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Student-Loan Refinancing Boom Could Cost U.S. Taxpayers Billions
- MichaelCrawford 11y agostudent loans are corporate welfare for the banks: the government pays the interest while one is in school, and will pay off the loan if the student defaults. It's crippling not just to the student but to the entire nation's economy that they're left with all that debt after leaving school - not after graduation, but after leaving school for any reason. We would all be a lot better off were students given outright grants that they were not required to pay back.
- adventured 11y agoThe radical majority of profit in the scheme goes to the US Government, not banks. It's government welfare, for the government, in fact. "Government books $41.3 billion in student loan profits" [1] That's the equivalent of the combined profit of JP Morgan and Wells Fargo for their entire businesses. The student loan racket is a huge slush fund for the Federal Government. They loan money that costs them nothing, courtesy of the Fed, and they generate a massive profit off of it. [1] http://www.usatoday.com/story/news/nation/2013/11/25/federal-student-loan-profit/3696009/ http://www.usatoday.com/story/news/nation/2013/11/25/federal...
- melling 11y agoIt's certainly an option but someone has to pay for it. The "government" is the tax payer. We could just do away with student loans all together. They've probably contributed to the cost of education far outpacing inflation. College prices would probably drop. It's amazing that a great program that has helped millions of people, myself included, has turned into this "horrible" program that people hate.
- mason240 11y ago>We could just do away with student loans all together. College prices would probably drop. The issue that causing tuition to rise - the injection of "free" money - would still be there and would actually be worse because students would be even further removed from any kind of cost/benefit analysis of the school.
- maxerickson 11y agoWhere is the free money coming from if you keep charging tuition but do away with student loans?
- mason240 11y agoFrom the government that would be paying the tuition.
- MichaelCrawford 11y agoIn California specifically, I'd like to see a ballot proposition which would set the UC Regents salary to one dollar per year. Presently they can set their own salary; the governor and the legislature have no say, nor do the students. So they lead lavish lifestyles at the expense of students who are doing pretty good to live under highway overpasses.
- deleted 11y ago[deleted]
- Daishiman 11y agoOr, you know, just allow people to default on loans.
- norea-armozel 11y agoThat's not going to happen. A trillion dollars worth of debt being wiped away sounds good on paper, but I'm sure that would have some significant consequences for the national (and possibly world) economy.
- deedubaya 11y agoNot to mention the message it sends future generations. Have a bad mortgage because you had to have those three extra bathrooms? waves wand Gone! Over paid for a useless degree when you should have known better? waves wand Audios!
- Zikes 11y agoOverpaid for a useless degree because every single person from school counselors to parents to businesses told you "college or bust"? Tuition costs skyrocketing? Well, you were 18 years old. That's practically an adult! You should have known better.
- melvinmt 11y agoMeanwhile, the national economy doesn't seem to have any problems with pouring 1.5 trillion in a fighter-jet (F-35).
- joshstrange 11y agoA fighter-jet that no one wants as well... It's not even a jack of all trades/master of none type of deal. It literally sucks at all of the things it was built to do...
- deleted 11y ago[deleted]
- adventured 11y agoThe government caused this mess in the first place by spurring the vast cost inflation in the system. The solution, to both this scenario, and the broader issue, is simple: 1) Begin squeezing the cost of education back down, by no longer increasing the amount of money the government will guarantee on student loans, and then eventually reversing that and reducing the sum. 2) We'll abuse the dollar reserve standard for war, bank bailouts, homeowner bailouts, etc. We might as well abuse it for dirt cheap refinancing of student loans (while simultaneously capping and then reducing the central problem of the inflation from the govt guarantee). The government should reduce the cost of student loan interest to 2% fixed for everyone. 3) Begin implementing broader reforms that will affect the next generation of students, to put an end to the cost inflation and begin bending the cost back down to where it was equivalent in ~2000. Politically it should be this simple as well, and unfortunately it's not. That's where the real problem rests.
