The Student Loan, Via the Dept. of Education, Has Become an Additional Tax on the Lost Generation

The Student Loan, Via the Dept. of Education, Has Become an Additional Tax on the Lost Generation

September 1, 2010

Subprime JD - The student loan portfolio has become Congress new slush fund apparently. The Dept of Education has originated and/or insured at least 600 billion in loans and this number will only continue to grow. The last few weeks I have been pondering our collective predicament and was thinking about how Congress stands to gain as a result of our student loan woes.

The Treasury department, which happens to do the borrowing for the US, can now borrow at extremely low interest rates. The 10 yr treasury is yielding a paltry 2.5%. 2 year paper has hit yields as low as .48%. US borrowing costs have never been lower.

On the other hand, consider that the US Dept of Education has become THE biggest player in the student loan market. I bet many of you have noticed that your loans have been purchased by the DOE. Furthermore, the feds have effectively pushed out the middle man (private banks) from the student loan business and are now dominating the student loan market.

Average interest rates on Federal backed loans range anywhere between 6-8%. In addition, many private loans have also been purchased by the DOE. When the Treasury borrows for 2 yrs at .48% interest, and then gives the 50 billion to the DOE, which then makes loans to students at 6-8% interest, they make the spread. This is how Wall Street gambled and lost big time, by borrowing short term at low interest rates and lending out long term to other borrowers at higher rates.

By looking at the DOE budget, the 2011 budget allocation to this lovely department is 49 billion per year. However, when you look at this section called "credit activity," you see the true numbers. Federal Direct Student Loans have exploded higher from 2009 to 2011 by growing from 37 billion to 137 billion dollars! This is a 300% increase over a 2 yr period. These numbers basically tell us that the DOE has become the Fannie Mae for the student loan market.

So the government borrows at .5%, lends it out at 6-8%, and makes a killing on the spread. The loans are NONDISCHARGEABLE, they never go away, they keep growing bigger if you don't pay and sometimes keep growing if you don't pay enough over the stated amount. This has become a new revenue stream for the government.

How else is the Treasury dept going to come up with all the trillions to pay off all the SS and Medicare beneficiaries? By raising taxes of course. However, this student loan provides a new method of obtaining government revenue from the younger segment of the population. This "student loan tax" mainly applies to younger people that recently went to college with bubble valuations in tuition. Surely some older people are getting whacked with these loans, but by and large its the lost generation that is paying the student loan tax.

A 2009 pie chart showing where the federal government spends its money further supports my theory. In fiscal 2009, 38% of all federal expenditures went to Social Security, Medicare, and Medicaid. It is projected that these entitlements will eventually require more than 100% of the current revenue stream. Surely there will be some form of "soft" government default on these programs, but until that happens expect the boomer politicians to fight tooth and nail to save these programs.

The repercussions of my theory suggest that student loan reform will be hard pressed to take place. Because the government by virture of the DOE has now become lender to so many of us, the government has a vested interest in seeing that the money it lent to us at X gets paid back at X plus Y. Owing money to your own government, especially when that loan is one of the few nondischargeable loans in the market, is a flashing red warning sign. This government of ours needs money BADLY to fund the retirements of all these boomers who failed to save. Now they will "tax" us with these loans in order to cover the shortfall.

Obama's Big Blow to Banks: Student Loan Reform

March 29, 2010

TheGrio.com - While Tea Party members were hurling racial and anti-gay slurs on the steps of the Capitol building protesting the supposed "government takeover" of health care last week, Congressional Democrats were working behind the scenes with the Obama administration to also overhaul student lending. In September last year, I wrote that the House of Representatives voted along partisan lines, 257 votes to 171, to take private lenders out of the loan business and make the government the primary source of student loans. This direct loan program was touted as the cornerstone of President Obama's education reform agenda.

Well, Democrats expanded this legislation by embedding it in the reconciliation bill for health care reform. And it's a big blow to big banks. It is an end to "corporate welfare," at least in the student lending business. This initiative would save over $60 billion dollars over 10 years by ending subsidies to commercial and private lenders providing student loans. The savings from the subsidies will be channeled into expanding the Pell Grant program and shoring up funding for ever-growing community colleges and financially strapped historically black colleges and universities. The law will also attempt to cap student loan debt at 10 percent of a college graduate's income. Unfortunately, students already mired in loan debt won't qualify for this relief under this new law.

But the battle wages on. Those Republicans who fought against big government (or as the Tea Partiers call it "Socialist government") initiatives like universal health care are attempting to shoot down the student loan initiative, viewing it as overreaching and back door retribution against banks for squandering bailout funds. This view is unsubstantiated.

In fact, many industrialized countries with state-sponsored health care also have impressive government support for higher education. England, our ally and free-market role model, provides cradle to grave medical coverage and virtually free higher education for low income students. It's probably the closest we get to a Socialist-type market economy than other countries in the European union.

President Obama's initiative is the most aggressive domestic reform agenda we have witnessed in a long time on this side of the pond. He states that "education and health are the two most important pillars in America." Indeed they are the two biggest industries in the United States, employing millions and generating over billions of dollars in revenue. And yet these two giant industries are also known for bilking consumers through inflated costs and reduced services.

As with health care costs, the next move for Obama is to mandate a cap on the rising cost of college tuition on those higher education institutions receiving federal funds. Rising tuition has been outpacing inflation for the last decade or more, while college classroom sizes become larger and taught increasingly by low-paid adjunct faculty. Indeed, we have essentially made college unaffordable for families. What if we made college affordable again? Now that would be revolutionary.

Big Banks Moving Away from Student Loans for Those at Community Colleges

Originally Published on July 12, 2008

NY Daily News - Major banks are cutting back on college loans, and education officials say students hitting the books at two-year schools have fewer financial aid choices.

Community college students are getting shut out when it comes to student loans, as big banks increasingly opt to finance studies only at four-year schools.

Amid a national credit crunch, major lenders such as Citibank, HSBC and JPMorgan Chase have cut back or eliminated loans for community college studies, leaving students scrambling to find other sources of support.

"Community colleges feel once again that they are being singled out as different from four-year colleges," said Thomas Bailey, director of the Community College Research Center, a division of Teachers College at Columbia University.

The big banks say the cutbacks are based on higher default rates, smaller loans and fewer borrowers at community colleges.

"In making our decisions, we simply looked at the typical size and length of loans at schools, and at schools where we did very little lending," said Mark Rodgers, a spokesman for Citibank.

Tom Kelly, a spokesman for JPMorgan Chase, confirmed the change in lending strategy.

"We stopped doing student loans at some community colleges and some four-year colleges, but we are not disclosing the numbers," he said.

The Community College Research Center found nearly half of all college students in the nation attend community colleges.

In New York, more than 100,000 students attend the six community colleges within the CUNY system and 214,129 students are enrolled in the 30 community colleges of SUNY. Those totals do not include the tens of thousands attending for-profit institutions such as DeVry and other technical schools.

CUNY's six community colleges are a special case because they participate in the Federal Direct Lending Program, which obtains student loans directly from the government. But many of SUNY's two-year schools are not as lucky.

"I have about six lenders that won't do business with us: M&T, HSBC, Citibank, Citizens Bank, Chase and Student Loan XPress," said Susan Mead, director of financial aid at Dutchess Community College.

"The entire student loan industry has gone through a lot of changes," she said.