Tuesday, April 20, 2004

Kerry's shows a way to a better tomorow: free college

Kerry proposes a plan that would result in a free college education in return for public service. Let's deconstruct ...

The problem is stated as "ending a $13 billion 'windfall' that banks earn for making government-backed student loans."

How does it get this "windfall"? Glad you asked. "The federal government guarantees student loans at an interest rate of 3.4%. If bank collections fall below that level, the federal government will make up the difference. With real interest rates higher than that level and collection levels relatively high banks are essentially guaranteed a profit under the program. This is a windfall that creates excess profits for the banks" Kerry said.

I see no claim of usury or even premium interest rates on the student loans. I see no guaranty of market-prevailing rates to an unproven class of credit risks. I do see social engineering in the federal law - you go to college, get an education, and we will see to it that you can get a loan - with one proviso: you have to pay it back!!

So at what interest rate are these loans made? Glad you asked. The rates to students are 3.42% and parents at 4.22%. Inflation takes at least half the rate, then figure administration costs, lost opportunity ... where is the room for a windfall?

These rates are slightly less than prevailing home equity rates, but in the neighborhood. How many kids own homes? If their parents are not getting involved, then the loan will be a personal one - move about that site and you will find personal rates are over 13%. Now there's a windfall for you ...

And this "windfall," let me understand because it is confusing me, this "windfall" exists because college students are paying back their loans? So if they didn't, the banks would get the same sub-market return, a "windgap" let's say, and that would be good? So the issue is removing the credit risk? But you compelled the removal of the credit risk by requiring a sub-market interest rate. Part of a higher interest rate is to offset credit risk.

Let's see .. make sub-market loan to protected class, realize "windfall," bad; lose money on sub-market loan, achieve "windgap," bad. High payback rate = Windfall = bad. High default rate = Windgap = good. Sub-market loan = Windfall. Lose on cost of loan = Windfall. Windfall = profit. Lose = profit. Lose = good. Windfall = Windgap. High payback rate = High default rate ... This guy makes my head ache ...

Isn't the long run issue the education of America?

Next, the solution. Kerry proposes that a student - instead of getting a loan that is somehow or another resulting in a windfall to a bank - would now have the tuition paid directly by the federal government. In return, the student would work for the federal government, unpaid, full-time for two years.

OK, doing what? Roadside cleaning crews? State issue. Volunteering to help some needy folks do whatever? OK, so we can make it up. But these are the same kids that could not afford college and needed a loan. I know these kids today - I teach at a community college. Most of my students have jobs - and these are kids just out of high school. How can they feed, house, and clothe themselves for two years? Will Kerry put the burden back on the parents until the kid is 24 - and thereby adjust the tax code to allow for dependency?

The depth of dysfunction in this proposal is astounding.

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