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http://online.wsj.com/article/SB10001424127887323393804578555143...

I can usually tell how a bill will shake out just based on the leverage of different players and those that are lining up on different sides.

The compromise legislation will probably be something like 10 year treasury +.5%. It's possible that either side could get the other side to go their way with treasury +1%(or higher) or treasury +0%, but the people trying to stop this or actually even decrease fixed rates even more will lose since not doing anything means that they shoot up to double the rate fixed.

Thought this was material enough financial information to some people especially those looking at going to school or back to school to post.


P.S. I particularly laughed hard at the idiocy of Elizabeth Warren in this situation.


WSJ said:
If you think the federal student-loan program looks like a bad deal for taxpayers, imagine how it would look with honest accounting. And now you don't need to imagine thanks to a new report that's receiving far too little attention. Turns out that the official "savings" for taxpayers of $184 billion over the next decade really add up to $95 billion in losses.

Here's the scam: Lawmakers peddle what is a massive subsidy for universities while claiming that student loans generate a windfall for the taxpayer. This phony windfall is conjured by creative accounting that politicians mandated via the Federal Credit Reform Act of 1990. Specifically, the law requires a deliberate under-counting of the cost of defaults.

This is partly how a Democratic Congress and President Obama managed to enact ObamaCare in 2010 while claiming that their big entitlement expansion would reduce costs. The health plan was paired with legislation that made the U.S. Department of Education the originator of roughly 90% of all student loans, which in turn generated billions in imaginary budget "savings."

To its credit, the Congressional Budget Office has noted on various occasions that while the law forces it to use this Beltway math, CBO knows it's not accurate under fair-value accounting. And in a new report on the costs of student loans made in the decade ending in 2023, CBO quantifies the size of this discrepancy at $279 billion. CBO adds with its typically wry understatement that Washington's mandated accounting method "does not consider some costs borne by the government."

That's for sure. Now keep in mind that the $95 billion net loss for taxpayers happens under current law. This includes Monday's doubling of rates that pushed subsidized Stafford loans for undergrads up to 6.8% from 3.4%. Politicians on both sides of the aisle say they don't want the rate increase to stick, and they are working on a bipartisan compromise that would be retroactive to July 1.

It's too much to hope that the politicians will swear off fraudulent accounting or try to reduce defaults. But one positive development is a growing bipartisan consensus that student-loan rates should rise as the government's own costs of borrowing rise.

The House has already passed a bill that would prevent student rates from doubling but would also protect taxpayers in the future by floating the rates at some spread above the 10-year Treasury note rate, depending on the type of loan.

Senate liberals like Tom Harkin (D., Iowa) came into the debate demanding that subsidized Stafford loans remain at a fixed 3.4%. Freshman Elizabeth Warren (D., Mass.) even introduced a plan to lend to kids at the Federal Reserve's discount window rate, currently 0.75%. Senator Warren claims to understand finance, by the way.

Refreshingly, someone at the White House budget office figured out that offering low fixed rates to students could be disastrous as the Treasury's own borrowing costs start to go north. Since Mr. Obama and Democrats have driven private firms almost entirely out of this market, the private lenders can't be squeezed anymore to pay for the next round of subsidies. So the President's budget also calls for tying rates to the 10-year Treasury note, though his plan is more taxpayer-unfriendly than the House bill.

The President's baby step toward fiscal sanity seems to have caught his liberal allies by surprise. Hence the recent hilarious spectacle of Ms. Warren, a Democrat, resisting a GOP effort to force a vote on the President's proposal.

Ms. Warren feared the vote because moderate Democrats increasingly accept that rates have to be tied to something resembling economic reality. Last week Senators Joe Manchin (D., W.Va.) and Tom Carper (D., Del.) joined Maine Independent Angus King and Republicans Lamar Alexander, Richard Burr and Tom Coburn to introduce a compromise plan that ties rates to the 10-year Treasury.

