Tuesday, February 06, 2007

"A Bid for Better Loans" and Real Risk

Michael Dannenberg and Phillip Longman over at the New America Foundation published a piece in yesterday's Washington Post about college loans and the veritable black hole these loans make that public funds can't escape. The pubic assumption of private risk is an ongoing issue in the financial aid literature, so I'm glad to see the issue gaining more popular press.

Dannenberg and Longman's piece, "A Bid for Better Loans," offers a succinct roundup of the funding crisis (yes I think this is a BIG deal). I first became acquainted with the debate through Art Hauptman's work. If you have a Chronicle subscription check out Hauptman's 2005 piece "College: Still Not for the Needy?"
"A Bid for Better Loans"argues that since there is no functioning market for private loans to compete in (the federal government guarantees all student loans borrowed under its numerous loan programs) there is no way to know how low banks might go in reducing rates for their clients, student and parent borrowers. Beyond the obvious savings that come with interest rate reductions for borrowers, the federal government would no longer incur all the risk for the private lenders.

Back when many federal loan programs were cutting their teeth powerful bank and lending lobbies pushed hard for guarantees that their generosity toward high risk borrowers would ensure rewards. The federal government complied and currently bankrolls default loans and provides a minimum guarantee to lenders on returns. Sallie Mae, owner of nearly half of America's student loans, according to Dannenberg and Longman,
"makes a 43 percent return on its cost of capital while incurring virtually no risk." Federal loan lenders live a charmed life indeed.

Dannenberg and Longman cogently argue against incremental change, i.e. the modest reduction in interest rates approved by the Democratic Congress, and argue for measurable changes that would allow for more competition for borrower dollars. There's enough of us and college is sufficiently pricey that many of us have no choice but to borrow. As a borrower and a tax payer I have twice assumed risk for my college education--last time I checked Citibank didn't assume any risk.

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