Student-Loan Refinancing Boom Could Cost U.S. Taxpayers Billions | Hacker News Reader

Student-Loan Refinancing Boom Could Cost U.S. Taxpayers Billions

bloomberg.com

52 pointsrandomname287 comments

Isn't education something that US taxpayer should choose to pay for?

It doesn't seem right that the government is charging students - taxpayers - un unfairly high rate of interest, one so high that commercial lenders can typically undercut the rate by a significant margin.

That's stealing from Peter to pay Paul.

The government should reconsider whether it's right to charge such a high amount to students remaining on the plan, that is, the students who don't qualify for refinancing. Isn't this just an exercise in taking money away from the poor?

Taxpayers haven't chosen to pay for unlimited, private post-secondary education. If they did, the loans wouldn't be necessary.

You could also fault the institutions for charging so much -- or fault the students for enrolling in programs they couldn't afford.

The government caused this mess in the first place by spurring the vast cost inflation in the system.

The solution, to both this scenario, and the broader issue, is simple:

1) Begin squeezing the cost of education back down, by no longer increasing the amount of money the government will guarantee on student loans, and then eventually reversing that and reducing the sum.

2) We'll abuse the dollar reserve standard for war, bank bailouts, homeowner bailouts, etc. We might as well abuse it for dirt cheap refinancing of student loans (while simultaneously capping and then reducing the central problem of the inflation from the govt guarantee). The government should reduce the cost of student loan interest to 2% fixed for everyone.

3) Begin implementing broader reforms that will affect the next generation of students, to put an end to the cost inflation and begin bending the cost back down to where it was equivalent in ~2000.

Politically it should be this simple as well, and unfortunately it's not. That's where the real problem rests.

The problem is that 2) is popular and (relatively) easy, but 1) is unpopular, regressive and difficult. So the most likely scenario is 2) is done without 1), making the problem you were trying to solve worse.

"But so and so state has three hot tubs dad, inexpensive college only has two..."

> The government will be left with a greater share of borrowers like Jennifer Rejon. A 29-year-old single mother of a 10-year-old daughter, she has $17,000 in federal loans. They helped pay for a medical-assistant degree from Corinthian Colleges Inc., a for-profit chain of schools that filed for bankruptcy in May. The U.S. Education Department this week said it may forgive hundreds of millions of dollars in loans to Corinthian students.

Sounds like those students got scammed.

> Rejon wouldn’t qualify for refinancing from private lenders because they screen borrowers based on creditworthiness and university quality. The government writes loans for any student who enrolls in an institution eligible for federal aid.

Here's an idea, why not require stronger certification?

Seems like the article writer is blaming Jennifer for her inability to pay loans, instead of blaming the for-profit institution that fleeced her. Seriously?

I thinking your loading the article with subtext that it doesn't have. I don't see any language in there indicating that they think the fault lies with her; hell they even describe her situation sympathetically. They're just describing that she's not likely to be able to pay her loans and that the inventory of loans is shifting more towards people with similar risk profiles.

Or how about blaming the government for just approving everyone?

Who else would give an 18yo with no assets, minimal skill, and no credit history an unsecured loan for 20k, 50k, or even 100k?

Does it really count as unsecured if it can't be discharged in bankruptcy?

Unsecured means there is no asset, such as a house, bank account backing up the loan. Unsecured does not mean forgivable.

It's assumed that providing access to education would help fix the "minimal skills", and thus provide for a safe way to pay back the debt.

Unfortunately the assumption falls short, and often the education/accreditation provided is nearly worthless in the current "job market".

Indeed. Really if people insist on financialising education it should be seen as an equity investment rather than a loan.

IIRC, Corinthian College students will get debt forgiveness.

"Sounds like those students got scammed."

So a business declares bankruptcy and you immediately say "scam". There isn't any way to determine this from the story.

"Seems like the article writer is blaming Jennifer for her inability to pay loans, instead of blaming the for-profit institution that fleeced her. Seriously?"

You can't take the blame completely away from people like Jennifer though. When I went through college, I picked a major that I knew would allow me to pay it back when I graduated..and I did. It took ~8 years, but I'm not debt free.

I knew so many people that assumed that as long as they had a degree, they would get a job. They were mistaken when the got out of college, did absolutely none of the work required to get a good job (internships, etc), and couldn't find a job.

It's the same with a house. If you don't do your research and don't want to lose money on a house when you sell it, do your research.

