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Thread: Student Loans: The Government Is Now Officially in the Banking Business

  1. #1

    Student Loans: The Government Is Now Officially in the Banking Business


    ELLEN BROWN, ESQ.

    "We say in our platform that we believe that the right to coin money and issue money is a function of government... Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson... and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business." -- William Jennings Bryan, Democratic Convention, 1896

    William Jennings Bryan would have been pleased. The government is now officially in the banking business. On March 30, 2010, President Obama signed the reconciliation "fix" to the health care reform bill passed by Congress last week. Slipped into it was student loan legislation the President calls "one of the most significant investments in higher education since the G.I. Bill." Under the Student Aid and Fiscal Responsibility Act (SAFRA), the federal government will lend directly to students, ending billions of dollars in wasteful subsidies to firms providing student loans. The bill will save an estimated $68 billion over 11 years.

    Money for the program will come from the U.S. Treasury, which will lend it to the Education Department at 2.8% interest. The money will then be lent to students at 6.8% interest. Eliminating the middlemen will allow the Education Department to keep its 4% spread as profit, money that will be used to help impoverished students. If the Education Department were to set up its own bank, on the model of the Green Bank being proposed in the Energy Bill, it could generate even more money for higher education.

    A Failed Experiment in Corporate Socialism

    The student loan bill may look like a sudden, radical plunge into nationalization, but the government was actually funding over 80 percent of student loans already. Complete government takeover of the program was just the logical and predictable end of a failed 45-year experiment in government subsidies for private banking, involving unnecessary giveaways to Sallie Mae (SLM Corp., the nation's largest student loan provider), Citibank, and other commercial banks exposed in blatantly exploiting the system.

    Under the Federal Family Education Loan Program (FFELP), the U.S. government has been providing subsidies to private companies making student loans ever since 1965. Every independent agency that has calculated the cost of the FFELP, from the Congressional Budget Office to Clinton's Office of Management and Budget to George W. Bush's Office of Management and Budget, has found that direct lending could save the government billions of dollars annually. But the mills of Congress grind slowly, and it has taken until now for this reform to work its way through the system.

    In the sixties, when competing with the Soviets was considered a matter of national survival, providing the opportunity for higher education was accepted as a necessary public good. But unlike Russia and many other countries, the U.S. was not prepared to provide that education for free. Loans to students were necessary, but students were notoriously bad credit risks. They were too young to have reliable credit histories, and they did not own houses that could be posted as collateral. They had nothing but a very uncertain hope of future gainful employment, and banks were not willing to take them on as credit risks without government guarantees.

    The result was the FFELP, which privatized the banks' profits while socializing losses by imposing them on the taxpayers. The loans continued to be "originated" by the banks, which meant the banks advanced credit created as accounting entries on their books, the way all banks do. Contrary to popular belief, banks do not lend their own money or their depositors' money. Commercial bank loans are new money, created in the act of lending it. The alleged justification for allowing banks to charge interest although they are not really lending their own money is that the interest is compensation for taking risk. The banks have to balance their books, and if the loans don't get paid back, the asset side of their balance sheets can shrink, exposing them to bankruptcy. When the risk is underwritten by the taxpayers, however, allowing the banks to keep the interest is simply a giveaway to the banks, an unwarranted form of welfare to a privileged financier class at the expense of struggling students.

    Worse, underwriting these private middlemen with government guarantees has allowed them to game the system. Under the FFELP, banks actually profit more when students default than when they pay back their loans. Delinquent loans are turned over to a guaranty agency in charge of keeping students in repayment. Pre-default, guaranty agencies earn just 1 percent of the loan's outstanding balance. But if the loan defaults and the agency rehabilitates it, the guarantor earns as much as 38.5% of the loan's balance. Collection efforts are also much more profitable than efforts to avert default, giving guaranty agencies a major incentive to encourage delinquencies. In 2008, 60.5% of federal payments to FFELP came from defaults. An Education Department report issued last year found that only 4.8% of students who borrowed directly from the government had defaulted on their loans in 2007, compared to 7.2 percent for FFELP; and the gap widened when longer periods were taken into account.

    In 1993, students and schools were given the option of choosing between FFELP and the Direct Loan program, which allowed the government to offer better terms to students. The Direct Loan program was the clear winner, growing from just 7% of overall loan volume in 1994-1995 to over 80% today.

    The demise of the FFELP was hastened in early 2007, when New York Attorney General Andrew Cuomo began exposing the corrupt relations between firms lending to students and the colleges they attended. Lenders that had been buying off college loan officials were forced to refund millions of dollars to borrowers.

