Monday, March 19, 2012

Student Loans and Government as Lender ... the Joke's on Taxpayers

The Bill for ObamaLoans describes the all too predictable developing student loan fiasco.

Today about one of every four student borrowers has past due balances. That already horribly high number will only grow now that the federal government is in charge:

"A recent report from the Federal Reserve Bank of New York has the disturbing details for taxpayers.

Thanks to President Obama, the government now stands behind almost the entire student-loan market. That debt pile is expanding fast and it turns out the borrowers are less reliable than advertised.

Here's how New York Fed economists describe them: "Of the 37 million borrowers who have outstanding student loan balances as of third-quarter 2011, 14.4 percent, or about 5.4 million borrowers, have at least one past due student loan account." That adds up to past-due balances of about $85 billion, or roughly 10% of total student loans, which is about the same past-due rate for other types of household debt such as mortgages, credit cards and auto loans.

Not bad, taxpayers might conclude, considering the government is handing out student loans regardless of credit history or ability to repay. But the researchers dug deeper.

"Does this mean that the prospects for student loan delinquencies are similar to those for the household debt in general, and thus no special attention is warranted?" asks the New York Fed. "Unfortunately, this is not the case—some special accounting used for student loans, not applicable to other types of consumer debt, makes it likely that the delinquency rates for student loans are understated."

Are they ever. After correcting for this "special accounting," says the Fed study, "We find that 27 percent of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21 percent—much higher than the unadjusted rates of 14.4 percent and 10 percent, respectively."

So student loan borrowers are roughly twice as likely to fall behind on their payments as borrowers for other types of consumer credit. And, thanks to decades of bipartisan support for taxpayer-backed student loans—and a recent acceleration in federal subsidies driven by Mr. Obama—this is a rare category of consumer debt that continues to grow. Total student-loan debt has grown to almost $870 billion and is now larger than the total of U.S. consumer credit-card balances ($693 billion) or auto loans ($730 billion).

The Fed economists acknowledge that they may not have a precise handle on the scale of student delinquencies, given the idiosyncracies of this government-controlled market. For example, Washington's increasingly popular "income-based repayment" options, which allow people to defer payments without being categorized as delinquent, make it difficult to get an accurate count of the deadbeats.

Also unclear is the impact of an expanded debt-forgiveness program for student loans enacted along with ObamaCare that was scheduled to begin in 2014. But last year Mr. Obama told a cheering crowd of students in Denver that he plans to make the forgiveness provisions available this year.

On Tuesday, the Congressional Budget Office disclosed that the gross cost of ObamaCare over a decade is $1.762 trillion, up from $930 billion when it passed. Just wait until we discover the true cost of ObamaLoans."

Summing Up

Why would we anticipate anything other than a fiasco with student loans? Government programs have a way of wasting taxpayer money.

But when loans are granted to students with no credit history or track record of borrowing and repaying, loaning is little more than a crapshoot.

To my knowledge, the government lending criteria are minimal, if that, to secure a student loan. It's like spending OPM on steroids.

Besides, the college sits in the spectator's position of not having to vet the borrower's ability to achieve success in college.

And for sure, nobody considers the likelihood that the borrower upon graduation will secure a job with sufficient earnings to pay off his loan as stipulated in the loan agreement.

Government loans to students very often will turn out to be a joke, and the joke will be on both students and taxpayers.

At that later time taxpayers will be asked to pay some more, and government officials will say it's only fair that they do so.

But it's not fair. Not even close.

Thanks. Bob.

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