If anything, it shows us that we need more financial education in the US.

I must be missing something basic here: If someone refinances their student loan, that means they get a loan from someone and uses the proceeds from that loan to pay the federal government back the balance on their student loan, right? So they're saying that people paying back their student loans will cost the paxpayers money? That makes no sense -- me paying the loan back means the taxpayers are no longer at risk for the balance of my loan.

Agreed. The only thing I can think of is that perhaps the interest payments on loans to low-risk borrowers subsidize the loans to high-risk borrowers who default.

My reading of the article is that the interest gains from more creditworthy borrowers help offset losses from loan forgiveness and defaulting borrowers.

If you take out a car loan or mortgage, the bank (or credit union (or government)) expects to make money off your interest for the next 5 to 30 years.

If you pay off your loan/mortgage early then the bank won't get all the future interest it expected to make — the bank only made [START, PAYOFF] interest instead of [START, FULL-TERM] interest. Some loans even have "pre-payment penalties" to favor the bank over the consumer in such cases.

Sure, but they now have the money back and can lend it again, which may even work to their advantage if interest rates have risen since the loan was signed. It seems impossible to me to say that the net effect is a sure loss.

And that's entirely beside the point that "not making as much money as I had hoped" is not the same thing as "lost money".

"not making as much money as I had hoped" is not the same thing as "lost money".

It depends on how you account for it. Technically you shouldn't assume all your future interest is materialized (IANAA), but if you run forecasts and see you have a million people who owe you a billion dollars total on a 7% interest rate over the next 20 years, you expect to have, within reason, that money.

If something incredible happens and all those people suddenly pay off their loans this month, that drastically changes your future (especially if your loans were at a higher interest rate from the past you can't re-charge today).

But you are still a billionaire so I won't be shedding any tears for you.

It seems to me that if early repayment of a loan is disadvantageous enough to require a penalty, the interest on the loan was unreasonably high to begin with. Out of proportion with the risk the bank is running, and out of proportion with the ROI they could normally get out of that money.

Maybe we should take pre-payment penalties as a sign to negotiate a lower interest rate.

But taxpayers are also unable to profit on any future accrued interest for your loan. Also, the people who are getting refinanced aren't typically high risk to begin with. So the government loses the low-risk interest, creating a riskier pool of investments that yields less interest overall.

So would you say that someone deciding not to take out a student loan at all also "costs the taxpayers money"?

No, but that's not relevant in a discussion of accounting/investment in this case. Here, what's happening is the government gets a commitment from a certain number of people, and well understood actuarial math tells them how many are likely to pay back, how quickly, etc. They then take all that combined with the interest rates and principal amounts, bundle it up into a number, and say "here's the money we will make." That gets used elsewhere in the budget to understand the flow of money, and AFAIK is very widely accepted as a valid accounting practice. (Side note: for an instance of where this went really haywire, look at the 07/08 crash where the math was fudged and we did not understand how much money was coming back from loan investments)

The problem is not "oh noes people are paying us back" it's "well crap, the private sector is undercutting our legislatively defined interest rates and we will be vastly under target on these returns."

If the government never "had" the money (again, in the accounting sense, loan payments are pretty stable investments normally), then they can't lose it (as in your counter-point). However, if they did "have" the future money (in the accounting sense), and they can no longer expect that to come in, they are in fact losing money (again, on the books). In these cases, there's no actual dollar bills flying out of the window, just some accounting projection spreadsheets somewhere that make people unhappy.

Well, it seems the actuarial math should include projections for people paying off their loans early just like they include projections for defaults, etc, and if you demand an above-market interest rate, obviously you'll increase the likelihood that people find better deals elsewhere.

But what I'm really objecting to is the conclusion that the future loss of interest represents a loss of income, when they now have the principal back and can invest that in the currently best way possible. If what you get from those funds today is significantly worse than the projected income from those loans were, then it seems you are implying that student loans really are meant to shaft the people who take them out.

The article's argument is that only people who qualify with the lender have the opportunity to pay it back. That will remove the successful wealthier debtors and leave the ones more likely to default.

Again, worth noting: there is no risk to the taxpayers for the balance of your loan. You cannot discharge student loans through bankruptcy, and the government can garnish your wages, tax refunds, and social security to repay them.

But you can still discharge them through death, can't you? So there's still risk of non-repayment, if the borrower stays poor until his/her death.

