Religion, Politics and World Events They make great dinner conversation, don't you think? plus Political Film

The government takeover of the student loan market

Old 09-13-09, 01:23 PM
  #1  
DVD Talk Hero
Thread Starter
 
jfoobar's Avatar
 
Join Date: Jun 2000
Posts: 37,812
The government takeover of the student loan market

http://online.wsj.com/article/SB1000...9266:b27668046

The Quietest Trillion
Congratulations. You're about to own $100 billion a year in student loans.

SEPTEMBER 12, 2009

The furor over President Obama's trillion-dollar restructuring of American health care has left his other trillion-dollar plan starved for attention. That's how much the federal balance sheet will expand over the next decade if Mr. Obama can convince Congress to approve his pending takeover of the student-loan market.

The Obama plan calls for the U.S. Department of Education to move from its current 20% share of the student-loan origination market to 80% on July 1, 2010, when private lenders will be barred from making government-guaranteed loans. The remaining 20% of the market that is now completely private will likely shrink further as lenders try to comply with regulations Congress created last year. Starting next summer, taxpayers will have to put up roughly $100 billion per year to lend to students.

For decades, loans carrying a federal guarantee have been the most common way of borrowing for college. After raising money in the private capital markets, lenders made the loans, paying a fee to the government for each one. The government covered most of the cost of defaults while allowing the private lenders to make a regulated return.

The system broke down after Congress in 2007 legislated a return so low that no private lenders could make money holding these assets. To keep the money flowing to student borrowers, the government began buying the loans from private originators last year. But this larger federal role was intended to be temporary, with an expiration date next summer. The news from Washington now is that rather than scaling back federal involvement, the pols want the U.S. Department of Education to be the exclusive banker to America's college students.

It's not a popular idea on campus. Loans directly from the feds have been available for decades, but the government's poor customer service has resulted in most borrowers choosing private lenders. This week three dozen college administrators, representing schools from Notre Dame to Nevada-Reno, signed a letter urging a longer transition period to this "public option." The fear is that the bureaucrats will not be able to pull off a takeover in just eight months. "Any delay in getting funds to schools on behalf of students will result in our needing to find resources at a time when credit is difficult to obtain," warns the letter.


Tough luck for the Irish. Democrats have already greased this fall's budget reconciliation to pass all of this on a mere majority vote. They are helped by rigged government accounting that disguises the cost of making below-market loans to unemployed 18-year-olds. Democrats have claimed their plan "saves" $87 billion in mandatory spending by cutting out the private middlemen, and the Congressional Budget Office has dutifully "scored" $87 billion in mandatory "savings" (or a net of $80 billion after subtracting administrative costs).

But in a remarkable letter to Senator Judd Gregg, CBO Director Douglas Elmendorf admits that government accounting is bogus. He writes that the statutory methodology "does not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected (that is, that defaults could be higher than projected)." Mr. Elmendorf further notes that the government's accounting system is specifically skewed to make direct loans from the government appear to cost much less than guaranteed loans made by private lenders. He says the real "savings" are only $47 billion, even though, in a deception that would be criminal fraud if it weren't mandated by Congress, the official estimate remains at $80 billion.

Even the unofficial number is dubious. The government has been claiming lower default rates than private lenders, but most government loans have been to students at four-year colleges. The private lenders have serviced a higher percentage of students at community and two-year colleges, where defaults are more common regardless of lender.

If the feds are now making and owning all such loans, expect default rates to soar. When the government hires contractors to collect on its loans, it pays them for simply calling the borrower, regardless of the result. Private lenders, on the other hand, make money from a performing loan and have a greater incentive to do careful underwriting and aggressive collection.


The government will nonetheless start spending these illusory "savings" immediately, and this spending is certain to top official estimates. The Obama plan also adds a CBO-estimated $46 billion in new spending over 10 years to enlarge Pell grants. Ominously for the federal fisc, starting in 2011 these grants will automatically rise each year by the consumer price index plus 1%. Not that students will actually benefit from this subsidy explosion. Colleges have reliably raised prices to capture every federal dollar earmaked for education financing.

