New Education Secretary: Will it make a difference?

Parent Cafe
101

A total non-sequitor and a sleight of logic…

The issue here is not that it is “chump change” for the government; the issue here is the rates the government is charging is NOT “chump change” to the students and families and are 50% above what should FAIRLY be charged in the marketplace.

But, when you have a monopoly, this is what happens - you have no choice but the pay what is charged. I guess people are happy with the monopoly of government loaning their kids money are atrociously high rates.

This is another “fake news” story because it uses the impact on the wrong subject (government) to answer a question that is about a totally different subject (student and families interest rates on student loans). Note specifically how the MSM changes the focus from the money students/families are paying to the impact of the government’s budget.

Additionally, the situation is more downright economically destructive to students than MSM would ever let on - the graduation rate from college is hovering near 50% or a little bit lower. Therefore, 50% of the kids/families with these high rate loans LITTERALLY get nothing for the money they borrow except payments for something they did not even receive, a college degree. Thus, they are stuck paying for decades for something they never benefited from - a net economic negative for the students 2X over. It is like being forced to make payments for years on a car that has been repossessed. A private entity cannot do that, yet government does it and people do not bat an eye.

Yep, another way government keeps people poorer, and most have not a clue.

102

@awcntdb - back in the day my first student loan was contracted under Jimmy Carter’s administration. Interest rate 11%. Reagan came into office and retroactively raised the interest rate to 13%! I’ve never figured out how that could be legal.

Since then, many private corporations and individuals have made $$$ profiting off of student loans. Remember when Catherine Reynolds tried to make a big donation to the Smithsonian? 27 million if I recall, and they had to reject it because she was trying to be too specific about what it could be used for. She made that money off of student loans and I would frankly rather the US make the money. As long as they don’t do any Reagan-like bait and switch.

103

The fact that I cite Breitbart does not mean that I endorse it, or that I think it is unbiased. It just means that I don’t think it should be ignored. I take everything I read in the media with a couple of grains of salt. There has been a lot of bias and false reporting in the NY Times, the WaPo, CNN, and other MSM. The eve of the election, the NY Times printed that Hillary Clinton had an 86% chance of winning. Sometimes bias is harder to see when you agree with it. I try to read as many different points of view as possible.

The head of Breitbart, Steve Bannon, is now senior advisor to the President-elect and likely to be a very major player.
The nominee for Secretary of Ed. is the sister of Erik Prince, who appeared continuously in Breitbart over the course of the presidential campaign. Until a few days ago, Erik Prince had a much larger national profile than did his sister, and Erik Prince is a Breitbart guy. Maybe the Sec. Ed. nominee has a Breitbart connection too (just speculating here).
Like it or not, Breitbart people are going to be in government.

104

Hm…not sure what you are questioning here. That is exactly correct as to what the rates should have been.

What happened there was again government setting false rates. Under Carter, recall that a mortgage was 15 - 18%, credit cards were north of 25% and car loans were 15% or so. All interests rates were higher because the market rates were higher due to a severe economic recession (really a depression at at the point).

However, government was artificially pricing down student loans and actually paying for those loans with debt spending. What Reagan did was let the rates float to where they should have been in the first place made students pay what the actual cost of the loan was.

And note. when rates in the marketplace came down, so did mortgages and student loans rates.

And you question whether it is legal for government to do that? Where have you been? Government does illegal stuff (using civilian standards) all the time and the people who benefit do not say a word about it.

105

re: Pinocchios and the savings from cutting out banks: Just as anyone has choices of what to do with savings in their budget, so does the government. The way Congress allocated the funds may not be the way everyone would, but it does address several needs, some not directly related to student loans–but a legitimate choice for using the money. The reasons for the 4 Pinocchios (upgraded from an earlier 2) is that the language used to describe where the savings “went” provides a very misleading rationale.

106

And this is as opposed to the MSM trusted news sources that are still crying because they did not see an obvious freight train coming at them? Yeah, I trust those guys to get it right.

Better still, the trusted MSM news sources who all reported to a man that there is no way that the country would be where it is today, i.e., with Breitibart people going into government.

An simple thought - may be time to expand your new sources and comparison shop the articles written on various topics.

But, go ahead and blindly ignore some sources at your peril. However, I do suggest you realize where that got you and assess if that is good place to be.

Back to regular programming… discussing education and the New Secretary’s policies - hopefully using various sources and not from living inside a bubble and just ignoring a source because it does not fit your worldview.

