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Student loan biz not looking too healthy
Mortarboard with price tag
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Kai Ryssdal: The political chatter in Washington this week is mostly about the health care bill. People might want to brush up on student loan rules, too. Marketplace's Nancy Marshall Genzer explains.
NANCY MARSHALL GENZER: Right now, the federal government pays a subsidy to banks that make government-guaranteed student loans. The measure that's hitching a ride on the health care bill would cut out the banks. The Education Department would make the loans directly.
Jack Jennings heads the Center on Education Policy.
JACK JENNINGS: If the middle man is eliminated, there's all sorts of money that's saved in the middle and can be mostly redirected into further grants to students to go on to college.
Democrats say the student loan overhaul would save the government about $68 billion over 10 years. Much of that money would go toward government grants for students. The losers in all this are the banks.
Scott Talbott is a lobbyist for the Financial Services Roundtable, a trade group.
SCOTT TALBOTT: We estimate that about 35,000 student loan professionals would lose their jobs overnight.
Jason Delisle has an answer for that. He's a budget expert at the New America Foundation in Washington.
JASON DELISLE: The guaranteed student loans program is not a jobs program. It's a program to ensure students get low interest loans.
But some schools are ignoring the student loan debate. They're starting to cut out the middleman themselves. Students don't have to get their government loans through the banks. There's already a direct government loan program. The loans aren't cheaper for the students, but they're more convenient. And more schools have started offering them.
Jack Jennings of the Center on Education Policy says schools are trying to maximize whatever help students may get from the government.
JENNINGS: And so they're looking for any way they can to make the system more efficient and provide as much money as they can.
So, out goes the middleman.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
It isn't true that the entire student loan business will be ended. Take Sallie Mae. According to its 2010 10-K, it made more money servicing loans than it did from the loans it owns.
Take a look at this: http://firedoglake.com/2010/03/01/making-money-the-sallie-mae-way/
and comment 20.
That means that the part of the business related to origination of loans would disappear, as would the part related to securitization of loans and some of the financing jobs.
Origination is a small part of the business. The companies charge less than $5.00 per loan in administrative fees. Even now, Sallie Mae says it will fire about 2500 people if SAFRA passes.
You didn't mention the huge amount of money Sallie Mae made from government programs under ECASLA and from TALF. You should ask. This is a much better story than the one your ran.
Lesson: never pay attention to anyone from the Financial Services Roundtable.
Unfortunately the Treasury charges federal agencies approx. 10 yr T-note rate for their direct loan capital. That particular interest rate is not anywhere close to zero.
40 years ago, it was simple. Banks paid out 3% on consumers' deposits and issued 6% mortgages. Now they pay out 0.5% on deposits and issue 6% mortgages (to the average customer). Someone is making out like a bandit, and it is the financial services sector, which is far less regulated than 40 years ago. I haven't even mentioned auto loans, where first offers to many types of customers are nearly 20% interest rate. In defense of the financial services sector, the publicly-traded ones face the quarterly pressure from shareholders to see "results" that exceed expectations.
In the early 1990s, those would be guaranteed student loans, issued by banks, credit unions or state govt marketers. In any case, the short-term fed discount rate should not have anything to do with student loans, which are long-term financial products. One of the many poor decisions which hurt the guaranteed loan program was to accept the lobbyists' argument to go to a subsidy based on short-term rates rather than long-term rates. Sure, they passed the costs of hedging onto the taxpayer but they also failed to anticipate challenges in short-term liquidity.
Scott Talbott is a lobbyist for the Financial Services Roundtable, a trade group.
SCOTT TALBOTT: We estimate that about 35,000 student loan professionals would lose their jobs overnight.
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Industry associations estimate that there are 35,000 jobs associated with the federal student loan program in total. This talking point doesn't hold up when the largest lender Sallie Mae estimates that they would have to cut 2,500 jobs (out of 8,000 total at the company).
M Siden, under the President's proposal, the government will make out like a bandit. You put your finger on it. The govt.'s cost of capital is close to 0% and the government will be charging families up to 7.8% It's good work if you can get it.
I am dealing with this right now in my family and quite honestly, the government loans, middle man or not, are just not as attractive as when I went through college in the early 90's. Back then the Discount rate was around 7% and my loans were cut at just under 5%. Today, the Discount is at .5% and the loans are at 8%. Somebody is making out like a bandit and I can guess who.