Rep. John Kline (R., Minn.) decided the cost estimate for Pell grants was too low, so he asked CBO to take a second look. Along comes another enlightening letter from Mr. Elmendorf. This week he wrote that Mr. Kline is correct—it looks like they will cost another $11 billion. Unfortunately, the earlier estimate must remain the official score under budgeting rules, even though the official scorekeeper says it is wrong.

All of this is certain to pass the House, and the only chance for stopping it is in the Senate. If it passes, parents will soon have no choice beyond a Washington bureaucracy to borrow money for their college-bound children, and taxpayers will pay a fortune for the privilege.
And I don't think it takes too much proverbial tinfoil in the headgear to share Kenneth Anderson's concerns over on Volokh:

How could how students pay for school not be? Mostly staunch Obama supporters, in my experience, these administrators and university leaders nevertheless have a strong suspicion that the federal government direct supplying university tuition funds will be followed by interventions in university management. Starting with price controls on tuition - it is not exactly a secret that subsidies aimed to aid student tuition bills largely wind up in school hands as tuition increases. Discussion among university administrators I know has centered on how to diversify revenue streams on the assumption that the federal government will try to control costs at the universities, in part to make up for losses by defaulting ex-students (or by defaulting ex-students at other institutions, such as two year colleges or technical schools where default rates are far higher.
jfoobar is offline  
Old 09-13-09, 01:28 PM
  #2  
DVD Talk Legend
 
DeputyDave's Avatar
 
Join Date: Apr 2002
Location: San Diego, CA
Posts: 14,081
Re: The government takeover of the student loan market

There are not enough hours in the day to protest this stuff. Obama's plan to dump everything at once and pass the stuff that gets overlooked is pure genius.

And before anyone starts arguing that this is a good plan, I don't care. I am against ANYTHING that expands the federal government, its power, and its influence. Save your breath.
DeputyDave is offline  
Old 09-13-09, 07:03 PM
  #3  
DVD Talk Hero
 
Th0r S1mpson's Avatar
 
Join Date: Apr 1999
Location: Seattle, WA
Posts: 36,443
Re: The government takeover of the student loan market

Originally Posted by DeputyDave View Post
There are not enough hours in the day to protest this stuff.
Jack Bauer could do it.
Th0r S1mpson is offline  
Old 09-14-09, 12:32 AM
  #4  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,201
Re: The government takeover of the student loan market

I disagree with the conspiracy part where there would be price controls on tuition. We are talking about pretty liberal institutions overall. It would be like Obama telling the auto unions to freeze their wages and benefits. Won't happen.

In reality, tuition will go up as schools need to increasingly add administration to deal with the requirements of the new loans, and because college will likely be available to more people, tuition will go up even more.

Having already prepaid for my kids' college tuition, I think this is the greatest thing in the world. It will give my kids no debt when they graduate and that will make their standard of living higher compared to their peers who will have big government loans...that they won't pay back.
kvrdave is offline  
Old 09-14-09, 12:46 AM
  #5  
DVD Talk Platinum Edition
 
Arthur Dent's Avatar
 
Join Date: Jul 2005
Location: Formerly known as "awil1026"/ Don't Panic
Posts: 3,407
Re: The government takeover of the student loan market

Originally Posted by DeputyDave View Post
And before anyone starts arguing that this is a good plan, I don't care. I am against ANYTHING that expands the federal government, its power, and its influence. Save your breath.


