Finance types may snicker. But I’ve seen this question asked fairly often, and it seems worth answering, respectfully, for people whose expertise and interest lie outside the realm of economics.
The short answer is: “Loans are not priced in real life the way they are in Sunday School stories.” In a Sunday School story, the cheapest loans would go to the nicest people with the noblest use for the money: single mothers who need money to buy their kids a Christmas present, say.
That’s splendid for the recipient. But what about the lender? Let’s say you had $150 that you really needed to have at the end of the month, say to pay your rent. Would you want to lend it to the single mother whose income is stretched so tight that she needs to borrow money for Christmas presents, or would you want to lend it to some heartless leech of a securities litigator with an 800 credit rating who happens to have left his wallet at home? C’mon. You know the answer; you just don’t want to say it. If you really need the money -- if you cannot afford to turn your loan into a gift -- then you lend it to the better credit risk with the higher income, not the person who may find themselves too short to pay you when the loan comes due.
In aggregate, most of the money in your savings account is loaned out using this cold calculus, and unless you could afford to have that contents of that account suddenly vanish, you want it to be. That’s why poor people, on top of all the other unfairness heaped upon them, pay higher interest rates. And that is why secured loans, like mortgages, get lower interest rates than unsecured loans, like credit card balances and student loans. (read more)
Via Instapundit
19 comments:
The interest rate on student loans is kept artificially high by the federal government, which took over all student loan programs from banks and other lenders. The takeover was part of the Healthcare Reform Act of 2010, aka Obamacare.
There used to be competition for the student loan business, but now there is none. That competition helped keep interest rates lower, just as competition does for mortgage interest rates. There is no real competition for student loan origination, and the government charges whatever the hell it wants to charge.
It has nothing at all to do with healthcare, does it?
What is is is a cheap and obvious ploy to lock in the college-age voters. An incumbent president seeking re-election, or a democrat candidate in an open election can garner student votes by promising the idiot that s/he will lower student loan interest rates, of better yet, provide free college! In reality, there will never be "free college" and the mopes will be happy to accept having a point shaved off of their already usurious interest rates.
Liberals, especially young liberals, are suckers. Suckers who have no real knowledge of how badly they get played by the political party to which they have pledged unending and unthinking political fidelity.
I'd like to carpet bomb college campuses with Dave Ramsey DVDs. But then, I'd be called a h8ter.
"The trouble with our liberal friends is not that they are ignorant, but that they know so much that isn't so." ~ Ronald Reagan from Josh Billings
Rational loan decisions are neither cold nor unfair. They are actually spurs to getting your act together.
That’s why poor people, on top of all the other unfairness heaped upon them, pay higher interest rates. And that is why secured loans, like mortgages, get lower interest rates than unsecured loans, like credit card balances and student loans
THIS THIS THIS!!!!!
One of the main reasons for the financial subprime mortgage melt down is that the government INSISTED that banks make bad loans to high risk people in areas where property values were shaky at best. Loans far far above the ability of people to repay on sub standard properties to sub standard borrowers. INSISTED and that those rates be at the same level as for those good credit risk borrowers.
The banks are using depositors funds to make these loans and to mitigate the FORCED risk they were taking the banks then sold those loans off to packagers who created the CMO (Collateralized Mortgage Obligation) financial products.
The CMOs were then resold to borrowers who wanted to get a higher interest rate return and were traded on the exchanges.
The smart traders knew just what portion of the CMO was junk and the honest brokers informed their clients. When I was in the biz, I always let my clients know that there was a portion of the portfolio that might never "pay off" (the loans would go bad and there would be NO cash flow). If that happened the value of their shares in the CMO could crash and their income return could be much less than offered. There was no real guarantee of return....or there could be a great return if you get lucky and the market doesn't collapse....... "So, Mr. Client.....are you ready to take this risk? With a portion of your investment? Really? OK then. Please sign this disclosure that we discussed these risks and you understand them."
Anyone who doesn't understand that loans are based on risk and are priced accordingly is a really really stupid person who wants to ignore reality.
As a former commercial lender we used the 4 Cs of lending. This is really how ALL loans are/or were before government intervention were priced.
Character: what is your credit score. Do you pay back your loans? Pay your bills on time? Are you over come with debt and unable to handle your own finances?
Capacity: What kind of cash flow do you have? In a business or personal life. Do you have the ability to make this payment. What are your other obligations?
