<p>"There are many reasons why the system needs to be overhauled, but let's start with this one: the federal government is profiting tremendously when it lends money to college students and their parents. </p>
<p>According to a report released earlier this year by the Congressional Budget Office, this is how much cash the government is pocketing for each dollar that someone borrows through the federal loan program: </p>
<p>I kept looking at the CBO data thinking there had to be an error in O’Shaughnessy’s interpretation but I can’t find one. Terrible. I always assumed it would be a zero sum game.</p>
<p>Appears as though the federal government is using these extrememly high “profit” loan rates to simply raise additional revenue. As the very wealthy don’t have to take out college loans and many of the poor get substantially larger grants, the bulk of the federal revenue generated by these loans comes from middle-class families. In a manner of thinking, it is a federal tax to get an undergraduate degree.</p>
<p>Obviously, whatever profit the government makes on any given student or parent loan depends on how long it takes the student or parent to repay it, the government’s own borrowing costs, and the default rate on student or parent loans. Then, of course, it is a separate argument as to what is the optimal public policy (which there is likely to be little agreement on).</p>
<p>Direct Subsidized Loans has been a misnomer for years. All the discussions in the past years about direct loans versus private sector loans have been hypocritical. The education loans have been a racket that has lined the pockets of the influential and the “easy” to convince. When you realize that a quasi-government official can afford his own golf course and a bid for Wash Diplomats after running Sallie Mae, you know you have some scandalous affairs on your hands. No wonder his name is Lord! </p>
<p>The fact that the government charges (and has been for a long time) more than its cost of borrowing plus a reasonable surcharge for default is simply stomach-churning.</p>
<p>The Congressional Budget Office calculatres that the Government is charging substantially more for the loans than market rate interest plus an administrative fee. This is a revenue generator (that is D.C.-speak for a tax). I understand that Washington wants to raise more revenue, but I thought I heard that they weren’t going to specifically tax the Middle-class. These premiums are charged to the Middle-Class - since they are the one taking out the lion’s share of these loans.</p>
<p>I suppose the folks currently overseeing the program believe there is a more worthy recipient of these funds than merely charging the middle-class families the cost of the loans.</p>
<p>"Subsidized loans are available for low-income students, and can’t be used on more than $5,500 a year in tuition and other costs, and can’t accumulate to more than $23,000 in debt total. Those carry an interest rate of 3.4 percent, and the government pays the interest on the loan as long as the borrower’s in school.</p>
<p>But that rate is set to double to 6.8 percent, the rate for unsubsidized loans (for richer students, or poor students with debt above the subsidized loan program’s limits), on July 1. That means more debt buildup for student, and higher payments down the line."</p>
<p>One can certainly quibble with the word “profit” - but 6.8% is pretty high in this market. The Dept. of Education is not distributing the “profit” to shareholders, but to whomever they believe is in more need of the funds than the students and their families taking out the Dept. of Education loans. I think that more accurately describes a “tax” than a “profit.”</p>
<p>Default rates on student loans are listed here:
[Background</a> & Analysis](<a href=“Higher Ed Index”>Higher Ed Index)</p>
<p>However, not all defaulted loans would be total losses for the lender.</p>
<p>A break-even interest rate would be the cost of borrowing for the same loan term as the student loan, plus coverage for the cost of defaults and administrative expenses.</p>
<p>Depends on what you mean by “market”. If you mean the market of other student loan lenders, then you would have to compare the interest rates they charge. If you mean the market for the cost of government borrowing as it would influence the break-even interest rate for government student loans, you would have to figure that plus the cost of default coverage and administrative costs to get that break-even interest rate.</p>
<p>Remember, with all the hue and cry about the 3.4% undergrad interest rate increasing, that for many years now grad student Stafford loans are at 6.8%. Many of these students were Pell grant recipients in undergrad and now they are funding lower rates for undergrad.</p>
<p>If they do change the rates, will they offer that to grad students, perhaps a low rate for consolidation? Or will they allow people who borrowed in the wrong year to fund those who borrowed in better years?</p>
<p>You’d also have to calculate the impact of Income Based Repayment and Loan Forgiveness for graduates who take public interest (government or nonprofit) jobs. That’s probably hard to project out, but a certain percentage of loans won’t get paid back in full because of that. </p>
