Obama to End Private Student Loan Funding

[Pangloss]

Well here's an Obama decision I disagree with. I understand its source and these things tend to be very complex, though, so I'm trying to keep a fairly open mind about it.

 

Currently student loans are, in the main, privately funded but federally backed, which means that if the student is unable to pay it back the government steps in and covers the loan. Since this is a 100% guarantee of repayment, investment was a no-brainer and that meant that plenty of money was available for lending to students (in fact this change, stemming from the Clinton administration, is generally attributed as the source of the great educational explosion of the late 1990s and early 2000s). Of course it also meant that schools could make easy money through predatory lending -- "putting butts in seats" to pull in that loan money when in fact the student had no real intention of staying there.

 

The administration has decided to fix this problem by forcing all student loans to pass through the Federal Direct Student Loan Program, which cuts the private lending sources out of the ballgame completely. All funding is to be derived from the federal budget.

 

So now taxpayers have to pay up front for the entire loan amount and hope they get paid back. Whereas before the taxpayer only had to pay if the student was unable to pay the loan back. Even if the latter was a really high percentage, it was still less than the total amount. And there's nothing in this program that would even address the problem of payback percentages. In fact some would even argue that the payback percentage will drop even further, because it's a government program rather than a private entity, with presumably less capability for collection. (Though I admit that's a long chain of assumptions.)

 

A better way to go would be to continue the highly-motivated private funding sources with 100% guarantee, and address the problems by putting the government's foot down on accreditation methods. Currently schools don't even have to have regional accreditation, which is relatively strict and difficult to obtain and maintain -- any fly-by-night accreditation source is sufficient. There's no oversight whatsoever. I can create a school and collect financial aid from students TOMORROW. Raising the bar to the nation's six primary regional accrediting bodies would solve that problem instantly, while retaining a wide variety of educational avenues, including private, for-profit institutions like the University of Phoenix (which is accredited through the North-Central regional accrediting body). There are even large numbers of "trade schools" with regional accreditation.

 

Here's an article on Obama's plans:

http://www.reuters.com/article/GCA-BarackObama/idUSTRE51P5YE20090226

 

What do you all think?

[Sisyphus]

Well, now wait a minute. We're not "paying for the entire loan amount." We're lending it, and getting it back with interest. Even if a lot of students default (although the consequences of that would be the same as always), we (the taxpayers) would still be more or less breaking even, right? Isn't that a much better arrangement for us than before, when tax dollars were only lost? Wasn't the former arrangement, in essence, just outright paying loan agencies to make zero-risk investments? If they were just profiting from our guarantee, why not cut out the middle man and profit ourselves?

 

(Disclaimer: I haven't yet read about this at all, and am basing the above solely on your summary.)

[iNow]

+1

 

Your response exactly mirrored my own, Sisyphus.

[john5746]

I would like to see companies withhold student loan interest pre-tax. Type in SSI number, get the loan payment info, then setup the withdraw amount. Have only a % taken if the employee income is at certain % of loan amount.

 

I guess that's too hard, let's send men to Mars, that will be easier

[jackson33]

Since the program seems to effect only those loans that would require 'Federal Guarantee' in the first place, its simply a minor intrusion into banking policy. Additionally questionable loans (credit rating), for most any reason have pretty well dried up...

 

Scholarships/Partial Scholarships and Corporate/Private Industry Investment or participation in funding education, directly or through some organization should not be harmed, or those families that have planned ahead, should not be harmed.

 

Along these lines, most all 'Low Interest' emergency loans given through FEMA or some Federal Agency, go through Banks as well and guaranteed by the Fed...That is the idea is a common practice...

 

Keep in mind also, for each 50k students that hit on the Federal, not through a Bank, for 15k$, your talking about an initial outlay of another 750 million. That could add up...

[Mokele]

Sisyphus is right, which brings up the issue of numbers: what percentage of students default on their loans? How much interest is made on those that don't? Does the latter exceed the former?

[jackson33]

Sisyphus is right, which brings up the issue of numbers: what percentage of students default on their loans? How much interest is made on those that don't? Does the latter exceed the former?

 

According to Ed.gov, 5.1% defaulted in 2006, with the worst year being 1989 when 22.4% defaulted. If your looking for profit; To start with those that would apply directly to the Government, would be those not eligible through the private sector, not really a good business plan.

[Mokele]

Isn't the point that this bill would take *all* the loans, not just those who can't get them elsewhere?

 

And what defines loan eligibility for a private sector only student loan? Income, or projected income? Would the private sector even bother anymore, with such a plan in place?

[Pangloss]

Well, now wait a minute. We're not "paying for the entire loan amount." We're lending it, and getting it back with interest.