Capital: What are the assets of the business? What do you own that could, in an emergency, be converted to cash. Ditto for personal loans. Do you own your house and have equity? Do you have savings, investments.
Collateral: Why are we making this loan? Buying a house...we get collateral in the property so that if you default at least the bank gets something. Buying a car? When there is collateral the loan percentage can be lower because there is less risk. Making a loan to someone on a wing and a prayer will cost you more because I am taking more risk....with other people's money to be clear.
Loan to a student who hasn't even graduated, who has zero guarantee of a job, who is likely taking some stupid courses in a major that has no chance of getting a job, who has no credit history, who owns nothing, who is more than likely to default......the lender will and should charge more.
Because the government is subsidizing the bad loans with the money taken from working taxpayers, there is always going to be a bubble and melt down. Economics 101 and human nature. You can't fight either of those.
Current rates on undergrad fed loans are 4.29% fixed. That's based on the 10 year T-bill rate plus 2.05% and set for the full year each spring. There's a rate cap of 8.25% for when interest rates go up in the future.
Obama-Hillary voters are the ultimate suckers. The ultimate in brainwashed stupidity.
Embrace the fascist government suck.
How come bank loans are described as predatory, and student loans are considered investments in your future? Aren't colleges running some kind of scam on impressionable young people?....,,,I worked my way through college. English major with philosophy minor. I think such an academic background gives you the understanding and vocabulary necessary to digest the utter futility and pointlessness of a college education.
Predatory loans to pay for predatory costs of tuition, housing and food. Seriously, who finances a meal plan over 20 years? Or apartment rental? It is predatory at the very least, and more likely verges on the criminal.
Especially when a university holds hundreds of millions, or tens of billions of dollars in so-called endowment accounts. "Endowments" is a word universities use to avoid the use of the word "profits" which would impair their tax-exempt statue, and also microaggress students who feel all icky about profits.
Current rates on undergrad fed loans are 4.29% fixed.
That is sort of beside the point. Many of the Student's loans are subsidized by the government and are highly subject to default. Just exactly like the sub prime mortgage loans that caused the 2008 melt down.
You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?”
The real point is that Bernie Sanders (and pretty much most liberals) is an economic idiot. Given the chance he will enact the same policies that have been proven to be failures and that will drive us into a deeper recession or even a depression with more bursting economic bubbles created by subsidizing bad decisions and bad lifestyle choices.
Universities and colleges should lock down a student's transcript if the student goes into default on a student loan.
Want your transcript sent to a prospective employer? Fine. Then make your loan payments, Buttercup.
This explains it.
The problem isn't the interest rate - its the massive amount of the Student loan. Why does College cost so much? And why is no interested in making it cheaper?
Instead the liberals want more subsidies and the Conservatives want the status quo.
Me: Ditto re: Haz and DBQ.
And also with regard to lower ed.
And so, so, so much more.
Here in Wisconsin Scott Walker had the university system books auditedfive years ago and found a hidden billion dollar slush fund. He ordered a tuition freeze four years ago, and tuition at all UW schools has been held at that level for four years. While (some) parents have been very grateful, faculty has juiced up student anger with tales of woe an misery, none of which are actually true. But the little dopes believe them, so they protest against their own interests.
A different study found that UW tenured professors teach on average 6 hours per week, and spend on average an additional 2 hours per week in their offices. For this they are very well paid. A member of the state legislature suggested that if each prof taught one more class per week, big improvements could be made to the UW budget. All hell broke loose with protests and vile invective.
Last year Walker's budget proposed a 3% cut in state funding for the UW system. After taking tuition and other revenues into account, this amounted to a 1% cut. All hell broke loose once again. Meanwhile, the chancellors of several non-Madison UW schools dug in and found numerous areas where costs could be reduced by combining HR departments, purchasing, etc. so they did that. But the commies in Madison refused to do likewise.
The point is: Universities and university systems are hellaciously bloated with inefficiencies and unnecessary costs, and fight any attempts to change their cost structure. And idiot students who have to borrow obscene amounts of money will enthusiastically protest against their own interests while the should be doing the exact opposite.
And parents, the alleged adults, who would never pay sticker price for a new car, happily watch as their kids pay sticker price for tuition, room, board, and the "college experience". On a 20 year payback schedule. A lot of dumb people go to college.
That is perfect, Bagoh.
I'd be thrilled if Scott Walker was our president.
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