Student Loans in the US and the Gods of Educational Debt

Student loan defaults are rising in the United States (and so are the debt rates) and we should wonder: are we be really surprised by all this?

Everybody knows what a student (or college) loan is: it is very simple, it is just “another loan” that is in fact designed to help college students pay for their tuition, living expenses, books, and the likes. The difference from other types of loans is that (i) the interest rate is quite lower with respect to a “standard loan” (the one you could get to buy a car for instance) and (ii) the repayment schedule is deferred for the entire duration of the education. Accepting a student loan, of any kind, should be done with extreme care, and the student should be aware of the basic facts and total US figures: – The current outstanding student loan debt in the United States stands at more that $830 billion; – Almost 14.5 millions are the undergraduates who enroll for college; – Each college student in higher education pays (but this is just an average figure) almost $11,000 to attend university education.

The figures above are impressive and we may wonder how the US can keep up this huge higher education loan deficit that appears to be getting wider and wider… Anyway, for sure a student loan has some advantages as said, in particular, the 2 major advantages of a student loan over conventional loans are: 1) Lower interest rates; 2) Easier repayment terms.

You can have a private student loan or a federal student loan. In the case of a federal student loan, Federal Direct Student Loan Program, also called Direct Loan Program or FLDP provides low interest loans for students (and parents) to help pay for the cost of college education after high school. The lender, in this case, is the U.S. Department of Education and not a bank or a financial institution, such as SallieMae for instance (and in this case we would be talking of private loan). For sake of clarity, also consider that until recently, there was the Federal Family Education Loan or FFEL Program, the second largest of the US higher education loan programs initiated by the Higher Education Act of 1965 and funded through a public/private partnership. Following the passage of the Health Care and Education Reconciliation Act of 2010 on March 26, 2010 FFEL Program was eliminated, and no subsequent loans were permitted to be made under the program after June 30, 2010. In other words, following the passage of the Health Education Reconciliation Act of 2010, the Federal Direct Loan Program is the sole government-backed loan program in the United States.

In this article titled ” Dark lords of student loan debt,” Vox Day (a blogger) shows that the advantages of a college loan (and the value of college education) may come as a hard bargain:

… the value of a college education has not only declined significantly [...] it has also been slashed by the construction of a methodical system of financial rapine…

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2012
01/01
CATEGORY
Education Reconciliation
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Who Benefited From the Elimination of the Federal Family Education Loan Program?

The Federal Family Education Loan Program (FFELP), created in 1946, was eliminated with the passage of the Health Care and Education Reconciliation Act of 2010 and replaced by the Federal Direct Loan Program (FDLP), created in 1993. FDLP was created to compete with FFELP but by 2010, two thirds of student loans were still originated under FFELP. Loan origination (processing the loan application) under the Direct Loan program is performed directly by the Department of Education. Servicing (account billing and payment processing) is done by a select few organizations including Sallie Mae, Nelnet and some State guarantee agencies. Under FFELP, companies that originated loans had the option to service them. The Department of Education defined the terms and conditions; including underwriting criteria, loan amounts, interest rates, origination and guarantee fees, repayment plans and interest rate reductions for features such as automatic payment and on time payments.

The Federal Direct Loan Program uses the US Treasury to finance loans. The Department of Education earns revenue when the cost of the funds charged by the US Treasury is lower than the interest rate charge to the borrower, all other things being equal. FFELP relied on private lenders (both for-profit and non-profit) to finance the loans. Lenders would package their loans and sell them in the auction rate security market and earn fees for servicing them. These securities provided higher returns compared to other investments and were considered less risky because the Federal government in the case of default guaranteed them. In 2008 the auction rate security market evaporated after auctions failed, the securities did not sell for the minimum bid price. The Federal government did provide temporary financing with the stipulation that lenders would have to refinance the borrowed money, or give the loan back to the Department of Education by assigning the loan to one of the FDLP servicer. Lenders with access to capital were able to finance the loans they originated, but lenders without access to capital gave those loans back to the Department of Education.

The provisions in the Health Care and Education Reconciliation Act of 2010 reduced the fees paid for servicing the loans made under the FDLP. To reach the break-even point requires large-scale operations and the provision require servicers to have at least 1 million existing customers. Companies with less than 1 million customers could not increase the number of loans serviced to reduce variable costs and average total costs. Public companies like Sallie Mae and Nelnet have the ability to raise money through bond offerings and have a competitive advantage over private companies that can’t sell bonds. Only companies with these competitive advantages will survive the elimination of the Federal Family Education Loan Program.

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2012
01/01
CATEGORY
Education Reconciliation
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