 

Well yes, that's what I meant to say. Sorry if I gave the impression that I thought we were presuming a 100% loss. It's my concern that the default rate will climb because the cause of the default rate isn't being addressed by this change (even thought this is what the change purports to address), not that it will automatically zoom to 100% just because the government is involved (I raised that objection as well, but also included its answer).

 

 

Even if a lot of students default (although the consequences of that would be the same as always), we (the taxpayers) would still be more or less breaking even, right?

 

Right. And student loans are a good investment for the taxpayer's money, IMO, as they were before.

 

 

Isn't that a much better arrangement for us than before, when tax dollars were only lost?

 

It's an interesting point that I haven't considered. To summarize, you're saying that under the old approach we could never recover 100% of our money, but under the new approach we can recover all of our money and interest (which realistically means enough interest to potentially cover the defaults).

 

I don't know the answer to the question of whether this will provide a lesser loss over the long term than the other way -- there may be analysis on that point out there that I just haven't seen (and a lot of it probably from special interest groups with their own agendas, unfortunately). I do think it's fairly safe to say that it is a loss one way or another, and that it's probably worth finding out which loss is greater. I don't particularly care that people are profiting -- so long as the playing field is level and the job is getting done right. I do care that the government is hemorrhaging money these days.

 

But the real fly in the ointment here is just that this is a great deal of money that we still have to cover in the short term -- we are the "capital" portion of the investment now. We have to make that money available -- it has to be budgeted and apportioned, regardless of whether it's paid back later. Under the old system we didn't have to do that. We only had to cover the loss. And we're already deep into deficit spending. But we're going to have to lay out billions of dollars for this program every year, at the very time when we're trying to CUT spending to save the economy. Won't that mean that student loans will be subject to rising and falling with the political whims and budgetary needs of the day? With private capital that wasn't be a problem -- all we had to do was keep investors interested.

 

 

As a side note, something isn't automatically better just because the government does it, and it isn't automatically worse just because somebody's making a profit off of it. Neither of these sentiments should be fueling this discussion, IMO, and I hope they are not.

Edited February 27, 2009 by Pangloss

[iNow]

It's an interesting point that I haven't considered. To summarize, you're saying that under the old approach we could never recover 100% of our money, but under the new approach we can recover all of our money and interest (which realistically means enough interest to potentially cover the defaults).

Almost, but not quite.

 

Under the old system, there was zero loss of tax payer money until the student failed to pay. When the student failed to pay, the government "footed the bill," but never got that money back. The government provided security to the lender on the default, but (AFAIK) the lender never paid the government back, nor did the student responsible for the default. It was purely outgoing money from the government with the old system... no returns.

 

Under the proposed system, the government handles it all, hence taking the interest profit themselves. This means that they are making money off of this no matter what happens. They gain interest (instead of the 3rd party lender), and the vast majority of students who have borrowed the funds will be paying them back (I think in the 95% range).

 

So, old system = loss only, no recovery of funds. New system = additional income for the government to fund more educational (and other "collective good") programs.

[Pangloss]

Income for the government "IFF" the default rate is less than the income realized from interest (which, by the way, we want to keep artificially low in order to put more people back in school -- although that, notably, isn't happening yet, and could be a benefit from greater government control). (I know I'm all over the map here.)

 

Also, as I pointed out above, we're out 100% of the money up front. It's budgeted and spent, with the assumption that it will be paid back 6-10 years later.

[ecoli]

Here's an interesting idea... how about the government gets out of student loans altogether which would force people and businesses to stop over-valuing the mostly-useless 4 year bachelor's degrees.

 

I mean think about it... If demand for 4 year degrees wasn't so high, universities wouldn't be able to charge so much (which would help alleviate a lot of debt).

 

Honestly, how many college graduates actually use their diploma's in a useful sense, other than to get a job?

[SH3RL0CK]

Here's an interesting idea... how about the government gets out of student loans altogether which would force people and businesses to stop over-valuing the mostly-useless 4 year bachelor's degrees.

 

I mean think about it... If demand for 4 year degrees wasn't so high, universities wouldn't be able to charge so much (which would help alleviate a lot of debt).

 

Honestly, how many college graduates actually use their diploma's in a useful sense, other than to get a job?

 

I really like this idea. What, really, is the value of a degree when much of the time it isn't utilized? I know many people who got into debt to get their degree, then wound up with a job that didn't really require the degree (or paid no more than a job they could get without the degree).

 

I think there is a bubble in the academic world in that the supply of degreed people exceeds the demand (evidenced by so many people who don't use their degree in a meaningful fashion). And with the costs of education increasing much faster the inflation, at some point people will stop enrolling into the school. What will happen then?

[Sisyphus]

Income for the government "IFF" the default rate is less than the income realized from interest (which, by the way, we want to keep artificially low in order to put more people back in school -- although that, notably, isn't happening yet, and could be a benefit from greater government control). (I know I'm all over the map here.)

