<p>Elizabeth</a> Warren Q&A: Students ?deserve the same break that big banks get? - Salon.com</p>
<p>ridiculous idea, of course. But note, one of the reasons that student loans have a high rate is that Congress is using the excess to subsidize the cost of the Pell grants. (look it up.)</p>
<p>So what is missing from the blog, is the cost of the Pells which will have to be made up.</p>
<p>With zero chance of passing, this is just political grandstanding by the new Senator.</p>
<p>Why does it have to be made up? Why students are paying for someone else education when they can hardly pay for their own? The rich will be able to get better loan that is market based, the poor but not poor enough get fleeced again and again.</p>
<p>There are quantifiable reasons that banks receive a lower rate than students:</p>
<p>-banks have a much lower default rate on loans (despite headlines when one does default, it is relatively rare)
-the administrative and overhead costs of loaning to students is exponentially higher than loaning to banks</p>
<p>The rate that students pay is already heavily subsidized by taxpayers. In an open market, the rate differential would be far higher than a factor of nine. Sen. Warren is choosing to demagogue this issue to score political points on a hot button issue with a loyal constituency rather than deal with facts.</p>
<p>In the article, Sen. Warren admits that the core issue is that students costs are rising too quickly. Why doesn’t she instead propose a bill mandating that all colleges must cut tuitions in half for one year? The answer is obvious when you look at facts.</p>
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<p>A free lunch is great for everyone, correct? :)</p>
<p>But look at it this way: the actual loans go out 10+ years, but the federal debt goes out a generation+, which means that today’s college students who borrow the money, will (hopefully pay their loans back and then have to pay back the interest on the national debt. But more importantly, those not attending college will end up helping to pay off the loans for those that do (attend college).</p>
<p>Great deal for those that get the free lunch. Not so good for those that do not.</p>
<p>It is not free lunch when you are paying the interest, and then let’s pile on some more because it is convenient and we the government has captive market so there’s no way around it for you unsuspecting students in the middle.</p>
<p>Not sure I understand your point, and I don’t want to expand this to class warfare but those that do not go to college probably will have nothing to do with paying those loans of college attending folks. The interest is actually higher than the market rate, and the program actually makes money off these students. There is nothing to pay from those that did not go to college.</p>
<p>Think of the poor savers in this country.</p>
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<p>They pay for the subsidy on the interest rates.</p>
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<p>What’s the market rate on unsubsized loans? I own a company that makes business loans to small companies. The company typically charges over 13%.</p>
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<p>Net of the subsidies I think.</p>
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<p>The interest rate subsidies.</p>
<p>What subsidy? Interest means the program take back more money than going out. What is the US treasury rate? 13% for business loan is because probably they have large default rate. What is the default rate of federal student loan? How does one declare bankruptcy and dispose of student loan? How do you have money left over for Pell grants from the program?</p>
<p>The President and some members of Congress are proposing that the federal government move to market based interest rates for all federal student loans, including PLUS, Perkins and Stafford. The rate would be a certain amount above the current rate for Treasury bonds. This would mean that most current rates would fall for new loans taken out during the 2013-14 academic year. However, if inflation increases (which is likely), the rates for brand new loans that are taken out in future years could be higher than the current rates. The rates would be fixed interest rate based upon the standard in place at the time the loans were approved. </p>
<p>Some members of Congress are insisting that any market based rate program needs to include maximum caps.</p>
<p>Other people think that Congress will not be able to come to a consensus and they will just agree to another one year extension of current rates. Congress never likes to agree to an extension of more than one year for most subsidies because it makes the federal deficit look worse.</p>
<p>Market based is ok by me. In the end, this is not a handout and it should not be. If you want to give handouts, then appropriate money for it and justify it to the tax payers and not soak it from students who already are struggling to pay for education or unfairly punish current students during low interest rate period and reward others in higher interest rate environment.</p>
<p>[Student</a> Loan Rates Boost Government Profit As Debt Damps Economy](<a href=“HuffPost - Breaking News, U.S. and World News | HuffPost”>Student Loan Rates Boost Government Profit As Debt Damps Economy | HuffPost Impact)</p>
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<p>Are you sure?</p>
<p>Market-based would also mean that market risk is involved. And in reality, what ‘market’ would loan an unemployed 19 year-old – without the foggiest idea of how to pay it back – any money at all?</p>
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<p>Assuming the above is accurate, I don’t have much concern from a policy perspective of making money of grad loans.</p>
<p>But as I noted earlier, the program is cross-subsidized. In essence, grad students are subsidizing undergrads, and all educ borrowers are subsidizing the Pell Grant recipients.</p>
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<p>Yes, I am sure. It is still a government program not very different from what we have now. So the unemployed 19 year-old is taking a loan directly from the government (although some private companies are administering it for a fee). Leave the term the same, the loan is permanent and cannot be discharged through bankruptcy. Whatever cost is incurred to administer the program including cost from default or from death or other rare circumstances, then that is the premium that people need to pay.</p>
<p>No commercial program can beat it since it is not for profit. It is fair and self contained. Banks and their lobbyists won’t like it because they don’t get into the action but that is a good thing for students.</p>
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<p>Then by definition, it is not market-based.</p>
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<p>They are practically out of the loan game anyway – educ loans were nationalized a few years ago. Private lenders typically require a co-signer.</p>
<p>“But as I noted earlier, the program is cross-subsidized. In essence, grad students are subsidizing undergrads, and all educ borrowers are subsidizing the Pell Grant recipients.”</p>
<p>No, 64 cents of every dollar comes from grads but still by deduction, 36 cents must be coming from undergrads. Those Pell Grant recipients could be very well off after graduation while the other grads and undergrads students could be in a much worse off situation. Why is it ok that grads students or any students for that matter should subsidize the program?</p>
<p>PS: the rate is market-based, that is the proposal on the table. And you can believe that the private lenders are trying to find ways to get back in the game every chance they get.</p>
<p>I agree with ttparent.</p>
<p>To clarify, the reasons why grad and professional school loans are now more profitable to the feds than undergrad loans apparently is because:</p>
<p>a) grad and professional school students typically have lower default rates than undergrad loans (particularly because so many undergrad loans go to for-profit diploma mills and college drop-outs, and because a disproportionate amount of the grad school debt probably goes to medical school and other health care students),</p>
<p>b) grad and professional school students are now paying interest on their federal loans while they are in school (the cost is typically added onto the loan amount), and</p>
<p>c) the interest rate is 6.8% on federal grad school loans, vs. many undergrad loans are subsidized to 3.4 to 5.0 percent.</p>
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<p>Assuming that the guesswork above is somewhat close, the Senator’s idea of a 0.75% interest rate is rather uneconomic.</p>
<p>@ttparent - where do you get the idea that the default rate for undergraduate loans is close to zero?</p>
<p>Arne Duncan, then Secretary of Education, cited a default rate over 10% in 2010. Just because a loan does not get discharged in bankruptcy does not mean that students are actively repaying them. Chances are good that someone you know is currently in default on their loans (and thus costing taxpayers money and raising rates for all student loans).</p>
<p>Source: [Default</a> Rates | Federal Student Aid](<a href=“http://studentaid.ed.gov/about/data-center/student/default]Default”>http://studentaid.ed.gov/about/data-center/student/default)</p>
<p>I don’t think I ever said that the default rate is near zero.</p>