- twoodfin 11y agoThe problem is that 2) is popular and (relatively) easy, but 1) is unpopular, regressive and difficult. So the most likely scenario is 2) is done without 1), making the problem you were trying to solve worse.
- cmdrfred 11y ago"But so and so state has three hot tubs dad, inexpensive college only has two..."
- vinhboy 11y ago> The loans -- can be variable and reset monthly, exposing borrowers to the danger of a sharp spike if the economy shifts Wait, what? Who would actually take that kind of risk? That does not sound prudent at all.
- aikah 11y agoThat's no different from the subprime mortgages, and we all know how it ended.
- joshstrange 11y agoWith virtually none of the bankers/financiers going to jail or paying in any meaningful way for their actions?
- hueving 11y agoCute, but not the point. It ended with lots of people losing homes and a massive disruption to the global economy.
- BurritoAlPastor 11y ago'Sharp spike' is relative. Look at the numbers; Mr. Winiarz is going from 6.55% to 2.69%. If a 'sharp spike' doubled his interest, he's still paying less interest than he was on the Fed's legislatively-fixed rate. Mr. Chopra, who warned of the 'sharp spikes', works for the Consumer Financial Protection Bureau, which is a federal agency. I wouldn't go so far as to say that Mr. Chopra is spreading FUD, but from where the CFPB is standing, student loan refinancing is creating a threat to consumer financial safety, so they absolutely have an interest in discouraging it.
- seiji 11y agoEducation should cost tax payers in a society billions. But, the money should go to, you know, education. (and not be seen as an unlimited tap of free money for university administrators to double tuition rates and ancillary fees every ten years.)
- klipt 11y ago> The government will be left with a greater share of borrowers like Jennifer Rejon. A 29-year-old single mother of a 10-year-old daughter, she has $17,000 in federal loans. They helped pay for a medical-assistant degree from Corinthian Colleges Inc., a for-profit chain of schools that filed for bankruptcy in May. The U.S. Education Department this week said it may forgive hundreds of millions of dollars in loans to Corinthian students. Sounds like those students got scammed. > Rejon wouldn’t qualify for refinancing from private lenders because they screen borrowers based on creditworthiness and university quality. The government writes loans for any student who enrolls in an institution eligible for federal aid. Here's an idea, why not require stronger certification? Seems like the article writer is blaming Jennifer for her inability to pay loans, instead of blaming the for-profit institution that fleeced her. Seriously?
- wutbrodo 11y agoI thinking your loading the article with subtext that it doesn't have. I don't see any language in there indicating that they think the fault lies with her; hell they even describe her situation sympathetically. They're just describing that she's not likely to be able to pay her loans and that the inventory of loans is shifting more towards people with similar risk profiles.
- caseysoftware 11y agoOr how about blaming the government for just approving everyone? Who else would give an 18yo with no assets, minimal skill, and no credit history an unsecured loan for 20k, 50k, or even 100k?
- guelo 11y ago> borrowers with successful careers subsidize the less fortunate, who are more likely to default. What does defaulting mean here? If you stop paying, in addition to ruining your credit as long as you don't pay, the government will hound you for the rest of your life and will garnish your wages and even your social security payments when you retire.
- kansface 11y agoSure, but that doesn't mean the government will get anything close to the amount owed.
- rayiner 11y agoNot really. I don't know how many people are covered by Pay as you Earn, but under that program you never pay more than 10% of your disposable income.
- richardbrevig 11y agoAs well, if having financial difficult, someone could request forbearance for up to 12 months and not have to make payments [0]. [0] https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance#what-is-forbearance https://studentaid.ed.gov/sa/repay-loans/deferment-forbearan...
- fredgrott 11y agoWe need to do the math, How many HS grads in US per year Times 2 semesters full-time at $10,000 Hint, folks it under $1 Trillion and its even lower if take that money and invest it at US citizens birth as an education investment vehicle. Actual numbers: US HS Grads: 4 Million per year so that is 40 Billion tuition payments or we can guarantee ed loan debt at $250 billion.. Which will you pay as US taxpayer?
