May 8, 2008
The Government "Fix" of the Student Loan Mess
Congress has decided to "fix" the student loan mess by purchasing those student loans that it guarantees against default (technically the guarantee is only for 90% of the default). Direct government lending now accounts for only 22 percent or so of total student loans. The argument is that the purchase money will go to banks who can make more loans. There are multiple problems: 1) many lenders have left the market leaving only one -- the government chartered Salle Mae corporation. Salle Mae has close to 80 percent of the guaranteed federal loan market. Salle Mae is a) losing money and b) very poorly managed. If Salle Mae continues to struggle we will have another call for a federal bailout. and 2) underappreciated, greatly underappreciated, is the problem the federal government will have managing a complex loan portfolio. Guaranteeing loans is one thing, managing loans is another. My guess is that the government will outsource the loans and pay a management fee to a company that the government does not monitor. [E.g., Blackstone's job of handling the sub-prime loans picked up by the government in the government brokered Bear Stearns deal.] This is not a solution folks.
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Thanks for the post, Professor Oesterle.
I'm a financial analyst who has been following the student loan industry for a few months now.
Re: "My guess is that the government will outsource the loans and pay a management fee to a company that the government does not monitor."
How does this square away with the following in the recently signed H.R. 5715, in the section granting temporary authority to the DoE to purchase loans:
"any purchase under this section shall not result in any net cost to the Federal Government (including the cost of servicing the loans purchased)...."
Would outsourcing the loans for a fee run afoul of the "net cost" exception above?
Posted by: Prashant | May 8, 2008 9:57:37 AM
Paying for college is already tough enough.
But with banks tightening their belts, students who rely on private loans find it even tougher to fund their education.
I would like to know how "fixing" of the student loan mess would help the students?
Will it help in reducing the burden of repaying the loan after graduation..??
Posted by: Aditi | May 9, 2008 12:23:25 AM