But bitter-enders including Majority Leader Harry Reid still want to gore the taxpayer with a fixed 3.4% rate, financed by tax increases. When Congress returns after this week's recess, expect Mr. Reid to force a vote on a one-year extension of his sweetheart rate for colleges. Fortunately for taxpayers, the Senate will also likely vote on the bipartisan plan that moves toward market rates.

If Mr. Reid wins, a $95 billion taxpayer hit will look like a lowball estimate. Either way, you can count on politicians like him to keep claiming they're saving you money.

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Wasn't the default rate for variable interest mortgages a lot higher than it was for fixed interest mortgages?

larrymoencurly (Jul. 03, 2013 @ 9:36p) |

Why would private lenders have a less desirable mix of borrowers? Borrowers would include children of parents who are no... (more)

tbuccelli (Jul. 06, 2013 @ 1:57p) |

As with everything that the government does, the problem is that politicians (and most people) refuse to recognize the a... (more)

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Cliffs: FU 8% borrowers of the past 5 years. We are going to give away money to idiots to keep unemployment artificially low and redistribute wealth, keep the higher ed bubble going, and tax you more to fund it. Enjoy that 8% btw.

It's astonishing how subsidized government money is being used to provide country club living in $13k dorms.

Actually, its not astonishing at all.

Warren's by no means an idiot, just has a different set of priorities. She's explicitly saying that the Federal Gov't should heavily subsidize student borrowing. Choosing the discount window as the rate is a bit of theatrics, certainly. She absolutely understands that the discount window isn't the right risk-adjusted rate to use for student loans - she believes that student loans SHOULD be priced well below that risk-adjusted rate. Warren is a very smart, very analytical person. I certainly disagree with a lot of her policy priorities, but that's VERY different from saying she's dumb.

I think it was smart pandering on Warrens part. That whole 'we lend to banks at 0% but gouge students at 6.8%' argument got a lot of cheering from a lot of people.

Krazen1211 said:   It's astonishing how subsidized government money is being used to provide country club living in $13k dorms.

Actually, its not astonishing at all.
This is no different than anything else in life. Some people make good decisions, some make bad ones. Subsidized money has nothing to do with it.

Today's 10-year T-note is 2.47%, if you're curious. In comparison, the old pre-Bush era variable rates were based on the 91 day T-bill + 2.3-3.2% (depending on year and loan type). Today's 91-day T-Bill is a whopping 0.06%, which would correspond to rates of 2.4%-3.3%.

I agree that it is smart pandering on Warren's part. As a former student, I have issue with the 6.8% rate because it doesn't reflect the risk of borrowing. However, as a taxpayer I have issue with both Warren's fed window proposal as well as the 10-year treasury proposal because they are too low to reflect the actual cost of borrowing and the default rate. The student loan program should be revenue neutral. Is that really too much to ask of our representatives?

Kat009 said:   Today's 10-year T-note is 2.47%, if you're curious. In comparison, the old pre-Bush era variable rates were based on the 91 day T-bill + 2.3-3.2% (depending on year and loan type). Today's 91-day T-Bill is a whopping 0.06%, which would correspond to rates of 2.4%-3.3%.

I agree that it is smart pandering on Warren's part. As a former student, I have issue with the 6.8% rate because it doesn't reflect the risk of borrowing. However, as a taxpayer I have issue with both Warren's fed window proposal as well as the 10-year treasury proposal because they are too low to reflect the actual cost of borrowing and the default rate. The student loan program should be revenue neutral. Taxpayers shouldn't have to subsidize it, but at the same time it shouldn't be a cost center either. Is that really too much to ask of our representatives?


Not sure if serious, but if the government wasn't involved and guaranteeing all of these federal loans, the true risk of borrowing for an average college student over the past 5 years would be somewhere around 12%. If you're for true risk of borrowing then loans should be made based upon major and school prestige/reputation. Are you on board with that too?

jd2010 said:   
Not sure if serious, but if the government wasn't involved and guaranteeing all of these federal loans, the true risk of borrowing for an average college student over the past 5 years would be somewhere around 12%. If you're for true risk of borrowing then loans should be made based upon major and school prestige/reputation. Are you on board with that too?


