Saturday, September 15, 2007

The student loan racket

Here's how the program works: Banks and other private companies lend money to students. The federal government pays part or all of the interest—currently 7 percent or 8 percent. The government also guarantees the loans.

What is wrong with this picture? Well, the government itself borrows the odd nickel to finance the national debt. This borrowing, obviously, is also guaranteed by the government. For that reason, it carries an interest rate of only 3 percent or 4 percent. If the government can borrow money at 3 percent or 4 percent, why should it be paying 7 percent or 8 percent for the privilege of guaranteeing loans to someone else? Wouldn't it make more sense for the government to loan out the money itself?

That is the $4 billion question (the approximate annual cost of the interest subsidy). ...

It seems that kickbacks were being paid to university financial aid officers who delivered customers. Some of them even got stock in some of the more specialized, and dubious, student loan companies. When the government is giving away free money—which is what the program amounts to (and I mean giving it away to the banks, not to the students)—it's worth a good deal to get cut in on such a good deal.
--Michael Kinsley, Slate, on no-arbitrage violations in government borrowing

1 comment:

Jess Austin said...

Great line from the article:

Student loans are the clearest example of the common Republican confusion between free-market capitalism and business. Capitalism is an economic system that is held, with some justification, to be the best guarantor of prosperity. Business can be capitalism in action, or it can be something entirely different.

Maybe it's because I'm in the industry, but I've long felt that telecom in the US was the clearest such example. There's no excuse anymore. When you compare the broadband available in countries with actual telco regulation (France, Korea, Japan, UK, etc.) to what we have, all market pretense falls flat. The FCC has been an industry-captured defender of the status quo for its entire existence. At this point, the US consumer would be better-served if it simply ceased to exist. (Cue the wailing and gnashing of teeth from ILECs, MNOs, broadcasters, and astroturf groups.)