The government student-loan takeover looks like it has a high potential for disaster:
…the bill’s student loan provisions will not save the $68 billion promised, and will move the country closer to a European-style socialism that has brought that continent stagnation. Going to a Soviet/U.S. Postal Service model of student-loan services goes against the sound maxim that competition is always better than monopoly. Moreover, the bill’s repayment terms will lead to increasing student-loan defaults, adding to the crushing fiscal burden on a government whose IOUs are now trusted less than those of some private corporations.
Third, the bill proceeds from a false premise. President Obama asserted Saturday that “by the end of this decade, we will once again have the highest proportion of college graduates in the world.” Putting aside the nasty reality of a 45 percent six year college drop-out rate, the Labor Department forecasts that, over the next decade, there will be fewer new jobs requiring college degrees than there will be new college graduates.
But it continues to prop up Big Academia, which is supportive of all this continuing collectivism, so it has that going for it.
Except that this was already a government program. The loans were guarenteed by the government, so the banks took no risk. The loans weren’t obtained through banks, but rather through the financial aid departments at the schools. You got whatever lender they gave you.
All the old system was doing was subsidizing private lenders with public money to do something that the public could and is currently doing.
Chris.
Yes. Also there is evidence the banks, because the loans were guaranteed by the government, had no incentive to reduce risks and so aggressively marketed the loans through trade schools that were somewhat questionable. By bringing in with a government agency the program should be much better managed.
As a side note I received all my loans through a state agency, the New Mexico Guarenteed Student Loan Foundation. I found they were very easy to deal with and I got a much better rate on my loans then my wife, who received all her loans through a commercial lender so this move to bring them in house should improve the program greatly and reduce the aggressively selling of loans. If anything this will deflate the existing bubble in bad student loans.
I know, its against the belief system of libertarians that a government agency will perform better then a private for profit corporation, but that has indeed been the case with student loans over the last couple of decades which is why this move was in the works even in the Bush Administration.
“By bringing in with a government agency the program should be much better managed.”
I don’t think this is what you meant, but I wholeheartedly agree that virtually every government-run program should be much better managed.
By bringing in with a government agency the program should be much better managed.
Nonsense. The same problem exists as before. The program is designed to bribe college students. There’s no mechanism for cost control. There’s no mechanism for quality control or incentive to learn. The government still pays in case of student default. The money that was formerly siphoned off by banks will now go to inflating the cost of colleges and increasing the debt of college students.
My take on this is that we should eliminate most, if not all, government subsidized college loans. Bluntly, I don’t believe this program works well enough to justify itself.
the bill’s student loan provisions will not save the $68 billion promised
Well duh. I’d love to see some documented examples where a government program actually saved money. The converse is the rule, not the exception.
Karl,
[[[The government still pays in case of student default.]]]
And the government collects from the students either directly or by withholding future tax refunds…
So unless a court discharges the loan in a Chp 7 bankruptency the government gets most of its money back.
And there is nothing stopping banks from making loans without a government guaranteed if they wish.
The most amazing provision is the section discussing debt-relief if you end up working as “a public servant.”
We still leave the choice as to what degree programs are funded by gummint money to the least qualified individual in the system, the student. Which means we still fund ‘pissed off at whitey/straight/male/western civ studies’ instead of degrees that might actually add value.
And the government collects from the students either directly or by withholding future tax refunds…
Another reason government shouldn’t be in the business. They’ll have power over new graduates that they frankly should not have.
So unless a court discharges the loan in a Chp 7 bankruptency the government gets most of its money back.
Ok, so we’ll see more chapter 7 bankruptcies.
Karl,
[[[Ok, so we’ll see more chapter 7 bankruptcies.]]]
No, actually you will see less as the agencies administrating the loans will not have the same profit motivations as the banks to make bad loans. That is the entire reason the program is being taken away from the banks, because the failure rates of loans originated in banks have historically been much higher then those by the non-profit agencies.
No, actually you will see less as the agencies administrating the loans will not have the same profit motivations as the banks to make bad loans.
Profit motivation didn’t lead to those bad loans. Uncritical government subsidies led to those bad loans. That dynamic is still there. And if the only way you can get out from under a pile of bad loans and low earning power is Chapter 7, well then that’s what happens. A lot.
