Student Loans Make Money for Taxpayers

Reimbursement Teachers Student Loans

Is there a program to reimburse Teachers with their student loans if they teach for five years, before getting their Master's Degree? Would like too start Grad School, can't afford it... Teaching Kindergarten in Georgia. Graduated from University of Toledo, in Ohio.

Let Government Compete With Banks?

Glad to see the media finally recognize that the motive of government to take away the fee paid to banks was so they could keep it for themselves! The Dems bypassed the national banking distribution system to create their own lucrative enterprise. Get ready for Big Government over the next decade comrades.

The Government Direct Loan Scheme won't save students or taxpayers a nickel- will cost 10x more just like the SSA or Medicaid scam. That is a promise.

Many people don't ever pay back a student loan

In the last few years, I worked at a major student loan lender. My full time job, along with many other people, was to put forbearances on loans. I did them at about 1 per minute. There is no limit to how many forbearances a person can get. Therefore, we literally had people with hundreds of thousands of dollars in student loans who never made even 1 payment.

A forbearance is when a person says they can't pay. There is no proof required. It lasts for 1 year, after which a person can just get another one. Interest accumulates, but who cares if you never pay it back.

If someone were to steal that amount in any other way, they would be tried and prosecuted. It would be a great story to see someone write in a large newspaper, or a good place to start on student loan reform legislation. Then, maybe we could afford to give those lower interest rates to students who deserve them.

Does the Government Have a Financing Advantage in Treasury Bonds?

A common, but erroneous, argument offered to explain why a loan can be profitable for the government but not for private student loan companies is that the federal government has a financing advantage. It can finance the loans at a lower cost than the private market by issuing Treasury bonds with below-market interest rates. Such a financing advantage, however, is merely an accounting illusion.

The federal government is able to borrow at low costs because it has the power to tax to cover its obligations. The loans it makes with the borrowed funds are not less risky. The lower cost stems from the fact that risk has been spread among current and future taxpayers. Individuals purchasing Treasury bonds are willing to accept a lower interest rate on the bond than other debt not because the student loan that the bond has financed is less risky than if private entities had made the same loan; rather, the lower interest rate lenders accept stems from the fact that the federal government can compel taxpayers to pay the bond holder back regardless of what happens to the student loan. In essence, bond holders are insulated from any connection between the risks of the loan and repayment of the bond – but the risks and costs as valued in the private market remain.

Student Loans

Does anyone recall the rates in early 2000, loan rates were at 2%. With most students graduating with less than 5,000 in loans. Today, we have student similar to myself, with at least 20,000 of loans at 8 %.

As of 2006 the U.S. Census identifies the population within the United States only 27% hold a Bachelor's or higher. With this said, why are we increasing the barriers or cost to students of all ages; we are going backwards instead of forward.

Moreover, history proves education in the U.S. was originally targeted for a few, the rich. So, we must all keep this in mind, and not allow private companies to profit or monopolize the lending industry with rates that only benefit their bottom line and not students or borrowers. We the people hold the power to reverse or undue what is currently being done. In pursuit of increasing the education rates, having more people shape the world instead of a few.

Borrowing costs differ

Thanks for your comment, Jason. But as the story points out, the federal government has lower borrowing costs than the private sector. Now, one can argue whether that is the discount rate one ought to use in evaluating the profitability of the federal loans. But there is no disputing that, especially in the current economic situation, investors are willing to accept lower interest rates on T-bills than on corporate bonds or asset-backed securities. As the story points out, the differential between Treasury and corporate bond rates may soon narrow, however, which could change the impact of the loans on the federal budget.

Accounting Illusion

The government does not make money on PLUS loans. This is an accounting illusion that arises largely from rules written by Congress that federal budget agencies must use to estimate loan costs. A number of academics and budget experts have brought such problems to light, and it is a disservice to readers that the dispute is not mentioned in this article.

Consider this key discrepancy. Federal PLUS loans are provided to parent borrowers and graduate students at terms more generous than those provided in the private market, yet the federal government claims the loans earn a return for taxpayers. Has the private market overlooked this profitable opportunity? No, the private market collectively believes that the loans are unprofitable at the given borrower terms and does not make them. The discrepancy is explained by budget rules used to make the estimates.

Larger issue

Kim's insightful piece does though overlook one fundamental issue raised by these profit-making enterprises run by the federal government.

Middle class families who rely on federal student loans, rather than taxpayers generally, are paying for higher education initiatives benefiting low-income students.

This is called investing in higher education on the cheap--or Robbing Peter to pay Paul. Democrats passed what they like to call the largest increase in financial aid since the GI Bill and paid for it out of the hides of the middle class. Had the Republicans attempted that, the Democrats as well as US Student Assn., New America Foundation, US PIRG, Washington Post, New York Times, and others in the Democrats' hip pocket would have screamed bloody murder.

Since the Democrats took over the Congress, net federal investment in higher education has declined.

PLUS Loan fees

The federal government charges 4 percentage points in fees on PLUS loans, as documented here: http://studentaid.ed.gov/PORTALSWebApp/students/english/parentloans.jsp

For those of you who don't want to click on the link, here's what the Department of Education has to say about parent loan fees:

"Your parents will pay a fee of up to 4 percent of the loan, deducted proportionately each time a loan disbursement is made. For a FFEL PLUS Loan, a portion of this fee goes to the federal government, and a portion goes to the guaranty agency (the organization that administers the PLUS Loan Program in your state) to help reduce the cost of the loans. For a Direct PLUS Loan, the entire fee goes to the government to help reduce the cost of the loans. "

nitpick?

"and an additional 4 percentage points in upfront fees,"

Did origination fees increase from 3% when I wasn't looking? where's that other 1% coming from?