Inaccuracies in CNN article
Sent in by Ian Sacs:
today on cnn.com:
http://www.cnn.com/2004/EDUCATION/06/07/student.loans.ap/index.htmlam i reading this wrong, or is the text in this article totally inaccurate? it says:
"...The government began allowing students to consolidate loans in 1986 as a convenience that would let them make a single monthly payment. But as interest rates have fallen in recent years, it has become a popular way for students to refinance debt at a cheaper rate. That, in turn, has made the program more expensive for the government, which offers lenders a guaranteed rate of return. Millions of students have consolidated at low rates, forcing the government to pay lenders the difference."
to me this doesn't make any sense. nobody is able to "refinance debt at a cheaper rate". all borrowers are familiar with the "weighted average" calculation, so whatever your total interest (in dollars) was before consolidation, it will be the same after consolidation. the consolidation process doesn't reduce anyone's interest rates. i can't understand why there's all this talk about how "unfair" it is for students to consolidate their student loans, when all that is (at the moment) is a convenience (as stated in article) to pay one lender. the way i see it, the consolidation process has absolutely nothing to do with the current subsidy the government is paying to student loan lenders. student borrowers agree to borrow money from lenders at the going rate. this is a fixed rate, and lenders wouldn't offer it unless it was profitable. normally lower interest rates are offered only to those with the best credit, but the student loan program guarantees the loans, which is why lenders can afford to offer such low rates (and still make money since defaults are paid by the doe). and this doesn't even address all of us borrowers who are sitting on 5%-8% fixed interest rates with no option to refinance while the current rate less than 4% (and keep in mind the lenders, while still conservative, are still making money on 4%...just look at any local bank's website, can you find a money market rate higher than that?)
if you read the above referenced article, you'll see that all these politicians and interest groups are arguing about a totally inconsequential issue to the fed's budget concerns, whether or not student borrowers should have a fixed or variable interest rate, or in other words, totally sidestepping the real issue, which is that the loan industry lobbyists (and all their pseudonym interest groups) want variable interest rates for one reason only, because they know they can make even more money. the facts are clear, this bill is not going to help the federal government with it's budgeting for student loan programs, instead the benefit goes directly to the lenders. which, by the way, is what kerry is saying.
Comments
you're not reading it wrong. i'm not quite sure how the lobbyists for sallie mae and other lenders managed to stop the media from actually looking into this story but they have. the major media just sort of goes along with the flow when they hear the lenders say that the govt is losing money. they aren't losing money at all, just less is being made in interest on the loan itself. the only amount that is being guaranteed is the amount of the loan, not the interest.
the ridiculous part about this argument is that if this were the case on student loans than the same should ring true for any loan yes? no. there's no one standing at the street corner telling you NOT to refinance your home because the lender will be making less money on it. quite the opposite really where everyone goes on and on about the amount of money that can be saved on your mortgage by refinancing when the rates drop.
Posted by: liz | June 8, 2004 01:50 PM
I have seen the above article several times and even when I wrote my congressmen, that was basically his response on allowing reconsolidation, it would be to expensive for the loan program.
I am wondering and continue to wonder "does the federal government garuntee the lenders market rate of return i.e. if a borrower locks in 3% and the rate goes to 5% does the federal program pay the lenders the diference? I have seen this arguement so often stated for not passing legislation that allows reconsolidation that I am wondering if it is true. It would not suprise me if it is, just one more government program written in favor of the rich.
Posted by: bob | June 8, 2004 03:26 PM
bob, it's a good question, and i think the simple answer is yes. but if that was all, we'd have nothing to fight for. actually, that isn't really the whole story (of course), because an appreciable component of the market interest rates are the buffer that is worked in to cover the expenses and risk involved with defaults and other losses. these concerns are non-existant with federal student loan program lenders, since the loans are 100% guaranteed from default by the feds, so even though the student loan rate hangs below the market rate, the absolute security of having the fed guarantee the loan makes lending to students on par with the risk of investing in federal bonds...not extremely profitable, but a safe investment. and that finally returns us to the rhetoric, the student loan program shouldn't be about lender profits, it should be about an easier way to borrow money for an otherwise unattainable education. sure, lenders can profit, but it should be understood up front that this is about the students, not a cash cow. in short, lenders could profit even if there wasn't a subsidy to pay the difference between the market rate and the student loan rate, so the argument that the solution to the fed's problems is to switch to variable interest rates is bogus, it's irrelevant. the real problem is that the feds greatly subsidize an already very profitable industry, and are being pushed by that industry to make it even more profitable.
Posted by: ian | June 8, 2004 04:26 PM