    Congress responded by cutting the private lenders' subsidies. But after the 2008 economic crash, the lenders claimed they could no longer afford to lend to low-income (high-risk) borrowers without these subsidies. Congress therefore acquiesced with a May 2008 law requiring the federal government to give banks two-thirds of the funds lent to students. The bill also required the Education and Treasury Departments to buy loans from lenders made between May 2008 and July 2009 for the full value of the loans plus interest. To comply with this bill, the Department of Education projects that it will eventually have to buy $112 billion in FFELP loans.

    Despite all this government help, lenders have continued to turn their backs on riskier borrowers, driving students to the government's direct lending program. With the banks enjoying heavy subsidies while failing in their mission, Obama campaigned in 2008 on a promise of eliminating the middleman lenders; and with the new SAFRA, he appears to have fulfilled that goal.

    And thus ends a 45-year experiment in subsidized student lending. In the laboratory of the market, direct lending from the government has proven to be a superior alternative for both taxpayers and borrowers.

    The U.S. is not the only country exploring government-sponsored student loan programs. New Zealand now offers 0% interest loans to New Zealand students, with repayment to be made from their income after they graduate. And for the past twenty years, the Australian government has successfully funded students by giving out what are in effect interest-free loans. They are "contingent loans," which are repaid if and when the borrower's income reaches a certain level.


    Where Will the Money Come From?
    The Green Bank Model

    Continue:

    http://www.huffingtonpost.com/ellen-..._b_520318.html



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  3. #2
    As someone who might be taking out (more) student loans in the future thanks for posting it as it was an interesting read.


    .
    __________________________________________________ ________________
    "A politician will do almost anything to keep their job, even become a patriot" - Hearst

  4. #3
    Quote Originally Posted by Matt Collins View Post
    As someone who might be taking out (more) student loans in the future thanks for posting it as it was an interesting read.


    .
    You're welcome Matt. Will you be going in Tenn or Fla?

  5. #4
    I'm in love with this government takeover.


    There is no reason the banks should be able to borrow from others at 2%, lend at the congressionally mandated 6.2% and do so with full guarantees from the government.

  6. #5

    Wink

    Quote Originally Posted by bobbyw24 View Post
    You're welcome Matt. Will you be going in Tenn or Fla?
    Not even sure I'm going yet. Schools I might be interested in are, Ole Miss, Vanderbilt, FSU, UF, UT, Belmont. We'll see how it goes.


    .
    __________________________________________________ ________________
    "A politician will do almost anything to keep their job, even become a patriot" - Hearst

  7. #6
    Quote Originally Posted by Matt Collins View Post
    Not even sure I'm going yet. Schools I might be interested in are, Ole Miss, Vanderbilt, FSU, UF, UT, Belmont. We'll see how it goes.


    .
    Hotty Toddy from an Ole Miss alum

  8. #7

    Question

    Quote Originally Posted by bobbyw24 View Post
    Hotty Toddy from an Ole Miss alum
    Awesome. What year/ major? Where in FL do you live?
    __________________________________________________ ________________
    "A politician will do almost anything to keep their job, even become a patriot" - Hearst

  9. #8
    Quote Originally Posted by Matt Collins View Post
    Awesome. What year/ major? Where in FL do you live?
    Law (J.D.) 1990

    Jacksonville



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  11. #9

    Question

    Quote Originally Posted by bobbyw24 View Post
    Law (J.D.) 1990

    Jacksonville
    Are you practicing now? If so, what field of law?
    __________________________________________________ ________________
    "A politician will do almost anything to keep their job, even become a patriot" - Hearst

  12. #10
    Quote Originally Posted by Matt Collins View Post
    Are you practicing now? If so, what field of law?
    Yes-consumer bankruptcy and foreclosure defense

  13. #11

    Question

    Quote Originally Posted by bobbyw24 View Post
    Yes-consumer bankruptcy and foreclosure defense
    WOW!

    You must be swimming in the money right now.
    How do you have the time to post on RPF?


    Do you know Will Pitts or Sarah Lovett or Mark Cross from Jax?


    .
    __________________________________________________ ________________
    "A politician will do almost anything to keep their job, even become a patriot" - Hearst

  14. #12
    Quote Originally Posted by Matt Collins View Post
    WOW!

    You must be swimming in the money right now.
    How do you have the time to post on RPF?


    Do you know Will Pitts or Sarah Lovett or Mark Cross from Jax?


    .
    I work for a non-profit so I am not swimming in they money-just in clients.

    I get to work at 6 AM and have people help me post stuff since I don't have to much time.

    I know Will and Sarah. Will is the head of Fla. RLC; Sarah hasn't been around much and Mark is the Fla C4L Chair [Orlando].



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