Student Loan Changes

[southsider2k5]

NSS's post reads to me that they're closing accounting loopholes that amounted to large tax breaks for companies and that's why they're writing profit down.

 

And my point is that the government is doing the exact same thing with the health and student loan programs and they are allowed to call it "savings".

[Balta1701]

And my point is that the government is doing the exact same thing with the health and student loan programs and they are allowed to call it "savings".

You've been repeating this over and over and I can't find a single non-far right analyst who agrees with you that the government is doing something other than ending a large subsidy to the banks.

[southsider2k5]

You've been repeating this over and over and I can't find a single non-far right analyst who agrees with you that the government is doing something other than ending a large subsidy to the banks.

 

Gee, I wonder why.

 

It is Sabane's Oxley 101. The value of a loan on a companies books has to reflect its value. If the loan is being made at below market value, it has to be shown as a money loser on the books. That is where the subsidy came in. It was the gap between a market value loan and the below market value that the US government forces student loans to be made at. That way a bank wasn't hurting itself with the Federal Reserve by making these loans. Why do they no longer need the subsidy when the government takes over? The government exempted itself from SOX. They can make below market value loans without having to take a loss on them.

 

It is the same reason the Fed Bank doesn't have to do anything with all of the toxic loans it took on. It is exempt.

 

I know it doesn't fit with the left's anti-corporate agenda, but that is the way that it is.

[Balta1701]

That's simply not how it's been presented to me. The way it's been sold is that yes, the government is selling loans at below rates, but the loans still wind up profitable to the banks because the government guarantees the loans as well.

Since 1965, government has helped students finance college through the Federal Family Education Loan program. The system essentially operates as a lucrative form of corporate welfare, offering a guaranteed rate of return for banks and other middlemen who provide capital for student loans. The government not only makes all the decisions — who is eligible for loans, for what amount and at what rate — but it protects private lenders from virtually any risk: When college students are unable to repay their debts, taxpayers are required by law to reimburse the banks for 97 percent of the losses. "The government is doing all the work and taking all the risk," says Education Secretary Arne Duncan.

 

 

....

FFEL was inaugurated in 1965 with good intentions. At the time, there was no federal body to administer government loans — the Department of Education didn't even exist. To make matters worse, federal accounting rules required that direct loans from the government be recorded as a loss in the year they were made, while private loans guaranteed by the government were booked as a loss only in the event of default. Given the weird budget rules, asking private lenders to raise the capital for student loans made sound policy sense.

 

But the logic for subsidizing private lenders evaporated in 1990, when the first Bush administration revised accounting standards to distinguish loans from losses. In 1993, Bill Clinton — with an assist from Ted Kennedy — launched a program to compete with private lenders by making some federal loans directly to students. Students not only got the exact same loans, but the program actually paid for itself. In 2006, taxpayers earned 2 cents for every dollar lent directly to students. But under the FFEL program, the government forked over 15 cents to private lenders for the same service.

 

Those high prices are built into the system. Congress, which sets the rate that private lenders earn on student loans, has historically guaranteed a return of around two percent. That may not sound like much, until you consider the volume of business: There are currently $413 billion in outstanding FFEL loans. That's why industry giant Sallie Mae — which provides one-fourth of all student loans — clocked in as the second-most-profitable company in the world in 2005.

 

"The student-loan industry is as close as you can get to letting industry set their own subsidy rates," says Jason Delisle, a veteran Republican budget staffer who now directs the Federal Education Budget Project for the nonpartisan New America Foundation. "Congress was writing these subsidies into law, and the lobbyists encourage them to make it as high as possible."

 

Costs to taxpayers have also been driven up by another middleman — some 35 guaranty agencies that receive $1.5 billion a year in federal subsidies for helping students avoid default. But the way the rules are structured, the agencies actually have an incentive to let students fail on their college debts. The agencies collect a fee of one percent for assisting students who fall behind on their payments — but can pocket up to 38.5 percent aiding students who default. Sallie Mae does even better by serving as the collection agent for the largest guaranty agency, meaning it profits both from making loans and from squeezing students who default. "It's crooked," says Delisle.

 

To keep this lucrative scheme in place, private lenders rely on a potent combination of campaign contributions and graft. Since 2000, Sallie Mae has handed out nearly $5 million in campaign cash. A leaked "Federal Government Relations Strategy Discussion" memo from 2006 reveals what the company expects in return for its investment. The memo outlines Sallie Mae's determination to "protect FFEL economics" by moving to "grow [the] pro-FFEL coalition within the Democratic Party." The key to such growth? A strategy to "direct congressional PAC giving" to conservatives known as "Blue Dog Democrats." Since 2000, Sallie Mae has also spent $17.7 million on lobbyists — costs that are ultimately subsidized by taxpayers.

[southsider2k5]

That's simply not how it's been presented to me. The way it's been sold is that yes, the government is selling loans at below rates, but the loans still wind up profitable to the banks because the government guarantees the loans as well.

 

The government guarantee is irrelevant for accounting purposes.

[Balta1701]

The government guarantee is irrelevant for accounting purposes.

Not if the government pays out money to reimburse when a loan does go bad.

[southsider2k5]

Not if the government pays out money to reimburse when a loan does go bad.

 

Until that actually happens, yes, it is irrelevant. That would be a GAAP rule.

[kapkomet]

Until that actually happens, yes, it is irrelevant. That would be a GAAP rule.

 

 

What the hell is GAAP?

[StrangeSox]

I think I understand what you're saying, ss2k5. A bank takes out X dollars from the fed at Y interest rate and loans it to students at Z interest rate, where Z is less than Y.

 

Right?

