Seeking solutions to the student aid mess

Parent Cafe
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<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>Federal profit for each dollar lent</p>

<p>Subsidized Stafford Loan 12.49 cents
Unsubsidized Stafford Loan 33 cents
Parent PLUS Loan 49 cents
GradPLUS Loan 54.84 cents" ...</p>

<p>Seeking</a> solutions to the student aid mess - CBS News</p>

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<p>Whoa, the government taking money from people? How long has this been going on?</p>

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<p>It’s called interest - and it should be reduced. Banks pay lowest rate possible while student pay too much.</p>

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<p>Claims are already being discussed in this other thread:
<a href=“http://talk.collegeconfidential.com/parents-forum/1506985-government-just-taxing-middle-class-college-students.html[/url]”>http://talk.collegeconfidential.com/parents-forum/1506985-government-just-taxing-middle-class-college-students.html&lt;/a&gt;&lt;/p&gt;

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<p>Support the new student loan bill - <a href=“http://www.businessinsider.com/elizabeth-warrens-new-student-loan-f[/url]”>www.businessinsider.com/elizabeth-warrens-new-student-loan-f</a>… - it is ridiculous you can get a home mortgage loan for 3.7% and a student loan for 7% - it is more that unfair that banks paying back their loans from the government pay almost no interest, while students borrowing from the government pay 6.7% and higher.</p>

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<p>Any new student loan bill needs caps on the interest rates. In addition, watch out for the new 150% subsidized loan regulation that is being proposed … talk about confusing for students, expensive for schools to monitor (manpower-intensive), and a boon for the feds in terms of the need to hire more program reviewers to oversee schools to make sure they are following the difficult-to-follow regs. As usual, nothing can be simple when the government is involved.</p>

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<p>Why not lend at different interest rates, depending on the institution’s track record of alumni repayment? If a school’s graduates simply are not able to repay their loans, the interest rates will go through the roof for that particular school, signalling to prospective students that it is an unwise investment. </p>

<p>Alternatively, have the schools co-sign the loans, or administer the loans.</p>

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<p>^^ That policy would end up being discriminatory to a whole class of students because you are not judging the credit worthiness of the individual. What I suspect you would find is that repayment would be best at the schools where students have more family resources or where students graduate and have high-paying jobs (so elite schools and engineering schools)-- and students at those schools will be disproportionately white and upper-class. Schools where students struggle to get through, with lower graduation rates and where families can’t help make payments, are more likely to enroll African-American and Hispanic students. The purpose of student loans is to make college affordable to all. Students whose families have good credit and good income can already side-step some student loans if they wish by taking out private loans or second mortgages at lower interest rates.</p>

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<p>There was a typo in the CBS report, I went back to the actual CBO. I couldn’t figure out why the profit on unsubsidized Stafford loans would be greater than subsidized Stafford loans. Its not, per the CBP report, the profit on the unsubsidized Stafford loans is -33.30%.</p>

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<p>2collegewego: I would agree with you if everything were hunky-dory once a student gets a loan. But the problem is that it’s anything but hunky-dory - poor kids who major in communications at a mediocre school may never be able to pay back their loans. Why wouldn’t we tell them in advance that hey, you probably won’t be able to pay this back?</p>

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<p>ariesathena: How would charging them more interest rate make them more likely to pay? </p>

<p>The truth is that most people pay back their student loans. There are plenty of people who majored in communications at regional colleges who-- whether they graduate or not-- pay back their loans.</p>

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<p>Thanks for looking up the data, as it didn’t make sense to me that student loans would be wildly profitable given the high default rates. </p>

<p>I don’t think that the government should be in the student loan business, but given that it is and will continue to be, it should be revenue neutral. </p>

<p>I am in agreement with the poster that it should vary by institution. In a previous thread, I suggested it should be tied to the five-year repayment rate by college and major. Cue the cries of discrimination.</p>

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<p>The bill the Republicans have in congress now would have adjustable interest rates, tied to the current rate plus a couple of points. So your freshman loan at 6.7% might be 9% four years later. Or 12% ten years later. Unacceptable.</p>

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<p>No typo, the CBS report is correct. The -33.30 rate is the subsidy rate, this reflects a positive profit rate. A positive subsidy rate would reflect a cost to government. All the different loans show a negative subsidy rate. The numbers indicate the highest profit for a GradPlus loan and the lowest profit for a subsidized loan. Profit on an unsubsidized loan is higher because the consumer pays all the interest, and the interest is higher than subsidized. <a href=“http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913_StudentLoans.pdf[/url]”>http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913_StudentLoans.pdf&lt;/a&gt;&lt;/p&gt;

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<p>haha, my eyes are going, I had it read it as .333, yes I expected a subsidy.</p>

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<p>2collegewego: it would make them less likely to take out loans that they can’t pay back. Kids don’t believe that their loans might be too much to repay, so they sign on for them. It’s a signalling mechanism.</p>