The balance of the loan is different from what you (as a lender) have to put the loan on the books for. Even if there is no way to legally discharge it, if it's unlikely that the loan will be paid back (or part of it), you have to value it for the amount you expect to receive.

It's because The federal govt is making a nice profit off these low risk borrowers, which in turn subsidizes the high risk borrowers. Lose the low risk borrowers from your portfolio and your overall expected return drops. In more concrete terms the Kellogg MBA in the article was paying the govt 6.5% interest, but the free market would do the deal for less than half that.

Some of the borrowers (for loans in the amount of x) default on their loan, and some (for an amount y) don't. Then you (where 'you' is the original lender) have on the books, under 'assets': (y + expected interest on y) - (x + expected interest on x). You don't know for sure yet how many will default, of course; but you can predict something from the socio-economic makeup of the borrowers.

Now, y gets smaller because some people pay off their loans in one go, to refinance somewhere else (the whole presumption is that only those who won't default will refinance); the expected interest becomes zero. But x stays the same. So y - x gets smaller. Hence, your number in the 'assets' column gets smaller; a write down that is counted as a 'cost' at end of year. You do get y in the assets column (the money that is paid back), but without the expected interest.

In other words: non-defaulters will keep serving their debt, earning the lenders interest. Defaulters have to be written down, including the interest. The less non-defaulters there are, the worse the overall portfolio will perform. If you estimate a performance of x at year t, and in year t + 10 it turns out that you need to revise the performance to (0.8 * x), then that 20% is a write down - i.e. a cost.

Worth noting that this is probably a less catastrophic write-down than a private lender would face in the same scenario, as these loans typically can't be discharged and the federal gov't can do all sorts of crazy things to recoup money on a default (garnish wages, taxes, etc.).

But y does not get smaller. Only expected interest on y gets smaller. y is the same (actually a little larger because money today is worth more than money tomorrow) and in the governments pocket. If the government was smart they would put the y in their pocket to use to offset the risk of x.

You're right, I didn't write it exactly enough. What gets smaller is (y + expected interest on y) because the expected interest goes to 0.

The whole thing to realize here is that the 'cost' is not an actual loss as in 'less money comes in'; it's a cost in the sense of 'this portfolio will perform less than we anticipated'. And if the interest that people pay is based on a certain overall performance, but now all of a sudden the performance needs to be adjusted downwards, then one might argue 'we were shooting for a 0-operation, but in the end we will have to spend money to make up for the good borrowers leaving'.

Here's another intuition that explains it: if the market is willing to finance the good borrowers at half the rate it takes to lend to everybody, regardless of their prospects of paying back; then only the bad borrowers will stay in the government-funded portfolio, reducing the performance that was originally estimated. Which is, if you've accounted for future earnings based on the original estimate, a loss when you have to write it down.

What's happening is that lenders are saying "we'll pay back your loan and offer you a lesser interest rate". So they pay the government the 200,000 you owe at 6.9% APR and then send you a bill for the 200,000 with a 4.4% APR. The USG loses all the interest since everything is paid back immediately and these lenders pocket your 4.4% APR. It seems like a win win win for everyone since the government gets paid back everything, the student has a lower interest rate, and the lender pockets the 4.4% annually but when there are so many lenders doing this it essentially cheats the USG out of all interest they'd earn on these loans.

Yeah, but the 6.9% interest the government is asking is ridiculously high for a student loan (which is still an investment in the future of the country).

The government not wanting to fund education is bad enough, but trying to profit from it with loan-shark level interest rates is insane.

Oh yea you're telling me haha. I'm with you on that all the way.

Student loan interest rates were fixed at a relatively high level for a while: http://www.finaid.org/loans/historicalrates.phtml

One of the people cited in the article had their rate go from 6.55% to 2.69%. For a social program designed to send kids to college the rates should never have been fixed so high for so many years.

The author faults CBO accounting for comparing student loans with low-risk treasury bonds, but these loans pay out much higher interest rates than treasuries. And there are special restrictions relating to how the debt cannot be discharged.

6.55% on a government provided student loan?!

I think I'm paying about 1.9% interest on my (Dutch) student loan. (I'm really in no hurry to repay.)

I can (sort of, though I disagree) understand not wanting to spend too much tax payer money on education, but this looks more like the government is actively trying to make a profit on the fact that people want an education.

IN the UK it is with inflation, so the % is almost nothing

currently

A few lucky UK students had a negative interest rate for a while.

http://www.theguardian.com/money/2009/aug/31/student-loans-i...