[Y2HH]

I think I understand what you're saying, ss2k5. A bank takes out X dollars from the fed at Y interest rate and loans it to students at Z interest rate, where Z is less than Y.

 

Right?

 

That's not the whole picture he's trying to describe, however.

[NorthSideSox72]

I'd love it if someone could give me a real answer on this...

 

Obama says that by cutting banks out of the student loan business, it will save taxpayers $68B over the next few years.

 

Where does that savings come from? How is this possible?

 

And please don't give me the "it doesn't, he's lying as usual!" or "because banks are evil and will take profit from taxpayers" B.S., I'd really like to know the math involved here.

 

[StrangeSox]

Student Loans - Evil Banker Greed = $68B

 

ss2k5 made a few comments in the health care thread about it, but I only sort of get the point he's driving at.

[HuskyCaucasian]

Can we get a thread on the student loans topic? I too am curious as to how this all works. What has changed in the loan process? Will my loans be effected?

Edited March 30, 2010 by Athomeboy_2000

[southsider2k5]

Can we get a thread on the student loans topic? I too am curious as to how this all works. What has changed in the loan process? Will my loans be effected?

 

Damn that was a quick split!

 

Anyway, if you loan payment is >10% of i, then you can be adjusted downward.

[NorthSideSox72]

Damn that was a quick split!

 

Anyway, if you loan payment is >10% of i, then you can be adjusted downward.

Still doesn't tell me the tax part. I get the part where students could save some money, potentially. But where does this cost FEWER taxpayer dollars? Seems to me it would cost more, just on program implementation.

 

Is the US going to be collecting the interest now?

 

[southsider2k5]

Gee, I wonder why.

 

It is Sabane's Oxley 101. The value of a loan on a companies books has to reflect its value. If the loan is being made at below market value, it has to be shown as a money loser on the books. That is where the subsidy came in. It was the gap between a market value loan and the below market value that the US government forces student loans to be made at. That way a bank wasn't hurting itself with the Federal Reserve by making these loans. Why do they no longer need the subsidy when the government takes over? The government exempted itself from SOX. They can make below market value loans without having to take a loss on them.

 

It is the same reason the Fed Bank doesn't have to do anything with all of the toxic loans it took on. It is exempt.

 

 

I'd love it if someone could give me a real answer on this...

 

Obama says that by cutting banks out of the student loan business, it will save taxpayers $68B over the next few years.

 

Where does that savings come from? How is this possible?

 

And please don't give me the "it doesn't, he's lying as usual!" or "because banks are evil and will take profit from taxpayers" B.S., I'd really like to know the math involved here.

 

There you go.

 

[NorthSideSox72]

There you go.

It can't be just an accounting rule difference. That isn't about saving money anyway, that is about asset valuation. Taxpayer dollar savings are about cash flow, not asset and obligation valuation. Where does the tax savings supposedly come from?

 

[southsider2k5]

Still doesn't tell me the tax part. I get the part where students could save some money, potentially. But where does this cost FEWER taxpayer dollars? Seems to me it would cost more, just on program implementation.

 

Is the US going to be collecting the interest now?

 

I believe it is two different things. Taxpayers save because they don't have to pay the subsidy anymore to keep the loans at book value, which is where the 50 or 68 billion dollar numbers come from. I think the interest now goes to USA loans, which is basically the DOE.

[southsider2k5]

It can't be just an accounting rule difference. That isn't about saving money anyway, that is about asset valuation. Taxpayer dollar savings are about cash flow, not asset and obligation valuation. Where does the tax savings supposedly come from?

 

It is all related. Because of SOX when a bank makes a loan, they have to always have the value of their loan reported on their books. If they are giving out loans below market value, they have to report them as losses, which is counted as a negative against their capital requirments with the FDIC. The subsidy is the payment from the government to make up the difference so that the banks can stay in business while making these sorts of loans. The federal government isn't subject to SOX, so it doesn't matter what the loan's actual worth is. They don't need the subsidy in other words.

[HuskyCaucasian]

Let me try and use my personal situation as a case study as to how this effects some people and the industry.

 

My college loans Direct Loans from the "Federal Direct Student Loan Program". So, I'm already on the federal loan program.

My wife's loan was bought last year by a company called ACS Education. How does this effect her loan?

[JorgeFabregas]

I'll bet dollars to donuts the subsidy existed before Sarbanes-Oxley. The loans still needed to be subsidized so that the banks would loan at below market rates (and so that student wouldn't be charged interest while they're in school). Why you're obsessed with the accounting angle is a mystery to me.

Edited March 30, 2010 by JorgeFabregas

[NorthSideSox72]

I'll bet dollars to donuts the subsidy existed before Sarbanes-Oxley. The loans still needed to be subsidized so that the banks would loan at below market rates (and so that student wouldn't be charged interest while they're in school). Why you're obsessed with the accounting angle is a mystery to me.

I see what he is saying about the asset accounting, but its unrealized P&L, so it doesn't matter here (that's where I agree with you).

 

The key parts as to cash flow, and as to taxpayer dollars, is the lack of subsidy (as SS pointed out), and it sounds like the interest amounts go to the Fed Gov't now as income to the D of Ed. Feds still take on default risk in either case, so that is no difference. Implementation costs will rise now however, which will negate SOME of those savings.

 

[iamshack]

So are you guys telling me that they actually passed that thing about your monthly payment cannot be more than 10% of your gross monthly income?

[BigSqwert]

So are you guys telling me that they actually passed that thing about your monthly payment cannot be more than 10% of your gross monthly income?

Can we be grandfathered in?

[NorthSideSox72]

So are you guys telling me that they actually passed that thing about your monthly payment cannot be more than 10% of your gross monthly income?

Yes they did - put it into the Health Care bill. Because, you know, its about Health Care.