.harvard.edu/faculty/s..._vs_private.pdf

[wiegie]

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

what's not to like?

Student grants get a boost

Health care reform also changes loan program

By Beth Healy

Globe Staff / March 24, 2010

 

The legislation includes a major overhaul of federally backed student loans. From now on, borrowers will go directly to the federal government for these loans, and not to banks or other lenders. While this will have little effect on student borrowers, it will make college loans that parents take out for their children slightly cheaper and easier to get.

 

The student loan changes were included in the health bill in part to help offset the cost of the health plan. Of the $61 billion the government expects to save by cutting subsidies to banks for student loans, $36 billion will go the Pell grants, and $25 billion will go to lowering the deficit.

 

Many schools have been preparing for the change to direct loans, after the credit crisis hit two years ago and made private lenders less willing to extend government-backed loans. Northeastern University in Boston, for example, went to 100 percent direct loans two years ago.

 

“For Northeastern and our families, it’s a nonevent,’’ said Tony Erwin, senior director of financial aid. “Many institutions have been expecting this change or at least planning for it. People have seen the writing on the wall.’’

 

Students and parents should still contact their college’s financial aid office to help them navigate the borrowing process. Nearly 2,400 schools already use the direct loan process with the government, more than double the number that did so just two years ago, according to the US Department of Education.

 

Pell grants are generally available to families earning less than $60,000 a year. The additional funding will increase the maximum grant to $5,500 this year, and eventually to $5,975 by 2017. The legislation also adds an annual cost-of-living increase that would take effect in 2013.

 

Bernie Pekala, director of student financial strategies at Boston College, said the Pell Grant news was positive for students. The program was running short of money, due to high demand, and the new funds will shore it up. By cutting subsidies to banks and setting that money aside for Pell grants, Pekala said, “The savings will help many of the most needy students in the country.’’

 

In the 2007-2008 school year, 7.3 million students received Pell grants, out of 14.6 million who applied. A decade ago, 4.9 million students received the aid.

 

As for student loans, the changes will take effect July 1, pending a vote by the Senate. To most students, the shift will be barely noticeable. They will only apply for government funds to cover their tuition, rather than to a list of banks. Loan terms and interest rates of 6.8 percent would not change, either.

 

Parents, however, have an opportunity to save money on so-called PLUS loans, according to Mark Kantrowitz, publisher of the student loan website FinAid.org. PLUS loans offered by the government have a lower interest rate, currently 7.9 percent, than those that had been available from banks and other lenders — most recently 8.5 percent. In addition, the government approves more parent-requested loans than banks had, Kantrowitz said.

 

The new rules also will help graduates who have trouble paying their loans. Starting in 2014, eligible borrowers can cap their monthly loan payments at 10 percent of their discretionary income, down from the current 15 percent. In addition, borrowers who make their monthly payments faithfully for 20 years can have the remaining balance forgiven, down from 25 years under the current law.

 

The student loan world was rocked two years ago when the secondary market for the loans shut down amid the credit crisis. That meant lenders could no longer sell off their loans to raise money for new ones. The Massachusetts Educational Financing Authority, for instance, stopped writing federal student loans in April 2008. Now the agency, a nonprofit student lender, raises its own money to finance private loans for students and parents.

 

MEFA is offering private, fixed-rate loans for the next school year at 6.89 percent. But the agency still recommends families exhaust their direct-loan options first, and turn to the authority for parent and additional loans.

http://www.boston.com/business/articles/20...lthy_36b_boost/

[Brewer]

Imagine that.

[Brentastic]

It just occured to me how bass ackwards this bill is. On one hand the govt is denouncing a subsidy to students and trying to convince people how wasteful it is by misleading the public (saying it's a subsidy to the lender). Then in the health bill they are subsidizing health care to people who don't have it (basically jobless people and illegal immigrants). They are shunning education to cater to freeloaders. Great plan.