Actually I would. People don't realize that price alters as well. I mean if you actually think you're getting 0% interest when you walk into a dealership to buy a new car then you're not very bright.

I would much rather pay $10k for tuition at 12% than $25k for tuition at .75%.


At the very least I think everybody should agree that given the current state of affairs that allowing a temporary switch to market pricing and underwriting of 12%+ underwriting based on major would be exactly the type of reality check that market needs at least briefly.

From there if it's so important to continue to inflate tuition prices through unlimited cheap credit after those 2 years knock yourself out, but I don't think anybody can really get away with saying that the current state of affairs in higher education is sane.

jd2010 said:   Kat009 said:   Today's 10-year T-note is 2.47%, if you're curious. In comparison, the old pre-Bush era variable rates were based on the 91 day T-bill + 2.3-3.2% (depending on year and loan type). Today's 91-day T-Bill is a whopping 0.06%, which would correspond to rates of 2.4%-3.3%.

I agree that it is smart pandering on Warren's part. As a former student, I have issue with the 6.8% rate because it doesn't reflect the risk of borrowing. However, as a taxpayer I have issue with both Warren's fed window proposal as well as the 10-year treasury proposal because they are too low to reflect the actual cost of borrowing and the default rate. The student loan program should be revenue neutral. Taxpayers shouldn't have to subsidize it, but at the same time it shouldn't be a cost center either. Is that really too much to ask of our representatives?


Not sure if serious, but if the government wasn't involved and guaranteeing all of these federal loans, the true cost of borrowing for an average college student over the past 5 years would be somewhere around 12%.


I've never seen any data that supports your claim of 12% interest rates. Do you have a link? If student loans were dischargeable in bankruptcy, then 12% is probably correct or slightly generous. Right now, private lenders charge about 10-12% and still manage to make a profit, and I would venture to say that the private lenders have a slightly less desireable mix of borrowers than does the federal government. So, I think your 12% estimate is probably too high, but it is just a hunch. I have seen no data on the matter.

Kat009 said:   Today's 10-year T-note is 2.47%, if you're curious. In comparison, the old pre-Bush era variable rates were based on the 91 day T-bill + 2.3-3.2% (depending on year and loan type). Today's 91-day T-Bill is a whopping 0.06%, which would correspond to rates of 2.4%-3.3%.

I agree that it is smart pandering on Warren's part. As a former student, I have issue with the 6.8% rate because it doesn't reflect the risk of borrowing. However, as a taxpayer I have issue with both Warren's fed window proposal as well as the 10-year treasury proposal because they are too low to reflect the actual cost of borrowing and the default rate. The student loan program should be revenue neutral. Is that really too much to ask of our representatives?


See original post. The program is actually -$95 billion in the hole.

jd2010 said:   Kat009 said:   Today's 10-year T-note is 2.47%, if you're curious. In comparison, the old pre-Bush era variable rates were based on the 91 day T-bill + 2.3-3.2% (depending on year and loan type). Today's 91-day T-Bill is a whopping 0.06%, which would correspond to rates of 2.4%-3.3%.

I agree that it is smart pandering on Warren's part. As a former student, I have issue with the 6.8% rate because it doesn't reflect the risk of borrowing. However, as a taxpayer I have issue with both Warren's fed window proposal as well as the 10-year treasury proposal because they are too low to reflect the actual cost of borrowing and the default rate. The student loan program should be revenue neutral. Taxpayers shouldn't have to subsidize it, but at the same time it shouldn't be a cost center either. Is that really too much to ask of our representatives?


Not sure if serious, but if the government wasn't involved and guaranteeing all of these federal loans, the true risk of borrowing for an average college student over the past 5 years would be somewhere around 12%. If you're for true risk of borrowing then loans should be made based upon major and school prestige/reputation. Are you on board with that too?