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<p>And again…</p>

<p>"Over the past five years, student loans have generated profits of $120 billion for the Department of Education.</p>

<p>And the latest projections from the Congressional Budget Office (CBO) put the take from student loans for the 2013 fiscal year at $48.6 billion - helped along by a change in 2010 that eliminated the middleman and made the Education Department the direct lender for all government-backed loans.</p>

<p>It means the government will reap more in profits from student loans this year than any of the nation’s largest corporations. Last year, for example, the most profitable company was ExxonMobil (NYSE: XOM), which reported income of $44.9 billion.</p>

<p>The money is rolling in partly because the Education Department has stepped up efforts to collect on delinquent loans, but mostly because the U.S. government can borrow money far more cheaply than the students to whom it is giving the loans.</p>

<p>The government’s student loans now carry an interest rate of 3.4%, which has proved plenty lucrative.</p>

<p>But unless Congress acts soon, the interest rate on government student loans will double to 6.8% as of July 1. (The temporary 3.4% rate was supposed to expire last July, but last year Congress extended it for one year.)"</p>

<p>[How</a> Student Loans Became a $120 Billion Government Bonanza - Money Morning](<a href=“http://moneymorning.com/2013/05/16/how-student-loans-became-a-120-billion-government-bonanza/]How”>http://moneymorning.com/2013/05/16/how-student-loans-became-a-120-billion-government-bonanza/)</p>

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<p>And again…</p>

<p>"Student-loan defaults surged in the first three months of 2013, while efforts to collect bad loans are faltering, according to credit analysts and government audits. It is the latest twist in a college debt crisis that is hanging over recent graduates and dragging on the broader economy.</p>

<p>Credit-rating firm Equifax said $3.5 billion in government and private student loans went bad in the first three months of 2013, the most since the company began keeping track. The U.S. Department of Education said 6.8 million federal student loan borrowers are now in default, representing $85 billion in debt. And the department’s systems for collecting the bad loans are struggling to keep up."</p>

<p>[Surging</a> Student-Loan Debt Is Crushing the System](<a href=“http://www.cnbc.com/id/100598257]Surging”>Surging Student-Loan Debt Is Crushing the System)</p>

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<p>Student debt is morphing into what is essentially a financial con at this point.</p>

<p>However, the SLAB product has not really come back yet in it’s glory.</p>

<p>So, we will have to see.</p>

<p>The moral of the story is that debt is increasing and salaries are not increasing along with the added debt.</p>

<p>The <em>real</em> problem for this is in law school right now. <em>That’s</em> where the crisis is hitting.</p>

<p>Undergrad debt is the minor leagues at this point.</p>

<p>On the subject of SLABS:</p>

<p>"This week, the Fed’s delinquency stats found a fitting companion in a Wall Street Journal article about Sallie Mae’s student loan asset-backed securities. (The securities are called SLABS, in a brilliant bit of bizspeak that turns the products into something out of a Kubrick movie.) The Journal’s piece uses a $1.1 billion sale of some of Sallie Mae’s riskiest SLABS to imply that boom times might be back in the student loan market. “Investors’ hunger for risky loans shows the lengths they are willing to go to generate returns in a period when interest rates are hovering near record lows.”</p>

<p>These two data points have led to the predictable grousing over whether or not a new bubble is coming – if it’s not already here – and just how catastrophic it might be. Gawker wrote a piece slugged, “Student Debt Is Perfectly Following the Financial Meltdown Script.”The Atlantic demurred: “Don’t Panic: Wall St.’s Going Crazy for Student Loans, but This Is No Bubble.”</p>

<p>The concern is that banks will buy up too many student loan securities the same way they did in the mortgage crisis just a few years ago. The rebuttal is that mass default is less likely to happen because so few student loans are securitized, and the vast majority are backed by the government.</p>

<p>Leaving aside the egoistic battle to be the one who divines the whereabouts of an economic disaster that may or may not exist, let’s return to what we know: Wall Street isn’t going nearly as crazy for SLABS as they have in the past. At least not yet. I asked Thomson Reuters’ crackerjack data team to pull 20 years’ worth of data on SLABS auctions. This is what two decades of student loan securities looks like:"</p>

<p>[Student</a> loan bubble babble | The Great Debate](<a href=“http://blogs.reuters.com/great-debate/2013/03/07/student-loan-bubble-babble/]Student”>http://blogs.reuters.com/great-debate/2013/03/07/student-loan-bubble-babble/)</p>

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<p>I don’t know if comparing student loans to home mortgages is a fair comparison. A mortgage is a secured debt since the bank can always just repossess the house with failure to pay, making it less risky, which leads to cheaper credit. Student loans, to my knowledge, don’t have the same kind of direct collateral that a house or car loan inherently has, making it a riskier (hence more expensive) kind of credit.</p>