Wednesday, March 31, 2010

Student Loan Savings? We Don't Get It

We're not positive, but presently we have a what we think is a pretty clear understanding that the so-called savings from the elimination of subsidies to banks for originating federally guaranteed student loans is bogus.

As we see it, and subject to revision if we learn otherwise:
  • Up until the recently signed bill changed it, the federal government paid banks a subsidy to make loans to students. Payments were not "profits for middlemen" but guarantees to cushion the banks from the risk that the loans would default. In essence, the feds paid the difference to the bank between the interest rate that the students pay and the rate that the market would set based on the actual risk of default. (Banks have been leaving the business anyway, as even with the subsidies it didn't yield much.)
  • Now the feds will no longer pay banks subsidies. They'll still pay third parties to administer the loans, but they won't pay a bank the difference between the student's interest rate and the actual cost of loaning the dough. They're loaning the money themselves.
  • That means that the federal government will now assume the risk of the borrower's default directly.
  • And because the risk of default hasn't changed, it'll cost the government just as much money to loan directly as it did for banks. A default still has to be covered. Now the government will have to cover the defaults made to itself, not the banks.
  • In fact, it may well cost the government more. Banks have an incentive to get borrowers to pay up, but the government has an incentive to be nice to voters. We can probably expect more defaults when the feds run the whole show, so costs will be higher.
So what of the $67 billion that "over time" (how much time?) will be saved by eliminating the subsidies? We assume that most of it will actually be lost to loan defaults. And in the meantime, the feds will have distributed that money to students through increased Pell Grants and generous loan forgiveness terms (generous for public employees, that is, particularly those generously remunerated through contracts negotiated by the NEA, AFT, SEIU, AFSCME, etc., as the present administration continues to operate on the notion that working for the government is morally superior to working in the private sector). In fact, the plan is to spend $10 billion more than the amount saved, even when the savings are illusory.

So no savings, y'all. The money is being counted twice--once to cover loan defaults and another to be spent on more direct student aid.

It'll take every bit of Paul Volker's smarts to direct Tim Geither in a way that will staunch the inflation that has to come from this kind of unlimited giveaway.

On the way out, we feel compelled to complain about two loosely related matters:
  • It's time to quit acting like Manicheans who think that all the light is in government and nonprofits and all the darkness is in for-profit business. There's no inherent reason why the government should be a cheaper or better provider of healthcare or student loans or lots of other stuff that people have provided for a profit for a long time.
  • It's time to quit acting like "the richest country in the world" can afford to do everything at once. As a SWNIDish friend who manages other people's money often tells his clients, "You can be rich enough to have anything you want, but you'll never be rich enough to have everything you want." We seem to have some confusion about the indefinite pronouns since a year ago last November.

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