My student loans (UK, on whatever system we had round about the year 2000) were inflation minus some constant, which pushed it into negative territory. In the last year before I finally paid it off, I had the joy of watching the total owed go down by itself.

Some Dutch student loans are currently on 0.12%

I totally believe you. I haven't checked my interest lately, but I wondered if it was 1.9% or 0.9%. Whatever it is, it's low.

It's not costing tax payers, it's shrinking future gains on interest payments.

If the cost of defaults overtakes interest gains then yes, it is costing taxpayers.

So the worst case scenario is that somebody gets (part of?) their education for free and the government pays the school its exorbitant rate.

Maybe that's a good thing. Maybe it will force "taxpayers" to investigate why school had such exorbitant rate in the first place. Maybe there is some restitution to be paid to taxpayers by the school and if they are not paid maybe the school should be excluded from getting taxpayer money in the future.

Education should cost tax payers in a society billions.

But, the money should go to, you know, education. (and not be seen as an unlimited tap of free money for university administrators to double tuition rates and ancillary fees every ten years.)

So according to this article, we have the unintended consequences of ultra accommodative monetary policy (i.e. private lenders offering rock bottom refi rates) conspiring with both the VC world's enthusiasm for anything that even looks like P2P lending and billionaires' penchant for getting involved anywhere there's money to be made, to siphon off the best loans from the Department of Education's portfolio, leaving taxpayers with a book full of IBR enrollees and severely delinquent borrowers who aren't even thinking about making payments...

The government will be left with a greater share of borrowers like Jennifer Rejon. A 29-year-old single mother of a 10-year-old daughter, she has $17,000 in federal loans.

Under a federal program to help low-income borrowers, Rejon, who lives in Chicago and has struggled to find a job, isn’t making payments. “I’m trying to at least get my life on track and be able to pay my bills,” she said. “The loans are the last thing I’m thinking about.”

Take the above and throw in a few more $4 billion for-profit debt discharge fiascos and taxpayers could be in the red on the government's student loan portfolio before the mass debt cancellations even begin.

Why is this a problem? Presumably when the private lender refinances the loan, they pay the balance to the government? So yeah the government is losing all these future interest payments but are they not getting the principle back today? Couldn't they use that principle to offset the risk of default from lower income people with student loans?

You answered your own question.

> Why is this a problem?

>So yeah the government is losing all these future interest payments

i guess I need to clarify a question first: when the private company refinances the loan, do they pay the government the current principle?

Yes - otherwise, they would have to pay interest on the loan while refinancing to a lower rate (they'd lose money).

If the answer to the question is yes, then is the net present value of the remaining interest payments greater than the present value of the loan payout they just received? It is, but not by a huge amount. If I was the government is be happy to get all this cash from loans paid off early and I would use it to make more money (loan it out again to something more lucrative, mitigate the risks of likely to default student loans).

As someone who could never afford college I'm completely fine with it if this is the case. If this means I end up paying the principal off on someone's bullshit art degree I'm going to be pissed.

Worth noting: you cannot default on student loans. The government can and will garnish your wages, tax refunds and social security for them, and you can't discharge them through bankruptcy.

> borrowers with successful careers subsidize the less fortunate, who are more likely to default.

What does defaulting mean here? If you stop paying, in addition to ruining your credit as long as you don't pay, the government will hound you for the rest of your life and will garnish your wages and even your social security payments when you retire.

Sure, but that doesn't mean the government will get anything close to the amount owed.

Not really. I don't know how many people are covered by Pay as you Earn, but under that program you never pay more than 10% of your disposable income.

As well, if having financial difficult, someone could request forbearance for up to 12 months and not have to make payments [0].

[0] https://studentaid.ed.gov/sa/repay-loans/deferment-forbearan...

Hmm. People are bringing up the nondischargeability in bankruptcy of the government loans. But if someone took out a refi from a private lender, would that new loan still be nondischargeable, or has it been "laundered"?

Charging people 6.55% when the federal funds rate is 0.12% is a vig that's verging on usury.

Isn't this a case of the loans being mispriced? If the students attending for profit schools like Corinthian Colleges are getting lower interest rates because Kellogg MBAs are subsidizing their student loan interest rates, doesn't that mean more students will end up enrolling in those for profit schools? That encourages poorer students to make bad investments and forces them to go deeper into debt.

If the loans were more fairly priced and much higher interest rates were charged for the for profit colleges, wouldn't fewer people make those bad investments?