107

If the current rates are higher than the market would offer, then why wouldn’t some bank offer student loans on similar terms at lower rates than the current 3.76%?

Pre-2010 government guaranteed loans and post-2010 direct loans had similar interest rate spreads over 5 year Treasury notes, so it is not like the change made much (if any) difference in interest rates paid by the borrower.

https://www.nerdwallet.com/blog/loans/student-loans/private-student-loans/ lists some private student loan rates. The offers lower than 3.76% appear to be variable rate loans.

108

@awcntdb I read a variety of sources, and your ranting about the “MSM” (mainstream media) has been the chant of the ignoramous set for a long time, how there is this media conspiracy to ‘suppress’ the truth and the like. The MSM or whatever you call it is what it is, at times it does good journalism, at others it does horrible journalism. This last election they did a horrible job, they were caught I think in the thrall of not believing someone like Trump could win and did a horrible job…and before saying that is all left wing bias, the MSM did a horrible job on the runup to the Iraq war, they bought the Bush administration BS just as much and were likely as responsible for the war as much as any other factor (other than the St. Louis Post Dispatch and some other smaller papers), the papers of note, the NY Times, The Washington post, blew it. The one difference was later on they admitted they fouled up, unlike let’s say Fox News that promoted the whole WMD lie for years after everyone else acknowledged it was false…

And half the problem with news is how it is presented. For example, the claim that ACA support caused interest rates on student loans to go to 6%; they cite a fact (the 870 million a year that was saved by not using banks that went to ACA instead) as proof, which is utter BS if looked at objectively (a cost saving not taken won’t raise rates, it only means the rate will stay where it is rather than go down).

Likewise, the idea that the government “sets” interest rates, it doesn’t, that is a lie I have heard time and again. Yes, the federal reserve overnight rate (the one that is now 0%, prob will go up, the so called discount rate) is set by the federal reserve governors, but they are not the white house or congress, they are independent (for a reason). Reagan ‘jumping’ the interest rate to 13% of student loans is a load of crap, utter crap, it is spreading two distinct lies:

1)That the government originates student loans, or did back then. When Reagan was president student loans were issued by banks, and had a favorable interest rate because the government guaranteed the loans, if the student defaulted, the government paid it off (basically, insurance)…so the rate was set by the banks, pure and simple.

2)Anyone who knows basic interest rates understands that it is set by risk, the FICO credit score represents a risk asssesment of the person applying, and the higher the risk, the higher the rate. You have a so so fico score? You don’t get the 0% dealer rate, you don’t get the low cost lease, or the cheapest mortgage rate, etc. You borrow money to let’s say pay off medical bills? Lot higher rate than if you bought a car (which could be repossed) or if you use your home equity as collateral.

At the time of Reagan interest rates were at all time highs, I believe the prime rate hit around 15%, which is the rate that top borrowers would get (more than likely, not consumer loans0, that is the riskless rate in effect. When the loans went from 10 to 13% it represented market forces, where the prime was pure and simple. Riskless rate of return is generally on things like T notes and T bills, because the government has an obligation to pay it back. The base rates in turn are set to a large extent by inflation and fear of it, if they think there is likely to be high inflation (or is), rates go very high because otherwise they are being paid back by dollars that are worth less and less at a rapid pace. All loans are amortized (basically you front load on the interest, so in a sense the bank ‘makes its points’ early on then starts getting paid back the money it actually lent out (the principal), and in times of low inflation, they make a lot more money, whereas high rates reflect risk that they will make, in real dollars, a lot less than they lent out.

And if you want proof that the ‘private market’ rates are not any cheaper, I suggest you check around with banks for personal student loans (not government ones, student ones), that aren’t backed by collateral, I doubt you would do much better than the government ones (again, don’t give me home equity loans).

The problem with student loans is that congress , in large part thanks to the tea party crowd, allowed the old law to expire and the new one they are operating under is a lot more expensive, there is no getting around it. Basically, they refused to issue loans at the cheaper rates, even though they are paying for those loans at a ridiculously low interest rate (T notes are running like 1.5% base rate), so even at 3.5% they are getting much more than they are paying back, but congress refused to do so, pure and simple.

109

http://www.nytimes.com/2016/11/25/opinion/betsy-devos-and-the-wrong-way-to-fix-schools.html?smprod=nytcore-iphone&smid=nytcore-iphone-share

110

As far as competition with bank loan rates, how competition will ‘drive down prices’ the way it does with consumer goods, that is a crock in general, the same way that privatizing services to for profit ventures doesn’t lead to competition or the way competition with health insurance won’t bring down rates, and it is that the market is basically an oligopoly.