Originally Posted by kvrdave View Post
In reality, tuition will go up as schools need to increasingly add administration to deal with the requirements of the new loans, and because college will likely be available to more people, tuition will go up even more.
Sigh. The proportion of degrees being issued to morons is high enough already. (Of course, I'm sure there are some people who are competent but unable to attend due to financial (or other) circumstances.)
Arthur Dent is offline  
Old 09-14-09, 01:03 AM
  #6  
DVD Talk Legend
 
Join Date: Apr 2002
Posts: 20,726
Re: The government takeover of the student loan market

It's not a popular idea on campus. Loans directly from the feds have been available for decades, but the government's poor customer service has resulted in most borrowers choosing private lenders.
I thought most student loans were through the feds. Maybe not directly. Wasn't there a big run to them recently just before they raised the interest rate?
Ranger is offline  
Old 09-14-09, 01:50 AM
  #7  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,201
Re: The government takeover of the student loan market

Most loans are insured by the Fed. It is like your home loan being insured by Fannie Mae. You still deal with Chase (or whoever) and don't deal with Fannie Mae, which is good because they would suck to deal with. In this case, you can choose to get it from a regular bank (insured by the Fed) or deal with the Fed directly. But like the article says, their customer service sucks.

But they'll get it right with healthcare.
kvrdave is offline  
Old 09-14-09, 02:37 AM
  #8  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,201
Re: The government takeover of the student loan market

I think this is a very bad move, but unlike healthcare and Cap and Trade, this won't do serious damage to our economy, and this can be fixed by a future administration. I don't see any reason to get very worked up over it, personally.
kvrdave is offline  
Old 09-14-09, 03:57 AM
  #9  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,072
Re: The government takeover of the student loan market

Originally Posted by kvrdave View Post
I disagree with the conspiracy part where there would be price controls on tuition. We are talking about pretty liberal institutions overall. It would be like Obama telling the auto unions to freeze their wages and benefits. Won't happen.
Depends on where tuition goes. This year, several state colleges in California billed students up to $400 more only weeks before the start of the semester, because of the huge budget shortfall. The reason was because the shortfall caused a major hole in financial aid funding, which means that some students tuition is being directly diverted to pay for other student's financial aid. They might as well tax the students.

In reality, tuition will go up as schools need to increasingly add administration to deal with the requirements of the new loans, and because college will likely be available to more people, tuition will go up even more.
Most of the increases in tuition we've seen were due primarily to increases in financial aid available to students, and the lack of ability to pay for it. So a student who works 40+ hours a week and attends school full time but cannot receive financial aid for a myriad of reasons (and I knew tons of people like this in college) is going to subsidize other students. That's complete bullshit.

Having already prepaid for my kids' college tuition, I think this is the greatest thing in the world. It will give my kids no debt when they graduate and that will make their standard of living higher compared to their peers who will have big government loans...that they won't pay back.
I'm preparing to do the same thing.
Superboy is offline  
Old 09-14-09, 10:39 AM
  #10  
DVD Talk Legend
 
Join Date: Jun 2003
Location: Capitol of the Empire! Center of all Commerce and Culture! Crossroads of Civilization! NEW ROME!!!...aka New York City
Posts: 10,909
Re: The government takeover of the student loan market

Originally Posted by kvrdave View Post
I disagree with the conspiracy part where there would be price controls on tuition. We are talking about pretty liberal institutions overall. It would be like Obama telling the auto unions to freeze their wages and benefits. Won't happen.

In reality, tuition will go up as schools need to increasingly add administration to deal with the requirements of the new loans, and because college will likely be available to more people, tuition will go up even more.

Having already prepaid for my kids' college tuition, I think this is the greatest thing in the world. It will give my kids no debt when they graduate and that will make their standard of living higher compared to their peers who will have big government loans...that they won't pay back.
The CUNY system only allows students to use the Fed as their loan originator (I guess you can get a private loan and cash the check to pay them) and they have the most obscenely low tuition I have ever seen. I'm sure this actually SIMPLIFIES it for schools.
Tommy Ceez is offline  
Old 09-14-09, 10:43 AM
  #11  
DVD Talk Hero
 
Th0r S1mpson's Avatar
 
Join Date: Apr 1999
Location: Seattle, WA
Posts: 36,443
Re: The government takeover of the student loan market

