Student Loans. Student Loans are becoming an issue for higher education students in general. According to the New York Post (2011), two-thirds of all undergraduates have student loans obligations, and that number continues to grow. Without a true long-term solution to higher education funding, individual borrowing costs could surpass mortgage loan obligations in twenty years (New York Post, 2011).
Before July 1, 2010, students who needed to borrow money had to access federal loans through third party financial leaders (i.e., banks). Banks were allowed to charge fees and a higher interest rate, than the rate they borrowed it at, based off two lending benchmarks. Those benchmarks were the Prime Rate and the London Interbank Offered Rate (LIBOR). Fortunately, the federal government changed that policy in 2010. Now, when students need federal loans, they are able to get them directly from the federal government through the schools financial aid office (FinAid, n.d.).
Under today’s standards, students are charged an interest rate that is similar to the standards before July 1, 2010. Thus, the real different was cutting out the third-party lenders’ fees and the third party participants. However, one thing the federal government could do to assist students is treating them like they do banks. Under the discount window program, banks are able to borrow money from the federal government at the fed funds rate. Currently, that rate is -0-%. Essentially, this is free money to the banks. They borrow at 0% and charge others 3-6% more, in today’s time. However, why should students not be able to borrow at the fed funds rate? If this was possible, then each student could be able to save thousands of dollars over the life of their loans. Thus, reducing the burden of their overall obligation, and giving them more discretionary income. If this were possible, society could make a dent in the borrowing issues most students and families face.
FinAid (n.d.) Retrieved from, http://www.finaid.org/loans/
New York Post. (2011). Burden of college loans on graduates grows. Retrieved October 25, 2011 from, http://www.nytimes.com/2011/04/12/education/12college.html
The day the banks stop charging high interest rates on free money received from the government will be the day that all of society changes. Unfortunately there is a side of me that does believe it will be in the best interest in the world as we know, but it is necessary in order to ensure higher education is more accessible to a more broad population.
ReplyDeleteSo let's see how long this temporary absence of middle man will hold. In between time, I guess we are stuck with the colleges and Feds making money off of our tax paying money.
I like the idea of very low to no interest loans. Other countries, esp. in Europe have very low interest (UK) and Germany (zero). However, were you intending that these loans be need restricted or would current policies apply? If current eligibility were maintained, I would expect cost disease to increase, as institutions (especially private) would know that students could afford to pay more! If current eligibility were somewhat restricted to needs based, then I really, really like your idea of very low interest loans based on Federals funds rates. Would you charge interest if the loan goes into default, as there is a high default rate of about 7% in the US?
ReplyDeletePaul Watkins
You are right Paul, colleges would increase their cost basis based on said knowledge; thus, I'm mostly thinking about the repayment style (at the window) versus the interest rate that is set up by the fed for the (7 to 8.5 %) section they currently have. That section should be the same as the 'discount window.'
ReplyDeleteEven though the 'window's' interest rate does fluctuate, it is much lower than 5% on a historical average. Plus, by getting it from the 'window' there are no underwriting costs associated with the loan (no spread that banks charge). It still means that the fed is responsible for the loan, just like now, but the interest rate would be much lower.
You bring a good perspective to consider, from a loan standpoint though. Something that would need to be addressed if this occurred.