Government Student Loan Profiteering

NCPA August 28, 2013

In late May President Barack Obama warned that unless Congress took action soon, the relatively low 3.4 percent interest rates on key federal student loans would double, says Matt Taibbi of Rolling Stone Magazine.

• The Republicans and Democrats are snuggled in bed together on student loans, having hatched a quick-fix plan on July 31st to peg interest rates to Treasury rates, ensuring the rate for undergrads would only rise to 3.86 percent for the coming year.
• The Congressional Budget Office projections predicted interest rates on undergraduate loans under the new plan would still rise as high as 7.25 percent within five years, while graduate loans could reach an even higher 8.8 percent.

While it's not commonly discussed on the Hill, the government actually stands to make an enormous profit on the president's new federal student loan system -- an estimated $184 billion over 10 years, a boondoggle paid for by hyper-inflated tuition costs and fueled by a government-sponsored predatory-lending program that makes even the most ruthless private credit-card company seem like a "Save the Panda" charity. Why is this happening? The answer lies in a marriage of private-sector greed and government force.

• Tuition costs at public and private colleges were, are and have been rising faster than just about anything in American society -- health care, energy, even housing.
• Between 1950 and 1970, sending a kid to a public university cost about 4 percent of an American family's annual income.
• Forty years later, in 2010, it accounted for 11 percent.
• Moody's released statistics showing tuition and fees rising 300 percent versus the Consumer Price Index between 1990 and 2011.

Not only has Congress almost completely stripped students of their right to disgorge their debts through bankruptcy, it has also restricted the students' ability to refinance loans. Even Truth in Lending Act requirements (which normally require lenders to fully disclose future costs to would-be customers) don't cover certain student loans. That student lenders can escape from such requirements is especially pernicious, given that their pool of borrowers are typically one step removed from being children, but the law goes further than that and tacitly permits lenders to deceive their teenage clients.

Source: Matt Taibbi, "Ripping Off Young America: The College-Loan Scandal," Rolling Stone Magazine, August 15, 2013.