
Student-Loan Refinancing Boom Could Cost U.S. Taxpayers Billions - randomname2
http://www.bloomberg.com/news/articles/2015-06-10/student-loan-refinancing-boom-could-cost-u-s-taxpayers-billions
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learnstats2
Isn't education something that US taxpayer should choose to pay for?

It doesn't seem right that the government is charging students - _taxpayers_
\- un unfairly high rate of interest, one so high that commercial lenders can
typically undercut the rate by a significant margin.

That's stealing from Peter to pay Paul.

The government should reconsider whether it's right to charge such a high
amount to students remaining on the plan, that is, the students who don't
qualify for refinancing. Isn't this just an exercise in taking money away from
the poor?

~~~
robbiemitchell
Taxpayers haven't chosen to pay for unlimited, private post-secondary
education. If they did, the loans wouldn't be necessary.

You could also fault the institutions for charging so much -- or fault the
students for enrolling in programs they couldn't afford.

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adventured
The government caused this mess in the first place by spurring the vast cost
inflation in the system.

The solution, to both this scenario, and the broader issue, is simple:

1) Begin squeezing the cost of education back down, by no longer increasing
the amount of money the government will guarantee on student loans, and then
eventually reversing that and reducing the sum.

2) We'll abuse the dollar reserve standard for war, bank bailouts, homeowner
bailouts, etc. We might as well abuse it for dirt cheap refinancing of student
loans (while simultaneously capping and then reducing the central problem of
the inflation from the govt guarantee). The government should reduce the cost
of student loan interest to 2% fixed for everyone.

3) Begin implementing broader reforms that will affect the next generation of
students, to put an end to the cost inflation and begin bending the cost back
down to where it was equivalent in ~2000.

Politically it should be this simple as well, and unfortunately it's not.
That's where the real problem rests.

~~~
twoodfin
The problem is that 2) is popular and (relatively) easy, but 1) is unpopular,
regressive and difficult. So the most likely scenario is 2) is done without
1), making the problem you were trying to solve worse.

~~~
cmdrfred
"But so and so state has three hot tubs dad, inexpensive college only has
two..."

------
klipt
> The government will be left with a greater share of borrowers like Jennifer
> Rejon. A 29-year-old single mother of a 10-year-old daughter, she has
> $17,000 in federal loans. They helped pay for a medical-assistant degree
> from Corinthian Colleges Inc., a for-profit chain of schools that filed for
> bankruptcy in May. The U.S. Education Department this week said it may
> forgive hundreds of millions of dollars in loans to Corinthian students.

Sounds like those students got scammed.

> Rejon wouldn’t qualify for refinancing from private lenders because they
> screen borrowers based on creditworthiness and university quality. The
> government writes loans for any student who enrolls in an institution
> eligible for federal aid.

Here's an idea, why not require stronger certification?

Seems like the article writer is blaming Jennifer for her inability to pay
loans, instead of blaming the for-profit institution that fleeced her.
Seriously?

~~~
caseysoftware
Or how about blaming the government for just approving everyone?

Who else would give an 18yo with no assets, minimal skill, and no credit
history an unsecured loan for 20k, 50k, or even 100k?

~~~
eli
Does it really count as unsecured if it can't be discharged in bankruptcy?

~~~
wglb
Unsecured means there is no asset, such as a house, bank account backing up
the loan. Unsecured does not mean forgivable.

------
lutorm
I must be missing something basic here: If someone refinances their student
loan, that means they get a loan from someone and uses the proceeds from that
loan to pay the federal government back the balance on their student loan,
right? So they're saying that _people paying back their student loans will
cost the paxpayers money_? That makes no sense -- me paying the loan back
means the taxpayers are no longer at risk for the balance of my loan.

~~~
namecast
Again, worth noting: there is no risk to the taxpayers for the balance of your
loan. You cannot discharge student loans through bankruptcy, and the
government can garnish your wages, tax refunds, and social security to repay
them.

~~~
roel_v
The balance of the loan is different from what you (as a lender) have to put
the loan on the books for. Even if there is no way to legally discharge it, if
it's unlikely that the loan will be paid back (or part of it), you have to
value it for the amount you expect to receive.