Loans are not a consumer good with a fixed cost and variable cost that is well understood. The difference between a bank loan and a consumer good is a manufacturer of consumer goods doesn’t face the most significant factor in loans, risk. There are many, two of the big ones are defaulting and inflation, and while they have a certain amount of handle on each one, it is not precise, it is a mathematical calculation based on prior results that isn’t perfect. And the way banks evaluate that risk is not asymetrical, they all do it the same way, so the claim of ‘competition’ is quite honestly, crap, because while a bank may play with a 1/4 point, maybe 3/8th, they certainly wouldn’t offer a student loan at 3.5% that the government was offering at 6%, competition on loans just isn’t that large. That was the myth of the housing ‘boom’ of the 00’s, they offered these mortgages at incredibly cheap rates, but those were not fixed 30 and 15 year standard mortgages, they were mortgages with low teaser rates that blossomed into almost usury rates after X years…

There is a direct analogy to this in the pricing of instruments like options, while there are all kinds of models out there to price options, all of them are variations pretty much of the Scholes-Black model, that takes into consideration things like the current underlying value of the thing you are trading (let’s say a commodity futures price for a certain expiration month), interest rates, the time to expiry (the longer the term of an option, like a loan, the more expensive since the risks increase as time goes out), interest rates, and also how the option moves versus underlying moves (kind of akin to how interest rates react to inflation). In the end, while the models might produce a different theoretical price for the option ie the ‘best’ buying/selling price, the models aren’t all that different, so one guy might be willing to buy at let’s say a contract at 50c, another one might value it at 52 or 53, but no one would be buying at a buck.

Competition on consumer goods is based in large part on being able to sell a higher volume of goods (which lowers the fixed costs of a product, for obvious reasons, on a per unit basis), consumer goods price gets driven down by newer technology or the cost of current technology coming down , which in turn is driven down by component suppliers being able to sell in more volume or make it more cheaply, that doesn’t apply to loans, the chief cost of any loan is going to be the risk factor on the loan + the base rate of borrowing (now 0% roughly) and lending (prime rate), and those cannot really be gamed with a loan. A bank could in theory offer a loan at half the rate, but it would be suicide to do so because of risk factors like inflation and defaults, at 6% their losses would likely be outweighed by the money they make, at 3% they likely would lose money, so they won’t do it. Loans are not a free market transaction the way consumer goods are, and the government can afford to ‘lose’ money on loans they originate so they can give much lower rates than a for profit bank would, the losses being the cost of getting kids educated (basically the losses become education spending, assuming they break even on the other loans) Competition only works when there are market forces that make it work, but market forces don’t work for everything. People talk about how expensive military stuff is, but there are reasons for that, the military has very different requirements than civilians do, for example, a military grade computer has components in it that are hardened, they are not standard chips off the shelf, and therefore are a lot more expensive (Milspec is a totally different animal), and as a result there isn’t that much competition there because it is a low volume market, whereas things like tv sets and hairbrushes operate in the market fully.

111

This presupposes there is free-market competition between the banks and the government, rather than the collusion and revolving-doors we have seen. A Wikileaked email posted a list of government appointees that Citigroup sent to the Obama administration during its transition, and most of the actual appointees came from the list.

When I went to college back in the 70s, student loan interest rates were way below market, guaranteed, and dischargeable through bankruptcy. The thinking behind this was that the federal government should encourage students (especially not wealthy students) to go to college.

The average loan indebtedness was also smaller because tuitions were lower in relation to salaries.

Now the government is making a profit on student loans – primarily used by the middle class – and using this profit to fund programs that primarily benefit more economically disadvantaged groups – basically forms of welfare.

Shouldn’t the $58 billion that is being shifted to welfare programs be built into the tax system so that the middle class would pay some, wealthy people more, and the poor little or none? Why is it all on the middle class parents sending their kids to college?

112

There is something I don’t understand here.

On the one hand, we keep hearing how the government is making a profit on student loans. On the other hand, the WSJ reported that about 40% of student loans are in default or forbearance:

http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

It doesn’t seem that both can be true. So what is the truth? Anyone, anyone? Beuller?

113

This article helped me better understand the history and what the ACA’s influence was on student lending. My read is that there are more choices than what some posters here would have you believe and there is risk no matter who is originating the loans:

http://www.factcheck.org/2014/10/student-loan-stretching/

114

And how do Obama’s student loan forgiveness programs figure into all of this? Repayment is based on income and then after 20 or so years the remaining balance is forgiven. How can that be profitable?