Combining and extrapolating on comments from Al and jsallison, how likely do you think it is that Americorps “jobs” (such as washing the car of major Dem donors and manning shakedown phonebanks for “community organizers”) will be classified as “public service?” Little Janey who majored in Underwater Basket Weaving will need somebody to hire her post-graduation, after all, and with the training the modern academy gives our kids, it’s about all they’re ready for.
Karl,
Its clear you haven’t a clue about the background of the issue you are talking about.
Some background reading on the practices of the private lenders that resulted in this legislation.
http://www.nytimes.com/2007/04/03/us/03loans.html?pagewanted=print
http://www.nytimes.com/2009/04/13/us/politics/13student.html
That is the entire reason the program is being taken away from the banks, because the failure rates of loans originated in banks have historically been much higher then those by the non-profit agencies.
What could possibly be the cause of this? Any government involvement that might screw up normal lending practices? If the government guarantees the loans, why bother consideration of risk?
Banks loan money for profit… Banks are a business. What part of this is hard to understand?
So the government screws with the banks business, then takes that business away because it’s screwed up. Now I understand.
I would more inclined to consider your POV if you quoted some source more reputable than the NYT.
Degree Inflation?, It’s a question of how many people really need undergraduate degrees in Film, Dance, Pottery Studies, English Literature, etc. . .
Technical degrees, that’s a different story since fewer HS graduates are going into the technical fields (to meet the replacement rate) and most of the candidates need remedial work due to the high quality of Secondary Education.
I agree with Mr. Clark.
Its clear you haven’t a clue about the background of the issue you are talking about.
Thomas, why do you think government will issue less loans because a middle man has been cut out?
Let me put it this way. What student who gets a loan now, won’t get an equivalent loan later due to the changes from the health care bill? In fact, I see that they intend to use at least part of the hypothetical savings to increase the number of Pell grants for “poor” students (ie, academically weak students of certain targeted ethnicities). My take is that this will actually increase demand and price of educational services.
Let us also keep in mind that the category of loans that is being subsumed by government would be higher risk than what the government currently covers. It has a higher interest rate and principle of the loan often grows considerably by the time the student graduates.
Karl,
You comments just don’t match the facts.
Most loans were from the government before the mid-1990’s. Then private banks pushed the government, specially Congress, to get into the business. They charged higher interest rates for the same loans, but didn’t care about the risks because they quickly bundled them and sold them to Sallie Mae. So they talked a lot of students into borrowing to go to school, more then they needed and didn’t care about the prospect of paying them back because they knew they wouldn’t be stuck with the loans. The default rate soared. And then the banks cut deals with financial offices at schools to steer more loans their way instead of the better run government lending agencies. Several schools, including major universities like Columbia made out of court settlements with state attorney generals.
And unlike Rand misleading title, the new law is actually deflating the bubble the private banks created by ensuring the program is better managed.
Also want part of Loan don’t you understand? Students pay these off at an interest rate ABOVE the rate the government pays on the bonds that cover them. So if student is paying off their loan why would it matter what they study? Its money they are borrowing and will have to pay back to the government.
As for degree inflation, I guess you feel that college degrees should only be restricted to the wealthy. Well fortunately Presidents as far back as Jefferson felt higher education should be accessible to everyone in America. That is the difference between the U.S. university system and the European one where only the elite are allowed to go on to college further enforcing the class differences that have historically been a part of Europe’s culture.
Call it degree inflation if you wish, or call it creating a educated work force.
Clark,
I used the NY Times links because they are the most accessible to most people.
Which news outlets do YOU feel are credible? I will find the same articles on them. Doesn’t matter as the facts won’t change.
When I got out of the air force, I went back to college, however after one semester I found that the government had defrauded me of my GI Bill college benefits I’d paid for (100 bucks a month for my first year of service). So I had to drop out of school, at which time I then lost my GSL deferment I’d had on my Guaranteed Student Loans from my pre-service stint at university. I spent the next 20 years fighting with the government over this issue. They’d want me to pay the GSL’s, I’d tell them to go talk to the VA, as thats where the money was… Needless to say I didn’t go back to school after that unless I paid cash for the course work, and I have generally been self employeed the entire time partly to avoid them seizing my income, although they still grabbed my income tax return money every year.
They would never let me regain my deferment status so I could return to school full time, which kept my educational advancement at a standstill pretty much.
