Bailout of the Year (College Loans and Congressional Excess)

Wall Street Journal ^ | 24 April 2008 | Staff

[shrinkermd]

...In September, Congress vowed to make education more affordable by passing the "College Cost Reduction and Access Act." The law reduced the interest rates borrowers pay on federally insured student loans. Backed by the Federal Family Education Loan Program, these loans account for more than 70% of education lending. Taxpayers will fork over $7 billion by 2012 to pay for the rate cuts.

But Congress didn't stop there. Convinced that the private lenders who make these loans were reaping too much profit, Congress also cut the yield on each loan. The return on the popular Stafford loan for undergrads was reduced by 70 basis points. For loan consolidations, Congress cut returns by 65 basis points. In a vibrant market, banks might have absorbed these hits and continued to lend. But the combination of legislative fiat and fewer investors willing to buy asset-backed securities amid the credit crunch has put the squeeze on lenders.

What's now clear is that Congress didn't merely wring the profits out of student lending. It's blown up the entire student loan market. Market leader Sallie Mae says it now loses money on every new federal education loan. Sallie continues to lend in hopes of a change in D.C., or increased investor demand for securitized loans.

Others can't wait. A third of the nation's top 100 lenders to students in 2007 have temporarily suspended new loan originations or exited the business altogether.

Usually, the law of unintended consequences takes so long to reveal itself that no one remembers the culprits. But the speed at which Congress's student lending changes have gone south is raising political danger for Democrats, if Republicans had the wit to point it out. (They don't; that's why they're Republicans.)

[whipitgood]

And now colleges, responding to the perception that student loans are more affordable, are raising their tuition rates!

[Always Right]

Stupid is as stupid does.

[ontap]

And the beat goes on. In the immortal words of Archie Bunker”Stupid is in the head of the Democrat” (not an exact quote but the results are the same)

[pnh102]

I still think the best way to make student loans more affordable is a proposal that a friend suggested to me. Basically... you make students pay a fraction of the actual payment while they are in school. This fraction could be small, say, 10% or 20% of the post-school loan payment. These payments would go directly towards principal and the dollar amount would increase as the student borrows more.

Such a regime would serve to remind students that loans are not free money and that a student loan payment, if not low enough, can seriously impede someone's progress in life. It might even entice some students to reevaluate the worth of their degrees and possibly go directly to the workforce instead, or it might entice them to work during school to cover some of the expenses.

[milwguy]

congress mandates ethanol, gives subsidies of 50cents a gallon, and food prices skyrocket. Congress mandates banks lend money to people with poor credit so they can buy big, expensive houses they could never afford. Housing plummets and bankruptcies soar. Now student loans. When will it stop?

My son will be a freshman next year at Hillsdale College. They accept NO federal money and finance any loans a student may need through their own resources.

[iopscusa]

congrats that your son will be a freshman next year at Hillsdale College. Please keep us informed on Hillsdale, I just love what I have heard and read about this fine college!

[milwguy]

Thanks....We visited Hillsdale twice in the last year, and were very impressed with the facilities, the faculty, and the students. Both times, my son went to classes with a student, as well as touring the campus. It is obvious the school is on the way up. Their endowment is growing rapidly, and when you have the likes of Victor Davis Hansen teaching a symposium class each spring, their reputation is improving as well.

Even though some think of it as a ‘conservative’ college, I think they are more interested in producing students who can think for themselves than they are in producing card carrying members of the Republican Party.

[iopscusa]

Someone put me on their mailing list and the editorials/articlea are exemplar of real Liberal thinking sans the lefty liberal thinking...

[groanup]

thanks for posting this. It would do us all a lot of good if congress just closed down for about two years.

According to Bloomberg, Penn State's student body borrowed 411.3 million dollars in private government-guaranteed loans in 2006. Now that 411 million bore into Penn State like a weight gain pill and sure as hell props up the tuition and fees they charge.