 

Also, as I pointed out above, we're out 100% of the money up front. It's budgeted and spent, with the assumption that it will be paid back 6-10 years later.

 

But even if there isn't a net profit, it's still necessarily less unprofitable than the current arrangement. Currently the "private" (scare quotes very much emphasized) loan agencies bear none of the risk and reap all of the profit, while the taxpayer bears all of the risk with no chance of profit. It's like capitalism with cheat codes, and we're the ones being cheated. Under the new arrangement, the taxpayer would at least get the reward in addition to the risk, which might even yield a net profit. The only downside, which you point out, is that we have to supply the initial capital, but "with the assumption that we'll be paid back" is a misleading way to phrase it, since we the amount we're not paid back would be paid by us anyway.

[Saryctos]

Almost, but not quite.

 

Under the old system, there was zero loss of tax payer money until the student failed to pay. When the student failed to pay, the government "footed the bill," but never got that money back. The government provided security to the lender on the default, but (AFAIK) the lender never paid the government back, nor did the student responsible for the default. It was purely outgoing money from the government with the old system... no returns.

 

Under the proposed system, the government handles it all, hence taking the interest profit themselves. This means that they are making money off of this no matter what happens. They gain interest (instead of the 3rd party lender), and the vast majority of students who have borrowed the funds will be paying them back (I think in the 95% range).

 

So, old system = loss only, no recovery of funds. New system = additional income for the government to fund more educational (and other "collective good") programs.

 

Well, The gov't receives money from these banks in the form of taxes and such. Plus any international activity draws in money from outside the US. By having a private entity doing the loaning they can bring in money from a myriad of different avenues that the gov't wouldn't be able to do. Taking away that cash flow might impede on other credit markets.

[iNow]

I mean think about it... If demand for 4 year degrees wasn't so high, universities wouldn't be able to charge so much (which would help alleviate a lot of debt).

 

Honestly, how many college graduates actually use their diploma's in a useful sense, other than to get a job?

This is off topic, but interesting, and might warrant its own thread. It would include the need to improve lower education (K-12) and also some recognition of the points made by the move "Idiocracy."

[CharonY]

If demand for 4 year degrees wasn't so high, universities wouldn't be able to charge so much

 

Actually I fail to see how that would work. Mind you, I am not as long in the USA (and primarily as researcher and not lecturer) and am only starting to grasp some of the more intricate aspects of the system. However from what I have heard only about 30% of the educational cost per student is covered by the tuition fee (which again brings the point that education in the US is, imo massively overpriced). The rest is subsidized mainly by state funds (IIRC). It is probably true that some courses could simply be cut (and maybe some lecturers could be laid off that way....) but I am not sure whether that savings would really cut the overall overhead costs and thus allowing a reduction of tuition fees.

Edited February 27, 2009 by CharonY

[jackson33]

Actually I fail to see how that would work. Mind you, I am not as long in the USA (and primarily as researcher and not lecturer) and am only starting to grasp some of the more intricate aspects of the system. However from what I have heard only about 30% of the educational cost per student is covered by the tuition fee (which again brings the point that education in the US is, imo massively overpriced). The rest is subsidized mainly by state funds (IIRC). It is probably true that some courses could simply be cut (and maybe some lecturers could be laid off that way....) but I am not sure whether that savings would really cut the overall overhead costs and thus allowing a reduction of tuition fees.

 

It's the simple 'Supply vs Demand' principle. Then with added income and the idea most higher education is 'Non profit' the money must be spent. That is the higher paid personel follow, not lead the cost.

 

If Government didn't back student loans, allowing X number of people who couldn't afford the education, the demand drops followed by the cost.

 

To the thread; During the 2005/6 year, of the 85.9 Billion borrowed for higher education, 68.6 was Federally back and 17.3 was purely private. Estimates are for 86 Billion to be backed in 2009/10, but this could add a few extra billion and prices WILL go up...

[Pangloss]

But even if there isn't a net profit, it's still necessarily less unprofitable than the current arrangement. Currently the "private" (scare quotes very much emphasized) loan agencies bear none of the risk and reap all of the profit, while the taxpayer bears all of the risk with no chance of profit. It's like capitalism with cheat codes, and we're the ones being cheated. Under the new arrangement, the taxpayer would at least get the reward in addition to the risk, which might even yield a net profit. The only downside, which you point out, is that we have to supply the initial capital, but "with the assumption that we'll be paid back" is a misleading way to phrase it, since we the amount we're not paid back would be paid by us anyway.

 

I do see your point there, and it's given me something to think about. If the "new revenue" stream offsets the "new expenditure" then perhaps it's a wash. It is still a new budgeted expense with an unknown revenue stream to potentially offset it down the line. I don't know much about the collection side of this issue.

 

So basically we're saying that this approach accidentally addresses a problem that it didn't purport to address (eliminating a relatively small but regular loss), while failing to solve a different one (reasons for student default rates).