115

Great question.

And the answer is, “If a tree falls in the forest, does it still make a sound?” We all know the problem with this is the silly assumption that only humans can hear. Same thing happening here. If humans are not told about the losses here, then government pretends it did not happen.

And you have hit upon the problem of having government in this business or in any other business that essentially provides a service to consumers - no accountability required.

All government has to do is never account for the loss in the proper accounting line item, something a private business cannot do without going to jail or without going bankrupt and out of business.

Specifically, what is happening here is the government is issuing these loans and 60% of people are making payments, However, since student loans cannot be discharged in bankruptcy the government essentially keeps the “perceived” (non existent) revenue on the books as realized revenue in the positive side of the ledger because it knows it will get it from these people one way or the other. Either the students/families will pay up or they never acquire anything because the government will always be the first to take their money from them to pay the debt, as all their bank accounts, paychecks, SS, etc. are all subject to garnishment.

Just another sleight of hand by government. By, law a private company must line item those payments as non-receivable or unrecoverable and must take the write-off - anyway, the investors would demand this because it is very bad business to do otherwise because a business cannot run unperceived revenues.

Most of all, no private company with that loss ratio would not continue to loan because it is an unprofitable venture. And worse, it would be called predatory lending because it is known, in advance, that a huge portion of the recipients would never get the product they signed up because the loan requirements are purposely set at a low bar and colleges have no incentive to actually grad students because government guarantee colleges the money.

The entire engine of the loan program is to have more and more students in colleges even if 50% of students never get a degree - it is a revenue source to fund other things, not an actual loan program, as we think of normal loans.

116

Should it be the purpose of everything involving money to be profitable? Should it be the purpose of something that encourages college attendance to be profitable?

Serious questions there.

(And for those who are familiar with the novel, I’m a bit reminded of Milo Minderbinder in Catch-22, when he got into a bit of trouble with both sides of the conflict, and so he opened his financial books, and when everyone saw what an amazing profit he’d made, well, all was forgiven. Are we perhaps edging ever closer to that sort of outlook on the world?)

117

I don’t necessarily believe that but I thought that was the argument others were making relative to federal student loans. How are they making all this profit when so many loans are defaulting and there is also this loan forgiveness program?

118

If the loan program doesn’t cover it costs (and the post by @awcntdb above suggests it doesn’t even come close), then it should be either be:

  1. Modified to have an interest rate that reflects the real rate of losses, or
  2. Clearly advertised that the low interest rate represents a significant subsidy by other taxpayers, instead of the double-speak that "student loans are profitable".
119

In economics, there is always the “compared to what” question.

The interest rates are only considered low compared to the rates that should be charged to cover the high default rates. However, in comparison to actual market rates other loans (non-education), the interest rates are actually rather high in real terms.

120

Answered in Post #114 - a profit can be declared if you simply ignore an obvious loss and hide that loss in the books.

Maybe this will make it easier to understand. Remember Enron in the 1990s, the energy conglomerate and energy trader? This is exactly how government is doing the bookkeeping. Illegal for the private sector to do; however, legal for government.

Unlike government, Enron had to face up to investors and pay out to them, and walla, it was discovered there was no money, just line items in a ledger.

In contrast, government is both the company providing the service and the investor, so it has no accountability to anyone because there is no one to pay out to who would then realize there really is no money. And since government owns the printing press, there is seemingly always money and if people think they are benefitting then they like government.

You are confusing a loan forgiveness program with non-payment. The Obama loan forgiveness program is essentially getting people into public sector jobs AND they get lower payments stretched out over time, with eventual forgiveness after, I believe, 20 years. Not sure why one would call that loan forgiveness.

This is simply a way to get pubic sector workers under the guise of loan forgiveness. One is actually better off taking a private sector job and setting up one’s own repayment plan, but most people do not know how to do the math to realize that is a much better option than the requirements of the loan forgiveness program. Government strives on the ignorance of people.

More importantly, the Obama loan forgiveness program still does not address the larger problem - the students who still have loans, but did not graduate and did not get a degree. These people cannot qualify for the public sector jobs in any loan forgiveness program. So the real problem, high defaults, is still unaddressed.

The loan forgiveness problem sounds good, but does absolutely nothing to solve the nexus of the problem. In fact, the nexus of the problem just keeps getting bigger as the number of defaults gets more numerous, as more loans are given out.