Finally this last year I was able to reach a settlement with the government, as my business imploded with the economic collapse and my on-paper income for the year was zero. Obama’s new income based repayment plan has allowed me to regain my deferment on the consolidated loan, and I’m back at university full time working on finishing another degree.
Talking to veterans at the VA and american legion facilities, its been my experience that the prior way in which the student loan program operated was a vicious cycle that forced students out of the educational system and made it economically infeasible for them to return to school if they spent a year working to earn more money for school, unless they earned enough to both make payments AND save money at the same time as paying for normal living expenses. I have met many veterans who were homeless and unemployable at a living wage due to lack of a degree, yet unable to go back to school as well.
I don’t like much of what Obama has done, but the changes made to education funding already are IMHO a boon to getting veterans out of vicious cycles that prevented them from earning a better living, paying more taxes, and being more responsible adults.
As for degree inflation, I guess you feel that college degrees should only be restricted to the wealthy.
No, I feel that worthless college degrees (and many of them are) should be restricted to the wealthy.
So if student is paying off their loan why would it matter what they study?
IF. That’s the bottom line here. IF some fields of study, like say, garage mechanic, can pay off their loans and other fields, like say Women’s studies, cannot, then it does matter what they study, where they go, and what happens to those students when they either graduate or flunk out of college.
The problems with student loans and education inflation precede the mid 90s. The system was already being gamed when I first applied to college in 1987. I got a couple of offers where most of my payment would have been in the form of loans. The schools in question had a moderately good reputation, but were otherwise unremarkable. My academic record was decent, but didn’t really indicate my fitness as a college student (as it turned out I had significant problems as an undergraduate in college). The loan issuers would have been taking a significant chance on me. I wisely stayed away from those schools.
that has brought that continent stagnation.
Oh, joy! Thanks for that gem. I will share it widely.
That French and German “stagnation” is looking pretty good right now.
How’s that low tax route working for the Celtic Tiger these days?
No, I feel that worthless college degrees (and many of them are) should be restricted to the wealthy.
An interesting distinction that I don’t necessarily (GASP!) disagree with (History, Geography and American Politics BA Honours? My arse!) but the trick is how to manage and make the distinction.
I’d rather see grants based purely on academic measures for certain types of specialty and leave certain ones as a purely dilettante route for those that can or have parents willing to pay.
When I was doing my degree (Mech Eng B.Eng (Hons)) we were in lectures and labs pretty much 35 hours a week excluding the work we’d have to do on assignments and lab write ups in the evenings and weekends. Having a room-mate with 9 hours of largest voluntary lectures for his “Business Studies” degree was really annoying.
Fortunately the “work load” forced him to drop out in the second term and I got the room to myself.
Having better funding for medicine and science/engineering courses would potentially have a positive effect.
Rand,
[[[No, I feel that worthless college degrees (and many of them are) should be restricted to the wealthy.]]]
And who decides if a degree is worthless? As opposed to the current system where the market, in the form of starting salaries, decides the value of a degree. If students makes a bad choice and end up with a large loan burden for a degree that has limited value, its no one’s fault but theirs as information on degrees and starting salaries are easily available.
Basically you are saying the government should decide if a degree is worthless since it provides financial aid and should restrict financial aid, including government loans, only to degrees that are worthy.
Hmmmm, sounds a lot like socialism to me, actually more like a liberal fascist perspective, the government rather then the market deciding which career you should go into by only funding degrees it deems worthy. If I recall both the Soviets and National Socialists were big on ‘practical” degrees like engineering and science. None of those degrees in philosophy or political science that make people think and ask uncomfortable questions about government.
BTW Thomas Jefferson and the founding fathers would be spinning in their graves at the thought of the government favoring one type of degree over another, as would Ann Rand. Seems to me she had one of those “worthless” degrees (at least in terms of starting salaries) in philosophy. Maybe the USSR should have made her study engineering instead 🙂
For the record I really enjoy astronomy, and currently own a couple of great telescopes including an 8″ built by Russel Porter who designed the 200″ on Mt. Palomar, but decided against astronomy as a career when I looked at the starting salaries.
I explored engineering, specifically mining engineering (to eventually mine NEOs and the Moon) but decided I didn’t want to be a migrant worker moving from one job to another based on the boom and bust cycles common in the engineering fields. So instead I went into business where the real stable starting money is.
