Sunday, December 2, 2012

Student Loans ... Government Makes Getting Them Easy ... Too Easy

Student loans outstanding now exceed $1 trillion and are greater than consumer credit card loans outstanding.

We may have another housing type bubble in the making as anybody who wants a student loan can get one, and there essentially are no credit standards. But while borrowing is a no-brainer, later that borrowing may turn out to have been a no-brain of a deal, as the borrower is stuck with the problem of repaying the loan, whether he "invested" wisely and received his money's worth or not.

To me this whole thing resembles the recent housing fiasco -- individuals borrowing in excess to make a can't lose "investment," and which investment ends up being a loser. The student loan issues won't be nearly as big of an economy wide problem as the bursting of the housing bubble has been, of course, but the problems are very much alike. And for the unlucky borrowers, the problem of repayment or default will prove to be a huge worry down the road.

But the amount of student loans outstanding is not the focus of this posting. Instead let's use the growing student loan fiasco to tell the story of how harmful OPM government knows best spending and lending is to an economy and to a naive, unsuspecting and often financially unsophisticated group of young citizens. And some old ones, too.

President Obama wanted to cut out the "expensive" private sector "middlemen" when government took over the student loans in 2010, and promised that this government based financially sound maneuver would save the taxpayers money. That's because the government knows best gang could do it for less cost than the greedy profit seeking middlemen were charging. Boy, was he wrong about that!

In fact, government isn't, never has been and never will be as efficient with its OPM spending and lending compared to private sector participants investing MOM. It's just that simple.

Mr. Obama's belief that eliminating the private sector middlemen would save money in the managing student loans is a very naive approach, to put it charitably. With the government now in effect passing out easy to obtain money to student borrowers, there are essentially no credit standards being applied. The "new deal" is simple. Anyone who applies receives a loan. And government bureaucrats, always an inefficient group, administer the process at a cost undoubtedly higher than the private sector "middlemen" experienced.

Although at the outset this ease of borrowing  may sound to the uninformed like a happy state of affairs for students, it far too often ends up being a nightmare. In the event, both student loans outstanding and defaults on those loans have exploded since the 2010 government takeover.

And guess what happens now, my fellow taxpayers? We'll be getting the bill for all this "savings."

And in the end, all this government control, lending and middlemen elimination will also result in higher tuition and a higher cost of college attendance. In other words, taxpayers will pay much of the bill again. But what it absolutely won't do is make any positive  difference to educational attainment or limiting our nation's increasingly out-of-control college costs. 

In sum, things are going to get a whole lot worse now that the private sector "middlemen" have been eliminated by President Obama in his effort to save students and taxpayers money.

Here's part of what Federal Student Lending Swells has to say about the developing situation:

"The federal lending program designed to make college education available to everyone is creating a pile of debt so large it is fanning worries that it has become too easy to borrow too much.

U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter, the Federal Reserve Bank of New York said Tuesday. Overall household borrowing fell during that period.


Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June, a rate that now exceeds that for credit cards. Delinquency rates for all other consumer-debt categories fell or were flat.

Nearly all student loans—93% of them last year—are made directly by the government, which asks little or nothing about borrowers' ability to repay, or about what sort of education they intend to pursue.

President Barack Obama championed easy-to-get loans during the campaign, calling higher education "an economic imperative in the 21st century." A spokesman for Education Secretary Arne Duncan said the goal is "to make student loans available to as many people as possible," and requiring minimum credit scores would block many Americans from going to college.

But rising student-debt burdens and stories about students and parents drowning in debt, coming just a few years after aggressive mortgage lending triggered a financial crisis, is focusing attention on risks to the government and borrowers.

"Is there any way the federal government could possibly come out to the good?" Sen. Bob Corker (R., Tenn.) asked at a Senate Banking Committee hearing in July on student loans, noting that the government demands no collateral and has no underwriting requirements. "What we're really doing is piling up debt down the road the same students are going to have to pay off."

Others are asking whether the government is encouraging students to take on too much debt. "The way the system works now…put money on the stump, people come and get it," said Anthony Carnevale, director of Georgetown University's Center on Education and the Workforce. "Can't blame them. It's sitting out there in plain view. It's easy to get."

Unlike most other types of consumer credit, student debt is extremely difficult to discharge in bankruptcy. After falling behind on payments, a borrower typically finds it harder to obtain other types of consumer loans, or can only do so at higher interest rates.

Moody's economist Cristian deRitis earlier this year warned of the prospect of a wave of future student-loan defaults that could have a "crippling effect on the ability of many households to access credit in the future.". . .

Student lending grew rapidly in the 2000s, as did other consumer borrowing. The bulk of the loans were made by private lenders and guaranteed by the federal government. In 2010, in a money-saving effort pushed by Mr. Obama, Congress cut out the private middlemen and had the federal government start making loans directly.

Since the end of 2007, just before the financial crisis hit, total student debt has grown by more than 56%, adjusted for inflation, the new Fed data show. During that time, overall household debt—including mortgages, student loans, auto loans and credit cards—fell by 18%, to $11.31 trillion as of Sept. 30.

Earlier this year, New York Fed researchers said that their reported delinquency figures understate the problem because many borrowers are not yet required to make payments, either because they are still in school or have been granted a postponement. The unemployed, for example, can defer payments for a limited period.

Jackson Toby, a retired Rutgers University sociologist and adjunct scholar at the conservative American Enterprise Institute, said the federal-loan programs are "just putting a millstone around their necks" by saddling borrowers with debt without regard for their ability to repay it."

Summing Up

Government as a good steward of the taxpayers' money? Are you kidding?

Government as a lower cost and more efficient administrator than the private sector? Are you kidding?

OPM is better controlled than MOM? That's nuts!

Unsuspecting students and parents having faith in the fiduciary responsibilities of government and college officials, and proceeding to take on genuinely burdensome student loans, but not knowing at the outset exactly what future obligations they're assuming?

That's the really scary part about this.

Financial literacy is a must. Let's all take the course.

Thanks. Bob.

No comments:

Post a Comment