<p>That amount might grow somewhat, because it seems to me that some graduate schools push the idea that large graduate PLUS loans are affordable because of the IBR system-- so I can see students at the graduate level taking on more than they can ever hope to pay back based on that rationale.</p>
<p>As to the question, “if I need a loan, is it a better deal than using a private lender?” – it depends. A parent can usually borrow against their home equity for a much lower rate (3% or less), but rates for unsecured loans are higher. Some private lenders do offer student loans for slightly lower interest than the government rate – but then you have to look at whether the various protections (like IBR) are worth paying a couple of points more interest. (Every once in a while we read a story of a parent stuck paying private loans after their recently graduated child has died in a tragic accident; the government lets the parents out in that situation – so on the PLUS loan end of things, you might do the math to factor in the cost of life insurance for the student on top of the loan).</p>
<p>DS takes both Stafford and Perkins. Did not know the government is making big $$ off him. I guess the subsidized interests make it even for the time being. </p>
<p>If we take out a loan via refinancing, it is possible to get rate at 2.75% range.</p>
<p>Damned if you do, damned if you don’t. One minute we’re hearing about how taxpayers are going to be on the hook for massive defaults on student loans, and how generous loan repayment options mean taxpayers will never see their money back. Next minute we’re hearing that the government is making unconscionable profits on student loans by gouging student borrowers.</p>
<p>I don’t think both things can be true, people. Maybe they’e just setting interest rates at a level calculated to make it most likely that the net long-term cost to taxpayers will be approximately zero, given expected default rates and more generous loan forgiveness options. They might come in a little high or a little low. But I just don’t find either version of “the sky is falling” entirely plausible.</p>
<p>In the world of private lending, interest rates are set with degree of risk in mind. 'That’s why people with good credit scores often qualify for better rates, and why a person with a weak credit score might be charged much higher rates. For unsecured loans, most consumers are borrowing at rates of 15% +, because that is what the credit card companies charge. Those of us who can afford it make a point of paying our cards in full every month - so we are getting -0- interest plus whatever cash back or airline miles we’ve signed up for – but it is far more typical for a young person without cash reserves to be carrying a balance. So in that respect, a rate of 7% can seem pretty good. </p>
<p>I think the bigger issue is not what interest is charged, but just the fact that we’ve come to the point where college is unaffordable to many, and a whole generation is taking on the type of debt for college that, at least in my generation, was reserved for home-buying. At any level, the long-term interest payment do function as a type of tax on the privilege of having attended college (whether or not one earned a degree) – and I do think there are some very serious and significant social policy ramifications to that, especially an environment where wages have been stagnant for years. </p>
<p>I don’t think there’s an easy fix, because the root issue is the cost of a college education. To a certain extent, the more that the government is willing to lend, the more that the colleges will charge. So addressing student loan interest rates doesn’t really solve the problem – in a way, it may simply encourage students to borrow more, in the same way that lower mortgage rates empowers home buyers to sign to buy more house for the same monthly payment.</p>
<p>“I think the bigger issue is not what interest is charged, but just the fact that we’ve come to the point where college is unaffordable to many, and a whole generation is taking on the type of debt for college that, at least in my generation, was reserved for home-buying. At any level, the long-term interest payment do function as a type of tax on the privilege of having attended college (whether or not one earned a degree) – and I do think there are some very serious and significant social policy ramifications to that”</p>
<p>Very well stated Calmom.</p>
<p>I recall the government stating that the reason to change the laws regarding college loans was to get the “middle man” (private banks) out of the business of making a profit on middle-class kids going to college. Now, all of those college loans go through the Department of Education (which is acting as a federal bank, of sorts). But the so called “profits” are being generated, just not by shareholders of banks. That is a lot more money than is required to administer the program. It is being used for other education related priorities, not for the college education of the middle-class kid taking out the loan.</p>