BTW, a friend of mind who did pursue astronomy up to the level of a Ph.D. at New Mexico Tech and ended up as a science teacher as a high school in California when his post graduate grants ran out…
Mike,
Yes, the new programs are finally addressing many of the problems of the past. I know what you mean about losing the deferment. I lost mine after my masters and it took a why to get back into school. Its a real pain. Fortunately my loans were with a non-profit educational foundation, the kind emphasized in the new program and so was able to work out a deal.
Tom
Karl,
[[[The problems with student loans and education inflation precede the mid 90s. The system was already being gamed when I first applied to college in 1987.]]]
Yes, the problems go back a ways, but it was the stampede of banks into it in the 1990’s that really created a bubble and many more bad loans that the system is clearing itself of.
Basically you are saying the government should decide if a degree is worthless since it provides financial aid and should restrict financial aid, including government loans, only to degrees that are worthy.
Hmmmm, sounds a lot like socialism to me, actually more like a liberal fascist perspective, the government rather then the market deciding which career you should go into by only funding degrees it deems worthy.
Yes, when the government takes from one and gives to another, it’s socialism. But I’d rather have a socialism that subsidizes engineering degrees than “ethnic studies” or “womens’ studies” degrees. Or for that matter, “journalism” or “education” degrees, the latter of which are not just worthless, but harmful to society. My preference, of course, would be for government actually to butt out entirely.
Rand,
[[[Yes, when the government takes from one and gives to another, it’s socialism.]]]
No, the government issues bonds at around 4% and loans the money at around 7%. You know, loan, as in the money is paid back. The 3% difference covers defaults and administration so it doesn’t cost the taxpayer anything. And the government is not taking anything, as investors have a choice in buying the bonds or not buying them.
No, the government issues bonds at around 4% and loans the money at around 7%. You know, loan, as in the money is paid back.
If it is. People who get worthless degrees are less likely to pay it back. And private loanmakers wouldn’t provide loans for people to get degrees in underwater French basketweaving. Only a government would do that.
There appear to be two competing factors in the bill that means a lot of people won’t be fully paying back their loans. First, the bill caps repayment at 10% of discretionary income (presumably AGI) and forgives the debt after 20 years. That means that a lot of people won’t be fully repaying their loans.
Suppose a student ran up $100K of student loan debt. According to a loan amortization calculator, if the loan is at 5% interest over 20 years, the monthly payment should be $660 a month or $7920 a year. Capping the payment at 10% of income means a student won’t be fully paying back the loan unless he starts out at an AGI of almost $80K a year (likely over $100K a year true gross income). How many college students earn that much right out of school? Not very many. The end result is that at the end of 20 years, there will still be a balance on the loan that gets eaten by the taxpayers. I have not confirmed it but there was discussion of forgiving the loan after only 10 years if the student goes to work for government. That sticks it to the taxpayers even worse.
The perverse incentive of this bill is for students to maximize student loan debt because they won’t be having to fully repay what they borrow. This gives even less incentive for colleges to control costs as well. Student loans are easily abused. Once the check is cut, there isn’t anything to prevent the money being used for non-education expenses (e.g. spring break vacations).
Rand
[[[And private loanmakers wouldn’t provide loans for people to get degrees in underwater French basketweaving. Only a government would do that.]]]
Sign…. And here we come full circle again. The experience of the last several years show the exact opposite is true. Private banks, motivated by profit, were far more likely to fund so called “worthless” degrees and push lower quality schools then loans from government agencies. That was what the scandal was about and why the government brought it back in house.
Yes, Congress in the 1990’s bought the libertarian argument that private banks would run the program better then the government hook, line and sinker, and now the government has to pay to fix the mess it created.
Likely the same thing is going to happen with commercial crew…
Economic decisions based on faith rather then knowledge usually create a mess that needs to be clean up at great cost later.
Sign…. And here we come full circle again. The experience of the last several years show the exact opposite is true. Private banks, motivated by profit, were far more likely to fund so called “worthless” degrees and push lower quality schools then loans from government agencies.
Sigh…
Only because the government was guaranteeing them. Have you ever heard of the concept of “moral hazard”?
Rand,
Banks didn’t need government permission if the loans were not guaranteed…
[[[”Have you ever heard of the concept of “moral hazard”?”]]]
Have you heard of ripping off the public which the banks were doing under the program?
Banks didn’t need government permission if the loans were not guaranteed…
If the loans weren’t guaranteed, and the banks gave them out for womens’ studies majors, and they didn’t get repaid, then it’stheir tough luck.