 

I definitely have to give this issue more thought.

[Mokele]

Another point, one which I'm surprised hasn't come up, is the other reason to do this: with credit freezing up and loans getting progressively harder to come by, there's a real danger that lots of people won't be able to afford college (putting them at a competitive disadvantage during a time when job-seekers need every edge they can get). An educated populace is a huge asset, not just philosophically but economically, and to allow that to suffer would only make things worse.

[Pangloss]

I agree. And while I'm greatly concerned about the "dumbing down" of undergraduate education, it seems clear that more education is almost always better, and not just for the student.

[ParanoiA]

Education is one of those subjects like "the children", where we'll do all kinds of stupid things, malinvestments and never stop, never question because it's too sacred for that.

 

The government needs to get out of for-profit business ventures. Yes, I realize that we only lose money when we gaurantee loans without enjoying the interest and payback, but that's the government's place. The private sector should sweat about profiteering, while the government serves the public good.

 

Mixing profit sounds tempting, and hard to argue against short term gains, but when you turn the government into a profiteering business machine, that creates a natural conflict of interest between the public good and demand for profits - the EXACT problem and argument AGAINST the private sector in the first place.

 

I don't agree with government even gauranteeing these loans, but at least that doesn't monopolize a market with unfair competition - like the government, armed with law. Want to rob my money and use it for the public good? Well I don't like it, but I like it better than robbing my money to use for government profiteering.

 

It would be more credible for the government to make the loans, interest-free, if the excuse is to help folks get a loan that couldn't otherwise be secured in the interest driven private sector. Otherwise, you're just putting the government in business. Now, who's putting the public good over profits after that happens?

 

One of these days, just for fun, I'm going to draft a new pseudo establishment clause that advocates the separation of business and state. Whereas 'business' is defined with "profit" as a key dynamic.

[Mr Skeptic]

Well, now wait a minute. We're not "paying for the entire loan amount." We're lending it, and getting it back with interest. Even if a lot of students default (although the consequences of that would be the same as always), we (the taxpayers) would still be more or less breaking even, right? Isn't that a much better arrangement for us than before, when tax dollars were only lost? Wasn't the former arrangement, in essence, just outright paying loan agencies to make zero-risk investments? If they were just profiting from our guarantee, why not cut out the middle man and profit ourselves?

 

(Disclaimer: I haven't yet read about this at all, and am basing the above solely on your summary.)

 

This would be a good idea, but would require the government to provide the entire capital for the loans, and would be a short term drain of incredible proportions until students start paying them back. I don't think the government currently has the money to do that. Doing it all at once would be even more painful.

[CharonY]

It's the simple 'Supply vs Demand' principle. Then with added income and the idea most higher education is 'Non profit' the money must be spent. That is the higher paid personel follow, not lead the cost.

 

If Government didn't back student loans, allowing X number of people who couldn't afford the education, the demand drops followed by the cost.

 

Sorry to be off-topic again, but I still do not see it. If the demand is lower, the courses will simply not be maintained any more. It does not cut the costs for the other courses, though. Again, each student is subsidized, increasing them does not directly turn into higher profit, likewise a reduction does not mean a decrease in profit. This is actually more tied to the way that the state may subsidize the universities. At the moment for instance, due to budget freezes certain universities actually have to take in less students, or increase the tuition fees, as they cannot afford the needed lecturers, TAs and lab costs.

[jackson33]

Sorry to be off-topic again, but I still do not see it. If the demand is lower, the courses will simply not be maintained any more. It does not cut the costs for the other courses, though. Again, each student is subsidized, increasing them does not directly turn into higher profit, likewise a reduction does not mean a decrease in profit. This is actually more tied to the way that the state may subsidize the universities. At the moment for instance, due to budget freezes certain universities actually have to take in less students, or increase the tuition fees, as they cannot afford the needed lecturers, TAs and lab costs.

 

The "Budget Freezes" are the results of S&D, as students are having trouble getting financing. If it were to continue, cost would decline. Hundreds of Banks or financial institutions have dropped or scaled back 'Student Loans', Wells Fargo the largest and Sallie Mae (major go between on Gov backing) is near bankruptcy. The probability then is the cut backs are for lack of students (financing the School) and the cut classes are as in any other year, where participation determines activation. Further those lab's, lecturers and all facilities are set up for -x- number of active students, while an artificial (subsidized) base increase.

 

Again, most higher educational institutions are non profit (There are for profit, such as the University of Phoenix) where donations are part of income and they are declining. However like any business, when the demand (students) declines the supply must decline or change their model.

 

This is hardly off topic and much of which the reason Obama wants a take over of the funding, in the first place...If I explained the comparison of this issue to that the proposed Universal Medical Service (I could), then that would be off topic....