Good News for Students

[Pangloss]

One of the first promises that Democrats are making after winning control of the US legislature is lower interest rates on student loans. This is actually one of those rare areas where everyone in politics *should* agree that the current system (as more-or-less instigated by the Clinton administration) has been working very well, and is ripe for a rejuvenation following spiking interest rates and deliberate inattention from the Bush administration.

 

While this is generally good news, there is some cause for concern that Democrats might upset the apple cart if they're not careful. If they bend over backwards they may upset the delicate balance between profit motive and educational incentive that has made the current system so successful.

 

There are two specific areas of concern:

 

1) Increased grant spending. This obviously cuts a bit further into their lending amounts. (But it's a short-term problem given climbing interest rates and tuition costs.)

 

2) This is the real stickler: Direct Federal loans (bypassing intermediaries like Sallie Mae). Studies suggest a big savings to taxpayers here, but I think those studies assume way too much efficiency on the Federal government's part. We'll see what comes of this, but this is what Sallie Mae is probably most nervous about at the moment. It's probably still a fair way off, though.

 

So Sallie Mae's stock dropped a bit on this news today, but I think that was premature. Democrats in Congress ARE generally aware of the value of the current system, and concerns about Sallie Mae's profitability generally take a back seat to student welfare. For now. That's also in part because the questionable aspects of the relationship between Republicans and Sallie Mae was *generally* below the public radar. And it's not like Democrats are any better when it comes to graft and corruption. If they can do something good for students and not look bad doing it, they will do that.

 

So in all likelyhood Sallie Mae will still be making money hand over fist, with zero risk. And the new interest rates being discussed are still higher than the interest rates students were getting just four years ago. And regardless of the specific decision on rates, the lenders are guaranteed a "market rate" (i.e. a profit). As an investor, what's not to like about that? Free money all around.

 

Currently students are seeing numbers in the high sixes and low sevens on these loans, but the new number being bandied about is 3.8%, which would be a substantial cost savings for students and a good spike for smaller colleges and universities, whose fortunes often tend to wax and wane on these interest rates.

 

Couple articles:

http://www.usnews.com/usnews/biztech/articles/061110/10collegeloans.htm

http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyID=2006-11-08T193231Z_01_N08301503_RTRIDST_0_BUSINESSPRO-USA-ELECTIONS-STUDENTLOANS-DC.XML&from=business