> The loans -- can be variable and reset monthly, exposing borrowers to the danger of a sharp spike if the economy shifts

Wait, what? Who would actually take that kind of risk? That does not sound prudent at all.

That's no different from the subprime mortgages, and we all know how it ended.

With virtually none of the bankers/financiers going to jail or paying in any meaningful way for their actions?

Cute, but not the point. It ended with lots of people losing homes and a massive disruption to the global economy.

'Sharp spike' is relative. Look at the numbers; Mr. Winiarz is going from 6.55% to 2.69%. If a 'sharp spike' doubled his interest, he's still paying less interest than he was on the Fed's legislatively-fixed rate.

Mr. Chopra, who warned of the 'sharp spikes', works for the Consumer Financial Protection Bureau, which is a federal agency. I wouldn't go so far as to say that Mr. Chopra is spreading FUD, but from where the CFPB is standing, student loan refinancing is creating a threat to consumer financial safety, so they absolutely have an interest in discouraging it.

I hate the math level in articles like these. The only two ways to end an X could cost Y... headline is "Millions" or "Billions".

That contains just about no information at all. Why not convey some information with phrases like "400 Billions" or "up to 30 Billions per year"?

We need to do the math,

How many HS grads in US per year

Times 2 semesters full-time at $10,000

Hint, folks it under $1 Trillion and its even lower if take that money and invest it at US citizens birth as an education investment vehicle.

Actual numbers:

US HS Grads: 4 Million per year

so that is 40 Billion tuition payments or we can guarantee ed loan debt at $250 billion..

Which will you pay as US taxpayer?

Translation: The bondholders must be paid. That's the most important thing. If the students can't pay, taxes must be raised so the taxpayer can pay.

Or, you know, just allow people to default on loans.

That's not going to happen. A trillion dollars worth of debt being wiped away sounds good on paper, but I'm sure that would have some significant consequences for the national (and possibly world) economy.

Not to mention the message it sends future generations.

Have a bad mortgage because you had to have those three extra bathrooms? waves wand Gone!

Over paid for a useless degree when you should have known better? waves wand Audios!

Overpaid for a useless degree because every single person from school counselors to parents to businesses told you "college or bust"? Tuition costs skyrocketing?

Well, you were 18 years old. That's practically an adult! You should have known better.

Meanwhile, the national economy doesn't seem to have any problems with pouring 1.5 trillion in a fighter-jet (F-35).

A fighter-jet that no one wants as well... It's not even a jack of all trades/master of none type of deal. It literally sucks at all of the things it was built to do...

Sorry but I don't think that the level of usury the financial system is placing on the middle class through central planned interest rates which creates records amount of new debts are doing the middle and lower classes any good at all.

Come get some new credit here, more credit, more debt!

student loans are corporate welfare for the banks: the government pays the interest while one is in school, and will pay off the loan if the student defaults.

It's crippling not just to the student but to the entire nation's economy that they're left with all that debt after leaving school - not after graduation, but after leaving school for any reason.

We would all be a lot better off were students given outright grants that they were not required to pay back.

The radical majority of profit in the scheme goes to the US Government, not banks. It's government welfare, for the government, in fact.

"Government books $41.3 billion in student loan profits" [1]

That's the equivalent of the combined profit of JP Morgan and Wells Fargo for their entire businesses.

The student loan racket is a huge slush fund for the Federal Government. They loan money that costs them nothing, courtesy of the Fed, and they generate a massive profit off of it.

[1] http://www.usatoday.com/story/news/nation/2013/11/25/federal...

It's certainly an option but someone has to pay for it. The "government" is the tax payer.

We could just do away with student loans all together. They've probably contributed to the cost of education far outpacing inflation. College prices would probably drop.

It's amazing that a great program that has helped millions of people, myself included, has turned into this "horrible" program that people hate.

>We could just do away with student loans all together. College prices would probably drop.

The issue that causing tuition to rise - the injection of "free" money - would still be there and would actually be worse because students would be even further removed from any kind of cost/benefit analysis of the school.

Where is the free money coming from if you keep charging tuition but do away with student loans?

From the government that would be paying the tuition.

In California specifically, I'd like to see a ballot proposition which would set the UC Regents salary to one dollar per year.

Presently they can set their own salary; the governor and the legislature have no say, nor do the students. So they lead lavish lifestyles at the expense of students who are doing pretty good to live under highway overpasses.

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