At this point, the government is actually issuing just about all the loans. The same government has prevented you from discharging them in bankruptcy for nearly 40 years.

But bitter-enders including Majority Leader Harry Reid still want to gore the taxpayer with a fixed 3.4% rate, financed by tax increases. When Congress returns after this week's recess, expect Mr. Reid to force a vote on a one-year extension of his sweetheart rate for colleges. Fortunately for taxpayers, the Senate will also likely vote on the bipartisan plan that moves toward market rates.

The current 10 year rate is ~2.5%. If the proposal ends up as 10 yr + 0.5%, it will be 3.0%, actually less than the current (pre-July 1) 3.4%. So with Reid arguing for a 1yr 3.4% fixed extension, how exactly is he trying to "gore the taxpayer" relative to the expected compromise legislation?

dewolfxy said:   But bitter-enders including Majority Leader Harry Reid still want to gore the taxpayer with a fixed 3.4% rate, financed by tax increases. When Congress returns after this week's recess, expect Mr. Reid to force a vote on a one-year extension of his sweetheart rate for colleges. Fortunately for taxpayers, the Senate will also likely vote on the bipartisan plan that moves toward market rates.

The current 10 year rate is ~2.5%. If the proposal ends up as 10 yr + 0.5%, it will be 3.0%, actually less than the current (pre-July 1) 3.4%. So with Reid arguing for a 1yr 3.4% fixed extension, how exactly is he trying to "gore the taxpayer" relative to the expected compromise legislation?


So if you believe that then am I to assume that you have an adjustable rate mortgage?

Clearly you must just think that a lender offering a lower rate for variable than fixed loan is just offering a discount for the variable and gouging the customer for a fixed rate loan.

Good luck with that understanding of interest rates.


kitty
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to quote yourself at: http://www.fatwallet.com/forums/finance/1282434/m17834601/#m1783...
is this now your blog?
no one cares about these threads about rebating dodads, begining china hoohaws, variable gizmos, etc etc

So hypothetically you wouldn't care if the mortgage you were planning on getting is going to end up being variable interest instead of fixed? Oops my mistake. I thought this was a place for people who cared about practical financial topics that impact their lives, but I guess not when it comes to you, huh?

rice a roni, amarone, phoney baloney, abalone, rigatoni!

dshibb said:   dewolfxy said:   But bitter-enders including Majority Leader Harry Reid still want to gore the taxpayer with a fixed 3.4% rate, financed by tax increases. When Congress returns after this week's recess, expect Mr. Reid to force a vote on a one-year extension of his sweetheart rate for colleges. Fortunately for taxpayers, the Senate will also likely vote on the bipartisan plan that moves toward market rates.

The current 10 year rate is ~2.5%. If the proposal ends up as 10 yr + 0.5%, it will be 3.0%, actually less than the current (pre-July 1) 3.4%. So with Reid arguing for a 1yr 3.4% fixed extension, how exactly is he trying to "gore the taxpayer" relative to the expected compromise legislation?


So if you believe that then am I to assume that you have an adjustable rate mortgage?

Clearly you must just think that a lender offering a lower rate for variable than fixed loan is just offering a discount for the variable and gouging the customer for a fixed rate loan.

Good luck with that understanding of interest rates.


You're such a friendly, positive guy! It's hard to imagine how anyone could be rubbed the wrong way by your posts! I would imagine you're even more of a pleasure to interact with in person!

OIiverQuackenbush said:   to quote yourself at: http://www.fatwallet.com/forums/finance/1282434/m17834601/#m1783...
is this now your blog?
no one cares about these threads about rebating dodads, begining china hoohaws, variable gizmos, etc etc
I rather read some well thought out blog than your trolling to derail some good discussions.


dshibb
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oliver
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dshibb said:   jd2010 said:   
Not sure if serious, but if the government wasn't involved and guaranteeing all of these federal loans, the true risk of borrowing for an average college student over the past 5 years would be somewhere around 12%. If you're for true risk of borrowing then loans should be made based upon major and school prestige/reputation. Are you on board with that too?


