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Gov't may be chief student-loan source
David Lazarus
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TEXT OF INTERVIEW
Bill Radke: The U.S. Senate is considering pushing private lenders out of the student financial-aid business. The legislation has already passed the House. It would effectively make the Education Department the dominant source of student loans. Republicans say they don't want the government that involved in college financing. Los Angeles Times business columnist David Lazarus the real problem for him is how much the loans will cost. David, good morning.
David Lazarus: Morning.
Radke: So how should we feel about the federal government being the source for student loans?
Lazarus: I don't really have a big problem with that when you consider that it's the federal government's job anyway to make sure that everyone at least gets a high-school education. So who should be making the call as to who get a college education: the private sector or Uncle Sam? I don't have any problem with Uncle Sam doing it.
Radke: So if the federal government is the big dog, does that mean students benefit from better rates?
Lazarus: Well that's the big question because right now the rates aren't very attractive at all. In fact, the rates for the loans given under this program -- so these are mandated by the federal government -- range from 6.8 percent for some undergrad loans to 8.5 percent for graduate-school-level loans. Now these are very high when you consider that the market for 30-year mortgages, at the moment, is about 5 percent or less.
In fact, I was speaking the other day with the CEO of Edamerica, which is one of the largest providers of student loans out there, and he said, "I don't get it. These rates are way beyond what I'd like to be charging. I'd like to be charging market rates, but I can't because the federal government says we need to peg the loans at this level." That means a lot of students and a lot of recent grads are paying way above market rates.
Radke: So why doesn't the government help out students? A student bailout?
Lazarus: Well a student bailout. Exactly. Why not? Because we help homeowners, we help banks, we help carmakers, we help insurers. Indeed students would probably be a good beneficiary of such largess. The problem is it would take an act of Congress to lower these rates. Congress clearly has its plate full with other things. But considering these are the leaders of the private sector and the public sector in years ahead, probably a good investment for taxpayer money.
Radke: Los Angeles Times business columnist David Lazarus, thank you.
Lazarus: Thank you.
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I need a bailout.
I am a first year podiatric medical resident with over $200,000 in graduate school loans. My interest rates are 6.8% and 8.5%. I will be paying for these loans well into my professional career. All of my coresidents and friends are in the same situation. How is this okay?
How is a student with no job supposed to pay a 4% origination fee and then start paying the loan back at 7.9% the very day he starts college as a fulltime student? One can go buy a new car at 0% for six years or a mortgage for 30 years @ 4.75%. Where are the loans we had years ago that defer interest and payments until graduation?
I just got my papers today for my federal student loans and was a little surprised to find out that my private loans have lower rates that the 6.8% I have on most of my federal loans. I have two private loans at 6% and one at 4.75%. I know the government rate is fixed, but just getting out of school and into my first job with little savings and over 50K in debt from my school what am I supposed to do...
I don't know where Tim received his data from, but he is wrong on those rates.
David says he doesn't have a problem with "Uncle Sam" taking over the student loan market but identifies the problem as "Uncle Sam" regulations that keep rates too high. Further, he identifies the reason that "Uncle Same" has not got around to this problem as congress having "its plate full with other things." He wants an entity that is unable to effect a timely solution, bc it is too busy handling its other charges, to assume additional responsibilities and become the sole source of solutions to the problem in question!
If these federal loan rates seem high, well...the average rate that a borrower with a cosigner (federal loans do not require a cosigner) could get on a private, nonfederal loan, based on SLA research, is 9.5% to 10.0%. That nonfederal loan is a variable rate loan too, so expect that the average rate on that loan will average 13% to 14% over its life. While that 6.8% loan may look like a moneymaker for the government whose borrowing costs approach 0% today, these are "once in a lifetime" low rates. As for me, I would rather lock in a fixed rate 6.8% loan rather than bear the risk of having a variable rate loan, that might look great today but no so good when the Fed gets back to raising interest rates. Memories can be short, but I assure you no one was squawking in September 2007, when the Prime Rate stood at 8.25%.
The private student loan programs are basically a license to steal. They could almost be considered usurous. I am really not certain in some cases how they could be termed "student" loans because chances are, no school or institution of higher learning will ever be involved in the loan in any way. I firmly believe these lenders decided they had a gold mine when the legislation was passed negating one's ability to discharge student loans in bankruptcy. They allowed people to incur debt that probably could never be repaid and then started raising interest rates, adding interest until the debt reached phenominal proportions. They are issued indiscriminately with little or no counseling to the borrower about the pitfals or repayment requirements. They are issued with little or no verification of the information submitted by the potential borrower, as well. Something needs to be done to eliminate this predatory practice.
Its not surprising that Congress is not lowering interest rates on federal loans in their education bill. Most of the savings are going towards increasing the <a href="http://www.collegeloanconsultant.com/pell-grant.html">Pell grant</a> amounts. This is the real shift in funds that is taking place. Students who are not borrowing money are getting the subsidies now. Borrowers benefits stay the same (or get worse for those lucky enough to have had a lender offering incentives).
Mr. Lazarus completely missed the point in his loan comparison. It is not apples to apples. 30-year mortgages are credit driven, securitized loan products that traditionally never exceed the value of the asset. Federal Student loans (even the private lender model) do not require that a borrower be credit worthy and is simply an unsecured signature loan. Unsecuritized debt is always priced higher because of the greater risk.
I believe Ms. Ziegeweid is confused about the student loan programs. Right now a private lender can offer federally guaranteed loans to students (Federal Stafford and Federal PLUS loans). In fact over 70% of the Title IV student loans are provided by private lenders, banks and non-profit agencies. That is the program that Mr. Lazarus is referencing. The credit-based consumer loans are also offered by some private lenders but usually at higher interest rates and less generous terms. Federal loans are preferred but a 5% interest rate sure would be better than the current 8.5%
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