------
srj
Student loan interest rates were fixed at a relatively high level for a while:
[http://www.finaid.org/loans/historicalrates.phtml](http://www.finaid.org/loans/historicalrates.phtml)

One of the people cited in the article had their rate go from 6.55% to 2.69%.
For a social program designed to send kids to college the rates should never
have been fixed so high for so many years.

The author faults CBO accounting for comparing student loans with low-risk
treasury bonds, but these loans pay out much higher interest rates than
treasuries. And there are special restrictions relating to how the debt cannot
be discharged.

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mcv
6.55% on a government provided student loan?!

I think I'm paying about 1.9% interest on my (Dutch) student loan. (I'm really
in no hurry to repay.)

I can (sort of, though I disagree) understand not wanting to spend too much
tax payer money on education, but this looks more like the government is
actively trying to make a profit on the fact that people want an education.

~~~
easytiger
IN the UK it is with inflation, so the % is almost nothing

~~~
ExpiredLink
currently

~~~
notauser
A few lucky UK students had a negative interest rate for a while.

[http://www.theguardian.com/money/2009/aug/31/student-
loans-i...](http://www.theguardian.com/money/2009/aug/31/student-loans-
interest-rate-rpi)

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x3n0ph3n3
It's not _costing_ tax payers, it's shrinking future gains on interest
payments.

~~~
TazeTSchnitzel
If the cost of defaults overtakes interest gains then yes, it _is_ costing
taxpayers.

~~~
scotty79
So the worst case scenario is that somebody gets (part of?) their education
for free and the government pays the school its exorbitant rate.

Maybe that's a good thing. Maybe it will force "taxpayers" to investigate why
school had such exorbitant rate in the first place. Maybe there is some
restitution to be paid to taxpayers by the school and if they are not paid
maybe the school should be excluded from getting taxpayer money in the future.

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seiji
Education _should_ cost tax payers in a society billions.

But, the money should go to, you know, education. (and not be seen as an
unlimited tap of free money for university administrators to double tuition
rates and ancillary fees every ten years.)

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randomname2
So according to this article, we have the unintended consequences of ultra
accommodative monetary policy (i.e. private lenders offering rock bottom refi
rates) conspiring with both the VC world's enthusiasm for anything that even
looks like P2P lending and billionaires' penchant for getting involved
anywhere there's money to be made, to siphon off the best loans from the
Department of Education's portfolio, leaving taxpayers with a book full of IBR
enrollees and severely delinquent borrowers who aren't even thinking about
making payments...

 _The government will be left with a greater share of borrowers like Jennifer
Rejon. A 29-year-old single mother of a 10-year-old daughter, she has $17,000
in federal loans.

Under a federal program to help low-income borrowers, Rejon, who lives in
Chicago and has struggled to find a job, isn’t making payments. “I’m trying to
at least get my life on track and be able to pay my bills,” she said. “The
loans are the last thing I’m thinking about.”_

Take the above and throw in a few more $4 billion for-profit debt discharge
fiascos and taxpayers could be in the red on the government's student loan
portfolio before the mass debt cancellations even begin.

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iamjdg
Why is this a problem? Presumably when the private lender refinances the loan,
they pay the balance to the government? So yeah the government is losing all
these future interest payments but are they not getting the principle back
today? Couldn't they use that principle to offset the risk of default from
lower income people with student loans?

~~~
kansface
You answered your own question.

> Why is this a problem?

>So yeah the government is losing all these future interest payments

~~~
iamjdg
i guess I need to clarify a question first: when the private company
refinances the loan, do they pay the government the current principle?

~~~
kansface
Yes - otherwise, they would have to pay interest on the loan while refinancing
to a lower rate (they'd lose money).

------
guelo
> borrowers with successful careers subsidize the less fortunate, who are more
> likely to default.

What does defaulting mean here? If you stop paying, in addition to ruining
your credit as long as you don't pay, the government will hound you for the
rest of your life and will garnish your wages and even your social security
payments when you retire.

~~~
rayiner
Not really. I don't know how many people are covered by Pay as you Earn, but
under that program you never pay more than 10% of your disposable income.

~~~
richardbrevig
As well, if having financial difficult, someone could request forbearance for
up to 12 months and not have to make payments [0].