Actually I would. People don't realize that price alters as well. I mean if you actually think you're getting 0% interest when you walk into a dealership to buy a new car then you're not very bright.

I would much rather pay $10k for tuition at 12% than $25k for tuition at .75%.


At the very least I think everybody should agree that given the current state of affairs that allowing a temporary switch to market pricing and underwriting of 12%+ underwriting based on major would be exactly the type of reality check that market needs at least briefly.

From there if it's so important to continue to inflate tuition prices through unlimited cheap credit after those 2 years knock yourself out, but I don't think anybody can really get away with saying that the current state of affairs in higher education is sane.


Amen to that. As a student I took subsidized loans in 98-2002 along with grants, federal work-study program money, and applied to dozens of scholarships knowing I could land 1 out of 10. Paid for grad school using App-O-Ramas.

Cheap student loan rates provide none/very little incentive for borrowers (students) to pay back since they have been desensitized to low rates. We need a balance between the atrocious credit card rates and zero percent. 10% seems like a good rate to me.

Recently I checked the in-state undergraduate tuition at my alma mater and was shocked to see it had gone up 135% since I graduated 11 years ago, and this is in Florida which has some of the cheapest in-state tuition rates in the nation. Mostly to pay for fancy dorms and fine dining establishments considering the campus is in a well-developed metro area. And a brand spanking new athletics center for a mediocre football team and sub-par basketball and baseball teams. The educational standard of the university hasn't been raised. And the university president and her cronies make huge coin. Universities and colleges aren't in it to educate the future heirs of this country; they're just a big business selling their brand and product to naive customers just out of high school, some barely.

I hope they have a provision to allow student loan defaults and bankruptcy protection like any market driven loans. That way the taxpayers can pick-up a bigger share of this shit.

siyer68 said:   I hope they have a provision to allow student loan defaults and bankruptcy protection like any market driven loans. That way the taxpayers can pick-up a bigger share of this shit.

EXACTLY! The government has no business being in the student loan business. The government is too big and too intrusive. Everything revolves around votes. money and power. You're guaranteed a job and gain power when people become dependent on the government. People won't vote out Santa Claus.

Wasn't the default rate for variable interest mortgages a lot higher than it was for fixed interest mortgages?

Kat009 said:   
I've never seen any data that supports your claim of 12% interest rates. Do you have a link? If student loans were dischargeable in bankruptcy, then 12% is probably correct or slightly generous. Right now, private lenders charge about 10-12% and still manage to make a profit, and I would venture to say that the private lenders have a slightly less desireable mix of borrowers than does the federal government. So, I think your 12% estimate is probably too high, but it is just a hunch. I have seen no data on the matter.


Why would private lenders have a less desirable mix of borrowers? Borrowers would include children of parents who are now making upper middle class incomes - those that cannot just write a check for college, yet do not have the extra $20K-$30K in income lying around to pay for colleges for multiple children.

As with everything that the government does, the problem is that politicians (and most people) refuse to recognize the actual dollar cost of this program. Student loans are similar to social security. If there was actually a SS trust fund that was managed to actuarial standards, I could at least begrudgingly accept its existence. If the government was in the student lending business and people actually recognized the costs of having the government make loans to people with little/no real world experience at the cost of a BMW (whether it's a 3 series or a 7 series really depends on the school) and appropriately accounting for losses, I could deal with it.

As is, the country is pretty much going to have to inflate it's way out of the student loan bubble with the government taking huge losses. I think that if there is another president similar to Obama, he/she will run on a platform of forgiving some huge percentage of student loans getting a huge boost from idiots in their 20-30's who ran up $100k for their Bachelors in Humanities and would love to not have to pay back what they borrowed.



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