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I don’t understand this argument here: > Up until 1993, the federal government merely guaranteed/backed student loans that private lenders gave. This meant tha
by rlanday 6y ago
I don’t understand this argument here:
> Up until 1993, the federal government merely guaranteed/backed student loans that private lenders gave. This meant that only in the case of someone defaulting on their loan would the government be on the hook, stepping in and paying the college what’s owed.
> This amendment completely overhauled that system, making it so that for the vast majority of student loans, the federal government directly made the loans to students. More specifically, the federal government pays the universities/colleges up front, and the student then owes the government that money.
What’s the difference between the federal government directly making a loan and a private lender making a loan and immediately pawning off all the risk on the federal government? Either way the lender does not care if the borrower will be able to pay it back. It sounds like the problem predates the Student Loan Reform Act of 1993.
- chemag 6y agoI had the same thought. My hunch is that the difference is friction. In both cases, there's money going from the Feds to the University (100% probability) and money going from the student to the Feds (<100% prob). <1993: there's a bank in the middle. If the student cannot pay, the bank has to do the paperwork to get paid by the Feds. Note that the profit for the bank is limited. >1993: no bank in the middle. University gets paid right away. Zero risk for them
- mixmastamyk 6y agoYes, presumably Uncle Sam cares less about making a sound loan in the first place. It is also able to create money out of thin air—in other words, (symbolically) infinite resources. Getting paid upfront, instead of years later after tons of paperwork, can only accelerate the process.
- deleted 6y ago[deleted]