This is more on my recent discussion of the Direct Loan program. People who follow the student loan issue know that President Obama’s new regulations really don’t help out most people who graduated already. There is a BIG caveat though, and it’s worth discussing.
The Education Department estimates that there is still about $440 billion outstanding in what are called “FFEL” loans. These were commonly known as “Staffords”. What they are is private money that was lent to students, by banks, where the U.S. federal government was guaranteeing the repayment.
Now, I want everybody to understand, so I am going to be “math light”. Many of these loans carry rates of 6% to 8%–or more. They are also ALL eligible to be paid off by the Department of Education, and made into a Federal Direct Consolidation Loan. The U.S. government becomes the new creditor. It’s like TARP, only the money isn’t being sucked into Wall Street.
Although nominally the Education Department is going to charge you the same interest rate as what you have on the FFELs, the overall benefit is that it only costs the government about 1% or 2% to provide that long-term money to YOU.
Who is losing? It’s whoever the private lenders are, who want that coupon (the interest) at 6% or 8%. They have a great deal right now, because you really can’t SAFELY get that kind of a return.
So by everyone moving their FFELs to Direct, it means that the interest being paid out to private lenders becomes interest paid back into the Direct Loan program. If everyone began doing this, the private lender is shut out, and the money goes into Treasury.
Although you do not personally benefit right now from that, it makes it much easier for the government to modify everyone at once. If it only costs the government 2% to borrow for 10 years, why should it charge 8%? Why not charge 2% to the student borrower?
Thanks to Obama, the younger generation are getting loans where they pay no more than 10% of disposable (the amount of income over $16,500 for a single), with a maximum 20 years of payments. Cutting a similar break for older folks can only practically occur if the private lenders are cut out. It’s high time that they should be.
[Update: $400 billion dollars, where the borrowers are paying out 4.5% more than they should be, means $18 billion is going out to private investors. How much better it would be, if the $18 billion went back to the Education Department.]
[Update #2: By the way, this isn’t “cheating”. So much of the oxygen involving the student loan debate gets taken up by these people out there who feel that students “only have themselves to blame” for big loan amounts, and any attempt to remedy the problem amounts to some immoral “cheating”. But what is being discussed is only that there are these investors out there, getting a 6% or an 8% coupon off lending that the federal government insures anyway! When the federal government is backing some sort of loan, usually that loan’s coupons (the interest) is close to the federal rate! Who’s cheating?! I’ll tell you who: it’s the investor who is getting the 8% sweet deal, no doubt the product of some Sallie Mae lobbying on Capitol Hill.]