Have you heard of ripping off the public which the banks were doing under the program?
What does that mean? Are you saying that they were “ripping off” the people who they gave loans to who were too stupid to get useful degrees, and then couldn’t repay the loans? If so, how were they “ripping them off” if they had no guarantee of getting the loans repaid? Sounds more like the banks were getting “ripped off.”
And if they were doing them “under the program,” then that just means that the program was screwed up, as I’ve already noted. The “program” shouldn’t have guaranteed loans for worthless degrees.
Rand,
[[[What does that mean? Are you saying that they were “ripping off” the people who they gave loans to who were too stupid to get useful degrees, and then couldn’t repay the loans? If so, how were they “ripping them off” if they had no guarantee of getting the loans repaid? Sounds more like the banks were getting “ripped off.”]]]
http://www.cbsnews.com/stories/2007/03/16/eveningnews/main2579808.shtml
[[[Cuomo has sent letters requesting financial documents from universities to examine their arrangements with banks and loan companies designated by schools as “preferred lenders,” which 90% of student borrowers use. Typically – what troubles Cuomo – a school may receive a percentage of the interest earned on loans steered toward lenders. That cash payout could be money saved by students and their families.
“The common denominator is an incentive that goes back to the school at the expense of the student,” Cuomo says, “And it’s wrong. And it’s potentially illegal. And we’re going to enforce the law.”]]]
[[[According to documents obtained in the investigation, under a preferred lender agreement with EFP, Drexel University, in Philadelphia, gets a kickback of .25% on the interest earned on the first $1 to $2 million in loans it steers to EFP and .5% of the interest earned on the amount above $2 million.]]]
[[[The incentives offered to school administrators by lenders lobbying for the “preferred” label include cash payments and expense-paid junkets, according to the investigation.]]]
And
http://www.businessinsider.com/jpmorgan-citi-charge-with-cheating-on-student-loans-2009-10
[[[Previously sealed court documents show that JPMorgan (JPM) and Citigroup (C) are being sued for conspiring with education finance company Nelnet (NNI) to allegedly receive federal student loan subsidies by making false claims and illegally recruiting more borrowers.]]]
[[[The 285 page suit (below) says Nelnet illegally induced students to apply for federal student loans, paying telemarketers to aggressively push the government product, and used false advertising to get more applications, like promising that students would save thousands of dollars in interest payments by consilidating their loans with Nelnet. They then presented false claims to the Department of Education to receive federal funding.]]]
Let’s see, kickbacks, deceptive marketing, bribery, fraud…
Sounds like a rip-off to me, or do libertarians consider these good business practices?
[[[And if they were doing them “under the program,” then that just means that the program was screwed up, as I’ve already noted. The “program” shouldn’t have guaranteed loans for worthless degrees.]]]
Yes, the “program was screwed up” because it allowed private banks to do what the government does better. I know, heresy to the “religious beliefs” of Libertarianism, but true never the less.
Sounds like a rip-off to me, or do libertarians consider these good business practices?
Efficiently fleecing a government of liberty-hindering funds? For some, the answer would be “yes”. I personally see this exercise as shuffling the deck chairs on the Titanic. The rip-off still occurs, the culprits just have been shuffled around a little.
Let me add, what is important here isn’t that banks figured out yet another angle to get public funds, but that government subsidized loans both give money away for poor outcome and greatly increase the cost of an essential service, higher education. There are millions of people who have to pay more for education and a subset of those are wasting their time in college because they’ve been encouraged by easy to get loans.
It appears Rand did not release my reply this morning with links to a study that prove the important between education and freedom.
But the bottom line is that one of the majors drivers of the U.S. economy, and one of its strengths is the accessibility of its higher education system to everyone, not a few wealthy or connected folk as in other countries. Over the years I met many students who came to the U.S. because they couldn’t get into the elitist schools in their country and so came here to get their education. And then stayed here to create wealth for themselves and the nation.
You know, I always had a hunch that a country run by libertarians would be much like a country run by communists, with power concentrated in the hands of the few and the rest expected to do their bidding, with no real upward mobility. Your stand against the most powerful tool of upward mobility, accessible education, really enforces that hunch.
In the case of communists its do the bidding of those in power or be killed. In the case of libertarians its would be do their bidding or starve in poverty, but the results would the same. No wonder Ayn Rand disowned the libertarian movement.