Submitted by Art Hauptman (not verified) on May 1, 2008 - 7:06am.
I admit to being not up to date on the ins and outs of current proposals or statistics so I defer to Harris' figures and to the analysis of Mark Kantrowitz and others regarding who is using private loans. But that's part of my worry. If nearly half of the students using private loans now are enrolled in public institutions that means they are borrowing high-interest unsecured loans to pay for their living costs as the tuition levels in the public sector are not high enough to require borrowing above the federal loan limits.
Frankly, my interest in this issue was captured when I read that financially independent students would be eligible to borrow $57,000 under the House bill! That means that the students who are often the ones most at risk would be now eligible to borrow tens of thousands of federally guaranteed loans to pay for their living expenses because of the quirky way in which costs of attendance is determined for these students (where basic costs of living outside of college-related expenses are included in the calculation of need which accounts for the vast preponderence of 'unmet need' in the various reports that have come out on this subject over the years).
I also would take issue with Harris' assertion that increases in the loan limits for federal unsubsidized loans entail no federal cost and generate profits. Again, I've been on the outside of this debate for a while and I gather it is now commonly asserted that unsubsidized loans generate profits because of the 2006 change that reduces lender special allowance payments when market interest rates are below student rates. This assertion makes it much easier to understand how the Congress is ready to increase loan limits by so much. If you believe that a program generates profits why not increase the limits and make even more profits which can then be used to plow back into grants (although given federal budget rules entitlement savings are difficult to translate into discretionary program increases)?.
The problem with this kind of thinking it it ignores the impact on hundreds of thousands of student borrowers who will accumulate unsustainable debt burdens as they borrow more and more. And it also ignores basic economics that recognizes there is no free lunch. The only thing that is unsubsidized in this program is that students do not qualify for the in-school interest subsidy. To project government profits from more borrowing, this requires assuming that market interest rates remain below student rates for a sustained period of time and that default rates remain low. Both of these assumptions are highly questionable and should not be the basis for important policy decisions.
Interest rate projections are a notorious problem in student loans and some other federal programs because CBO acts as though low current market rates will continue throughout the life of the loan even though this is obviously not likely. That's how the consolidation deal was sold some years ago as budget neutral which it clearly was not with hindsight. It is also important to note that these loans remain fully guaranteed against default.
The default rate on these loans is clearly going to be higher than the average - it's hard to imagine a default rate of less than 10 percent for students who are currently borrowing private loans - at what rate are these loans currently defaulting and that's with lenders having no federal guarantee to rely upon? Imagine what the default rate will be if lenders can turn over these loans to the feds after 'due diligence'.
So the notion that the federal government will profit from increasing loan limits is not credible and my assertion of a raid on the Treasury - especially if lenders can get no-interest loans to storehouse their loans until the current fire subsides - seems a reasonably accurate one. This really is an invitation for student loans to join the sub-prime market as an example of federal mismanagement of a crisis or the manufacture of a crisis.
Regardless, I hope that my proposals -- that lenders and institutions should have to share in the costs of any defaults, that schools do more in the way of discounts in order to have their students participate in the federal programs, and that students should only be able to borrow a standard amount for living costs regardless of their status -- are not lost in the hubbub of how to avert this 'crisis'. These would be sensible changes with or without a crisis.
No free lunch for student loans
I admit to being not up to date on the ins and outs of current proposals or statistics so I defer to Harris' figures and to the analysis of Mark Kantrowitz and others regarding who is using private loans. But that's part of my worry. If nearly half of the students using private loans now are enrolled in public institutions that means they are borrowing high-interest unsecured loans to pay for their living costs as the tuition levels in the public sector are not high enough to require borrowing above the federal loan limits.
Frankly, my interest in this issue was captured when I read that financially independent students would be eligible to borrow $57,000 under the House bill! That means that the students who are often the ones most at risk would be now eligible to borrow tens of thousands of federally guaranteed loans to pay for their living expenses because of the quirky way in which costs of attendance is determined for these students (where basic costs of living outside of college-related expenses are included in the calculation of need which accounts for the vast preponderence of 'unmet need' in the various reports that have come out on this subject over the years).
I also would take issue with Harris' assertion that increases in the loan limits for federal unsubsidized loans entail no federal cost and generate profits. Again, I've been on the outside of this debate for a while and I gather it is now commonly asserted that unsubsidized loans generate profits because of the 2006 change that reduces lender special allowance payments when market interest rates are below student rates. This assertion makes it much easier to understand how the Congress is ready to increase loan limits by so much. If you believe that a program generates profits why not increase the limits and make even more profits which can then be used to plow back into grants (although given federal budget rules entitlement savings are difficult to translate into discretionary program increases)?.
The problem with this kind of thinking it it ignores the impact on hundreds of thousands of student borrowers who will accumulate unsustainable debt burdens as they borrow more and more. And it also ignores basic economics that recognizes there is no free lunch. The only thing that is unsubsidized in this program is that students do not qualify for the in-school interest subsidy. To project government profits from more borrowing, this requires assuming that market interest rates remain below student rates for a sustained period of time and that default rates remain low. Both of these assumptions are highly questionable and should not be the basis for important policy decisions.
Interest rate projections are a notorious problem in student loans and some other federal programs because CBO acts as though low current market rates will continue throughout the life of the loan even though this is obviously not likely. That's how the consolidation deal was sold some years ago as budget neutral which it clearly was not with hindsight. It is also important to note that these loans remain fully guaranteed against default.
The default rate on these loans is clearly going to be higher than the average - it's hard to imagine a default rate of less than 10 percent for students who are currently borrowing private loans - at what rate are these loans currently defaulting and that's with lenders having no federal guarantee to rely upon? Imagine what the default rate will be if lenders can turn over these loans to the feds after 'due diligence'.
So the notion that the federal government will profit from increasing loan limits is not credible and my assertion of a raid on the Treasury - especially if lenders can get no-interest loans to storehouse their loans until the current fire subsides - seems a reasonably accurate one. This really is an invitation for student loans to join the sub-prime market as an example of federal mismanagement of a crisis or the manufacture of a crisis.
Regardless, I hope that my proposals -- that lenders and institutions should have to share in the costs of any defaults, that schools do more in the way of discounts in order to have their students participate in the federal programs, and that students should only be able to borrow a standard amount for living costs regardless of their status -- are not lost in the hubbub of how to avert this 'crisis'. These would be sensible changes with or without a crisis.