Please Stop Helping
By Pejman Yousefzadeh Posted in Education Policy | I'm From The Government And I Am Here To Help | Policy | Student Loans — Comments (4) / Email this page » / Leave a comment »
From today's Wall Street Journal Political Diary (subscription required), comes the latest example of how government assistance is no assistance at all, courtesy of Brendan Miniter. As people will recall, upon taking control of Congress, the Democrats promised to make college "more affordable" and passed laws to cap interest rates to do so.
The result of all this do-goodism?
By one count, some four-dozen student lenders have either curtailed loans to students in recent months or closed up shop entirely. Sallie Mae, the biggest, rolled out its Chief Executive Al Lord yesterday to warn of a "train wreck" in the $85 billion student loan market without a federal bailout.
The broader credit crunch is certainly playing a role, but Mr. Lord laid most of the blame on a Democrat-sponsored law that took effect in October. As part of her "First 100 Hours" agenda, Ms. Pelosi and Co. slashed interest rates banks can charge students in half to 3.4%, leaving Uncle Sam to make up the difference. Democrats also pushed through cuts to the fees the federal government pays to banks for underwriting student loans. "It's not even a matter of break-even. [The lenders] lose money on these loans if they originate them," one financial analyst told Dow Jones Newswires last month.
The Federal Family Education Loan Program likes to boast that it's now the dominant source of college loan funding, making "it possible for borrowers with no income, credit history, cosigner or collateral to get student loans at low interest rates." Talk about subprime. All this federal money is also a substantial reason for the rapid inflation in tuition costs. Every Congressionally-created problem must have a Congressional solution. Pelosi ally Rep. Mike Miller, chairman of the House Education and Workforce Committee, is now pushing legislation through that will both lift the cap on federally subsidized student loans and expand Uncle Sam's direct loan program -- completing Washington's takeover of the business and no doubt setting the stage for bigger meltdowns ahead.
Congress has succeeded in making the student loan business less profitable. It did not think about the consequences of this, of course, but it should now see--if there is any wit on Capitol Hill--that when you make a business less profitable via government fiat, you decrease the incentives for that business to continue in its previous robust fashion--if at all.
Et voilà, that is precisely what we are seeing. Student loan lenders can't make as much of a profit thanks to the caps on the interest rates they charge. As a result--especially given the current credit crunch--they are scaling back their activities or cutting out of the student loan business altogether. And this only serves to harm students.
Nice work, Congress. What do you do for an encore? Have Speaker Pelosi start brush fires in California?
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however if banks can't charge more than 3.4% and the borrower doesn't start paying back for years after the loan is given, then I hope you can see how a bank would find this loan to be rather unprofitable.
Was it over when the Germans bombed Pearl Harbor
....the fact that Bank of America just announced that it will cease making private student loans (which are not subject to the interest rate caps of federally back student loans) but BOA will continue to offer federally backed student loans.?
On the surface...if Bank of America was going to stay in the student loan market...and given the "unprofitablity" that is implied due to interest rate caps on federally backed loans...it seems like BOA would have chosen to offer private loans where it could charge whatever interest rate it wanted...rather than ditch private student loans while continuing to offer federally backed loans.
have driven up the cost of college - benefitting the student loan business (until this year).
A look at local community colleges here in NY reveals bloated administration staffs filled with political flunkies, adjunct professors making $100K + a year for a handful of hours a week in the classroom, etc, etc. The college spending/cost bubble was encouraged and, as long as cheap financing was available, the system kind of worked. It's all crashing down now and the last thing we need are more subsidies or government backed loans. The colleges need to address costs by aggressively cutting their expenses and reducing tuition - by about 2/3. Distance learning, smaller campuses and a 'retail' perspective are needed so colleges can rapidly adapt to new learning formats or fall into the tar pits of history.
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"Enlightened statesmen will not always be at the helm." -- James Madison
I can't read the original article but this just sounds wrong on a number of levels.
Lenders under the new program get a lower rate or return but pay a small reinsurance rate to the government. Since this means the loans are absolutely risk free to the lender they just earn less. As I understand it there are hundreds of such companies and if 4 stop offering loans then they were probably inefficient anyway. Even if everybody failed to offer loans but the government itself offered the loans it would probably be better for taxpayers! I mean, they were already insuring the loans in the first place so we already shoulder the risks! Tell me this isn't the result of lobbyists and lots of money floating around...
I also fail to see how a no risk loan that a bank willing enters into can be a net loss to the bank as the quote indicates from some unnamed guy who wouldn't go on record. I bet that's a complete load of crap. Banks aren't THAT stupid since it's easy to calculate the return and costs on these things... The REAL issue is these banks aren't planning on holding onto these loans. They just want you to sign with them so they make their money up front, and then they then sell a bundle of such loans on the secondary market. Sounding like anything else lately? There is far less interest in this now so there is less money to be made. BUT, and this is key. These companies have no incentive to even try to validate the ability to repay because they don't plan on holding the loan. These guys should be forced to hold it for X number of years so they have a stake in doing the right thing and not another mortgage mess...
"All this federal money is also a substantial reason for the rapid inflation in tuition costs." Did they adjust for inflation which has certainly kicked in over the last year? I don't see enough data to back this up. I'm having trouble getting good data since the change is so new but I'm guessing it's not any worse the spikes in the 90s or early 00's. You'd have to prove it was really abnormal and they didn't include any details...