[0] [https://studentaid.ed.gov/sa/repay-loans/deferment-
forbearan...](https://studentaid.ed.gov/sa/repay-loans/deferment-
forbearance#what-is-forbearance)

------
pjc50
Hmm. People are bringing up the nondischargeability in bankruptcy of the
government loans. But if someone took out a refi from a private lender, would
that new loan still be nondischargeable, or has it been "laundered"?

Charging people 6.55% when the federal funds rate is 0.12% is a vig that's
verging on usury.

------
ybw601
Isn't this a case of the loans being mispriced? If the students attending for
profit schools like Corinthian Colleges are getting lower interest rates
because Kellogg MBAs are subsidizing their student loan interest rates,
doesn't that mean more students will end up enrolling in those for profit
schools? That encourages poorer students to make bad investments and forces
them to go deeper into debt.

If the loans were more fairly priced and much higher interest rates were
charged for the for profit colleges, wouldn't fewer people make those bad
investments?

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vinhboy
> The loans -- can be variable and reset monthly, exposing borrowers to the
> danger of a sharp spike if the economy shifts

Wait, what? Who would actually take that kind of risk? That does not sound
prudent at all.

~~~
aikah
That's no different from the subprime mortgages, and we all know how it ended.

~~~
joshstrange
With virtually none of the bankers/financiers going to jail or paying in any
meaningful way for their actions?

~~~
hueving
Cute, but not the point. It ended with lots of people losing homes and a
massive disruption to the global economy.

------
BurningFrog
I hate the math level in articles like these. The only two ways to end an _X
could cost Y..._ headline is _" Millions"_ or _" Billions"_.

That contains just about no information at all. Why not convey some
information with phrases like _" 400 Billions"_ or _" up to 30 Billions per
year"_?

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fredgrott
We need to do the math,

How many HS grads in US per year

Times 2 semesters full-time at $10,000

Hint, folks it under $1 Trillion and its even lower if take that money and
invest it at US citizens birth as an education investment vehicle.

Actual numbers:

US HS Grads: 4 Million per year

so that is 40 Billion tuition payments or we can guarantee ed loan debt at
$250 billion..

Which will you pay as US taxpayer?

------
narrator
Translation: The bondholders must be paid. That's the most important thing. If
the students can't pay, taxes must be raised so the taxpayer can pay.

------
Daishiman
Or, you know, just allow people to default on loans.

~~~
norea-armozel
That's not going to happen. A trillion dollars worth of debt being wiped away
sounds good on paper, but I'm sure that would have some significant
consequences for the national (and possibly world) economy.

~~~
melvinmt
Meanwhile, the national economy doesn't seem to have any problems with pouring
1.5 trillion in a fighter-jet (F-35).

~~~
joshstrange
A fighter-jet that no one wants as well... It's not even a jack of all
trades/master of none type of deal. It literally sucks at all of the things it
was built to do...

------
acd
Sorry but I don't think that the level of usury the financial system is
placing on the middle class through central planned interest rates which
creates records amount of new debts are doing the middle and lower classes any
good at all.

Come get some new credit here, more credit, more debt!

------
MichaelCrawford
student loans are corporate welfare for the banks: the government pays the
interest while one is in school, and will pay off the loan if the student
defaults.

It's crippling not just to the student but to the entire nation's economy that
they're left with all that debt after leaving school - not after graduation,
but after leaving school for any reason.

We would all be a lot better off were students given outright grants that they
were not required to pay back.

~~~
melling
It's certainly an option but someone has to pay for it. The "government" is
the tax payer.

We could just do away with student loans all together. They've probably
contributed to the cost of education far outpacing inflation. College prices
would probably drop.

It's amazing that a great program that has helped millions of people, myself
included, has turned into this "horrible" program that people hate.

~~~
mason240
>We could just do away with student loans all together. College prices would
probably drop.

The issue that causing tuition to rise - the injection of "free" money - would
still be there and would actually be worse because students would be even
further removed from any kind of cost/benefit analysis of the school.

~~~
MichaelCrawford
In California specifically, I'd like to see a ballot proposition which would
set the UC Regents salary to one dollar per year.

Presently they can set their own salary; the governor and the legislature have
no say, nor do the students. So they lead lavish lifestyles at the expense of
students who are doing pretty good to live under highway overpasses.