Originally Posted by kvrdave View Post
I don't see any reason to get very worked up over it, personally.
You obviously missed out on the fact that the President is black.
Th0r S1mpson is offline  
Old 09-14-09, 11:42 AM
  #12  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,201
Re: The government takeover of the student loan market

Originally Posted by Superboy View Post
Depends on where tuition goes. This year, several state colleges in California billed students up to $400 more only weeks before the start of the semester, because of the huge budget shortfall. The reason was because the shortfall caused a major hole in financial aid funding, which means that some students tuition is being directly diverted to pay for other student's financial aid. They might as well tax the students.

Most of the increases in tuition we've seen were due primarily to increases in financial aid available to students, and the lack of ability to pay for it. So a student who works 40+ hours a week and attends school full time but cannot receive financial aid for a myriad of reasons (and I knew tons of people like this in college) is going to subsidize other students. That's complete bullshit.
While that sucks, at least it is a state problem rather than a fed problem. I only say that because if our states get bad enough, we can find another, but we can't escape the fed. In WA, tuition and fees are going up 13% a year for two years (they've only looked that far out) because the state is cutting funding for state schools. Now the state did pass a law saying that tuition and fees couldn't go up more than 7% a year in 2007....but they they decided to forget that once they needed to cut their funding.
kvrdave is offline  
Old 09-14-09, 04:25 PM
  #13  
DVD Talk Platinum Edition
 
Join Date: Jan 2002
Posts: 3,236
Re: The government takeover of the student loan market

I have no problem with the federal govt expanding the student loan program to cover more students. Some of these private loans border on usury. They are the student equivalent of payday loans.

I do think that student loans should only cover tuition, books, fees, rent (equiv to dorm), food (equiv to eating in the campus cafeteria), and one computer freshman year. Some of my roommates bought cars, motorcycles, tv's, stereos, and annually, a new computer. People who obtained HEAL loans were able to get even more toys. Student loans need to limited to educational expenses.
Pistol Pete is offline  
Old 09-14-09, 10:18 PM
  #14  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,072
Re: The government takeover of the student loan market

Originally Posted by Pistol Pete View Post
I have no problem with the federal govt expanding the student loan program to cover more students. Some of these private loans border on usury. They are the student equivalent of payday loans.

I do think that student loans should only cover tuition, books, fees, rent (equiv to dorm), food (equiv to eating in the campus cafeteria), and one computer freshman year. Some of my roommates bought cars, motorcycles, tv's, stereos, and annually, a new computer. People who obtained HEAL loans were able to get even more toys. Student loans need to limited to educational expenses.
Yet another example of how irresponsible spending harms a loan market.
Superboy is offline  
Old 09-14-09, 10:30 PM
  #15  
Needs to provide a working email
 
Join Date: Oct 2007
Location: MD
Posts: 1,741
Re: The government takeover of the student loan market

Originally Posted by Superboy View Post
Yet another example of how irresponsible spending harms a loan market.
Also, an example of why no loan should be insured by the government. It's a man's right to use a loan irresponsibly, just as it's his duty to accept the consequences. Removing the duty must ultimately lead to removing the right. Works that way with a lot of things.

Last edited by Hank Ringworm; 09-14-09 at 10:31 PM. Reason: grammar OCD
Hank Ringworm is offline  
Old 09-14-09, 11:32 PM
  #16  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,201
Re: The government takeover of the student loan market

Originally Posted by Hank Ringworm View Post
Also, an example of why no loan should be insured by the government. It's a man's right to use a loan irresponsibly, just as it's his duty to accept the consequences. Removing the duty must ultimately lead to removing the right. Works that way with a lot of things.
Generally, I would agree. But there is societal benefit of an educated populace, yet no bank in their right mind would loan money to an 18 year old kid at a decent rate.
kvrdave is offline  

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Thread Tools
Search this Thread

Archive Advertising Cookie Policy Privacy Statement Terms of Service

Copyright 2018 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.