Submitted by Anonymous7 (not verified) on June 30, 2008 - 7:56pm.
This is more evidence that interest rates should not be established through a political process. During the late 1980s, stafford and consolidation interest rates were fixed, at a relatively-high level, so borrowers could not enjoy "the ride down." During the early 1990s, stafford interest rates were changed to variable-rate, so lenders could enjoy "the ride up." Consolidation interest rates were changed to variable as well, but were changed back to fixed-rate during the late 1990s so that borrowers would lock-in at a relatively high level and could not enjoy "the ride down." When market interest rates plummeted during the early 2000s, there was intense advocacy, apparently by loan holders, to switch consolidation back to variable-rate so that borrowers would stop locking in at low rates. The end result was the same, as NAF has noted. Instead of "lining up" variable-rate staffords with variable-rate consolidations, Washington switched staffords to fixed-rate, lining them up with the fixed-rate consolidation and thus reducing the "churning" effect which was so disruptive to loan holders' portfolios.
Instead of marching into Washington to change the interest rate formulae every time the market changes, it would make a lot more sense to move to a market-based loan program. All borrowers would pay the same rate -- in the spirit of a social welfare program which federal student lending is -- but that rate would be determined by some type of bidding process. Alternatively, the rate that lenders are paid could be market based, rather than determined politically as it is now.
Still no market forces involved . . .
This is more evidence that interest rates should not be established through a political process. During the late 1980s, stafford and consolidation interest rates were fixed, at a relatively-high level, so borrowers could not enjoy "the ride down." During the early 1990s, stafford interest rates were changed to variable-rate, so lenders could enjoy "the ride up." Consolidation interest rates were changed to variable as well, but were changed back to fixed-rate during the late 1990s so that borrowers would lock-in at a relatively high level and could not enjoy "the ride down." When market interest rates plummeted during the early 2000s, there was intense advocacy, apparently by loan holders, to switch consolidation back to variable-rate so that borrowers would stop locking in at low rates. The end result was the same, as NAF has noted. Instead of "lining up" variable-rate staffords with variable-rate consolidations, Washington switched staffords to fixed-rate, lining them up with the fixed-rate consolidation and thus reducing the "churning" effect which was so disruptive to loan holders' portfolios.
Instead of marching into Washington to change the interest rate formulae every time the market changes, it would make a lot more sense to move to a market-based loan program. All borrowers would pay the same rate -- in the spirit of a social welfare program which federal student lending is -- but that rate would be determined by some type of bidding process. Alternatively, the rate that lenders are paid could be market based, rather than determined politically as it is now.