- BurningFrog 11y agoI hate the math level in articles like these. The only two ways to end an X could cost Y... headline is "Millions" or "Billions". That contains just about no information at all. Why not convey some information with phrases like "400 Billions" or "up to 30 Billions per year"?
- iamjdg 11y agoWhy is this a problem? Presumably when the private lender refinances the loan, they pay the balance to the government? So yeah the government is losing all these future interest payments but are they not getting the principle back today? Couldn't they use that principle to offset the risk of default from lower income people with student loans?
- kansface 11y agoYou answered your own question. > Why is this a problem? >So yeah the government is losing all these future interest payments
- iamjdg 11y agoi guess I need to clarify a question first: when the private company refinances the loan, do they pay the government the current principle?
- kansface 11y agoYes - otherwise, they would have to pay interest on the loan while refinancing to a lower rate (they'd lose money).
- iamjdg 11y agoIf the answer to the question is yes, then is the net present value of the remaining interest payments greater than the present value of the loan payout they just received? It is, but not by a huge amount. If I was the government is be happy to get all this cash from loans paid off early and I would use it to make more money (loan it out again to something more lucrative, mitigate the risks of likely to default student loans).
- cmdrfred 11y agoAs someone who could never afford college I'm completely fine with it if this is the case. If this means I end up paying the principal off on someone's bullshit art degree I'm going to be pissed.
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- lutorm 11y agoI must be missing something basic here: If someone refinances their student loan, that means they get a loan from someone and uses the proceeds from that loan to pay the federal government back the balance on their student loan, right? So they're saying that people paying back their student loans will cost the paxpayers money? That makes no sense -- me paying the loan back means the taxpayers are no longer at risk for the balance of my loan.
- kareemm 11y agoAgreed. The only thing I can think of is that perhaps the interest payments on loans to low-risk borrowers subsidize the loans to high-risk borrowers who default.
- acrefoot 11y agoMy reading of the article is that the interest gains from more creditworthy borrowers help offset losses from loan forgiveness and defaulting borrowers.
- seiji 11y agoIf you take out a car loan or mortgage, the bank (or credit union (or government)) expects to make money off your interest for the next 5 to 30 years. If you pay off your loan/mortgage early then the bank won't get all the future interest it expected to make — the bank only made [START, PAYOFF] interest instead of [START, FULL-TERM] interest. Some loans even have "pre-payment penalties" to favor the bank over the consumer in such cases.
- lutorm 11y agoSure, but they now have the money back and can lend it again, which may even work to their advantage if interest rates have risen since the loan was signed. It seems impossible to me to say that the net effect is a sure loss. And that's entirely beside the point that "not making as much money as I had hoped" is not the same thing as "lost money".
- x3n0ph3n3 11y agoIt's not costing tax payers, it's shrinking future gains on interest payments.
- TazeTSchnitzel 11y agoIf the cost of defaults overtakes interest gains then yes, it is costing taxpayers.
- scotty79 11y agoSo the worst case scenario is that somebody gets (part of?) their education for free and the government pays the school its exorbitant rate. Maybe that's a good thing. Maybe it will force "taxpayers" to investigate why school had such exorbitant rate in the first place. Maybe there is some restitution to be paid to taxpayers by the school and if they are not paid maybe the school should be excluded from getting taxpayer money in the future.
- deleted 11y ago[deleted]
- learnstats2 11y agoIsn't education something that US taxpayer should choose to pay for? It doesn't seem right that the government is charging students - taxpayers - un unfairly high rate of interest, one so high that commercial lenders can typically undercut the rate by a significant margin. That's stealing from Peter to pay Paul. The government should reconsider whether it's right to charge such a high amount to students remaining on the plan, that is, the students who don't qualify for refinancing. Isn't this just an exercise in taking money away from the poor?
- robbiemitchell 11y agoTaxpayers haven't chosen to pay for unlimited, private post-secondary education. If they did, the loans wouldn't be necessary. You could also fault the institutions for charging so much -- or fault the students for enrolling in programs they couldn't afford.
- narrator 11y agoTranslation: The bondholders must be paid. That's the most important thing. If the students can't pay, taxes must be raised so the taxpayer can pay.
- ybw601 11y agoIsn't this a case of the loans being mispriced? If the students attending for profit schools like Corinthian Colleges are getting lower interest rates because Kellogg MBAs are subsidizing their student loan interest rates, doesn't that mean more students will end up enrolling in those for profit schools? That encourages poorer students to make bad investments and forces them to go deeper into debt. If the loans were more fairly priced and much higher interest rates were charged for the for profit colleges, wouldn't fewer people make those bad investments?
- srj 11y agoStudent loan interest rates were fixed at a relatively high level for a while: http://www.finaid.org/loans/historicalrates.phtml http://www.finaid.org/loans/historicalrates.phtml One of the people cited in the article had their rate go from 6.55% to 2.69%. For a social program designed to send kids to college the rates should never have been fixed so high for so many years. The author faults CBO accounting for comparing student loans with low-risk treasury bonds, but these loans pay out much higher interest rates than treasuries. And there are special restrictions relating to how the debt cannot be discharged.
- mcv 11y ago6.55% on a government provided student loan?! I think I'm paying about 1.9% interest on my (Dutch) student loan. (I'm really in no hurry to repay.) I can (sort of, though I disagree) understand not wanting to spend too much tax payer money on education, but this looks more like the government is actively trying to make a profit on the fact that people want an education.
- easytiger 11y agoIN the UK it is with inflation, so the % is almost nothing
- ExpiredLink 11y agocurrently
- notauser 11y agoA few lucky UK students had a negative interest rate for a while. http://www.theguardian.com/money/2009/aug/31/student-loans-interest-rate-rpi http://www.theguardian.com/money/2009/aug/31/student-loans-i...
- EliRivers 11y agoMy student loans (UK, on whatever system we had round about the year 2000) were inflation minus some constant, which pushed it into negative territory. In the last year before I finally paid it off, I had the joy of watching the total owed go down by itself.
- randomname2 11y agoSome Dutch student loans are currently on 0.12%
- mcv 11y agoI totally believe you. I haven't checked my interest lately, but I wondered if it was 1.9% or 0.9%. Whatever it is, it's low.
- acd 11y agoSorry but I don't think that the level of usury the financial system is placing on the middle class through central planned interest rates which creates records amount of new debts are doing the middle and lower classes any good at all. Come get some new credit here, more credit, more debt!
- pjc50 11y agoHmm. People are bringing up the nondischargeability in bankruptcy of the government loans. But if someone took out a refi from a private lender, would that new loan still be nondischargeable, or has it been "laundered"? Charging people 6.55% when the federal funds rate is 0.12% is a vig that's verging on usury.
- randomname2 11y agoSo according to this article, we have the unintended consequences of ultra accommodative monetary policy (i.e. private lenders offering rock bottom refi rates) conspiring with both the VC world's enthusiasm for anything that even looks like P2P lending and billionaires' penchant for getting involved anywhere there's money to be made, to siphon off the best loans from the Department of Education's portfolio, leaving taxpayers with a book full of IBR enrollees and severely delinquent borrowers who aren't even thinking about making payments... The government will be left with a greater share of borrowers like Jennifer Rejon. A 29-year-old single mother of a 10-year-old daughter, she has $17,000 in federal loans. Under a federal program to help low-income borrowers, Rejon, who lives in Chicago and has struggled to find a job, isn’t making payments. “I’m trying to at least get my life on track and be able to pay my bills,” she said. “The loans are the last thing I’m thinking about.” Take the above and throw in a few more $4 billion for-profit debt discharge fiascos and taxpayers could be in the red on the government's student loan portfolio before the mass debt cancellations even begin.