January 8, 2010--Fannie, Freddie, and Now Sallie
How does this deal sound to you?
You’re a huge bank and the government gives you all the money you need to make 10 million loans that average about $6,000 each. For every loan, the person borrowing the money pays you a 1% “origination fee.” That totals about $6.0 million. You keep the 6 mill.
Because the government advances the entire $60 billion that you need to make these loans, they also set the annual interest rate. Let’s say they allow you to charge 5%. Then, when all the loans are paid back, your bank will net $3.0 billion.
To sweeten the deal, so as to shelter your bank from risk, if any of the 10 million borrowers default on their loans, the government would guarantee them. That is, make sure you get paid back all the principal and all the interest so as to guarantee your profit.
But then, at some point, the government asks the following question—we’re running a big deficit and so why should we continue to do this? Why should we supply your bank with the money required to make these loans and then shelter you from all risks? Doesn’t capitalism say that you must assume some risk in order to justify your profit?
Otherwise, this sounds like socialism, doesn’t it? And since the government believes in capitalism it should want to end this taxpayer-paid-for giveaway. Who would oppose this since it’s the public who is paying for all of this, including the guarantees and the bank’s annual $6.0+ billion profit?
But there are members of Congress who want to protect the current practice. No surprisingly, members who get all sorts of campaign contributions from the bank. Members and their staffs who are subject to heavy lobbying in support of the status quo.
If you are politically minded, you would probably assume that it’s the Democrats who would be advocating anything that smacks of socialism. They are led by a president, aren’t they, who many see as a closest socialist or worse. Listen to what the Tea Party folks said about him over the weekend.
Well, you would be mistaken.
The theoretical situation I just described is anything but theoretical. It is a reasonably accurate summary of the way the current Guaranteed Student Loan Program works.
The U.S. government makes the loan money available, farms the loan making out to banks, and then guarantees the 10 million existing loans against default. For the banks it’s win-win-win. That’s what the “guaranteed” means—the banks are guaranteed a no-risk income that actually totals at least $8.0 billion a year.
Quite a deal.
Obama the socialist is trying to get Congress to end this federal funny business. He wants to cut the banks out of the picture and thereby save the $8.0 billion a year. But the banks, no surprise, are crying foul. And members of Congress are responding to their cries of pain. Mainly Republicans. They are being led by House Minority Leader John Boehner who calls himself a deficit hawk. (See the linked New York Times article for the ugly details.)
Included among the phony claims that are being trumpeted to justify leaving things as they are is the assertion that if the banks are cut out of the picture students will mss the careful guidance they currently offer and thus will no longer be sure of getting the best loan deals for themselves.
The truth of the matter is that college students get their advice about loans from their colleges, not from the banks. From their financial aid offices. And that advice is almost always totally impersonal since there is not much reason to shop around—the specifics of the loans (the origination fee, the interest rate, the pay-back terms) are the same at every bank in every state. So one bank is as good as any other.
(And this includes Sallie Mae, the largest of student loan providers. So now we don’t just have a Fannie Mae and a Freddie Mae problem, but a Sallie one as well. Among other things, we need some new acronyms.)
In fact, the little due-diligence that does take place happens at the college. The FA office there tells each student how much he or she is eligible to borrow, gives them a simple form to fill out, and passes it along to the banks the students choose from which to receive the loan. The bank merely cuts the check. So much for their cost of doing business.
And if a student at some point defaults the bank doesn’t even have to undertake the collection work—it is done via the college and the U.S. Department of Education.
There is one further crooked wrinkle. Typically, the loan form that students receive from their FA offices has pre-printed on it a list of three or four “preferred lenders.” From this it would appear that the college took students’ best interest into consideration when making these recommendations.
Well, it turns out, in most cases for a bank to get listed they have had to make “contributions” to the colleges. Not quite a bribe, but . . . Help me, please, I can’t think of an appropriate way to describe this.
For example, my old institution, New York University, for years listed Citibank as one of its preferred lenders. Three years ago the New York Attorney General caught NYU and other colleges banking money they received from Citibank; and though the university didn’t admit they were participating in pay-for-play hanky-panky, they still agreed, quoting the Times, to “make payments of more than $3.2 million to student borrowers who received loans from banks that paid money to the institutions to steer students their way.”
Say no more.
You’re a huge bank and the government gives you all the money you need to make 10 million loans that average about $6,000 each. For every loan, the person borrowing the money pays you a 1% “origination fee.” That totals about $6.0 million. You keep the 6 mill.
Because the government advances the entire $60 billion that you need to make these loans, they also set the annual interest rate. Let’s say they allow you to charge 5%. Then, when all the loans are paid back, your bank will net $3.0 billion.
To sweeten the deal, so as to shelter your bank from risk, if any of the 10 million borrowers default on their loans, the government would guarantee them. That is, make sure you get paid back all the principal and all the interest so as to guarantee your profit.
But then, at some point, the government asks the following question—we’re running a big deficit and so why should we continue to do this? Why should we supply your bank with the money required to make these loans and then shelter you from all risks? Doesn’t capitalism say that you must assume some risk in order to justify your profit?
Otherwise, this sounds like socialism, doesn’t it? And since the government believes in capitalism it should want to end this taxpayer-paid-for giveaway. Who would oppose this since it’s the public who is paying for all of this, including the guarantees and the bank’s annual $6.0+ billion profit?
But there are members of Congress who want to protect the current practice. No surprisingly, members who get all sorts of campaign contributions from the bank. Members and their staffs who are subject to heavy lobbying in support of the status quo.
If you are politically minded, you would probably assume that it’s the Democrats who would be advocating anything that smacks of socialism. They are led by a president, aren’t they, who many see as a closest socialist or worse. Listen to what the Tea Party folks said about him over the weekend.
Well, you would be mistaken.
The theoretical situation I just described is anything but theoretical. It is a reasonably accurate summary of the way the current Guaranteed Student Loan Program works.
The U.S. government makes the loan money available, farms the loan making out to banks, and then guarantees the 10 million existing loans against default. For the banks it’s win-win-win. That’s what the “guaranteed” means—the banks are guaranteed a no-risk income that actually totals at least $8.0 billion a year.
Quite a deal.
Obama the socialist is trying to get Congress to end this federal funny business. He wants to cut the banks out of the picture and thereby save the $8.0 billion a year. But the banks, no surprise, are crying foul. And members of Congress are responding to their cries of pain. Mainly Republicans. They are being led by House Minority Leader John Boehner who calls himself a deficit hawk. (See the linked New York Times article for the ugly details.)
Included among the phony claims that are being trumpeted to justify leaving things as they are is the assertion that if the banks are cut out of the picture students will mss the careful guidance they currently offer and thus will no longer be sure of getting the best loan deals for themselves.
The truth of the matter is that college students get their advice about loans from their colleges, not from the banks. From their financial aid offices. And that advice is almost always totally impersonal since there is not much reason to shop around—the specifics of the loans (the origination fee, the interest rate, the pay-back terms) are the same at every bank in every state. So one bank is as good as any other.
(And this includes Sallie Mae, the largest of student loan providers. So now we don’t just have a Fannie Mae and a Freddie Mae problem, but a Sallie one as well. Among other things, we need some new acronyms.)
In fact, the little due-diligence that does take place happens at the college. The FA office there tells each student how much he or she is eligible to borrow, gives them a simple form to fill out, and passes it along to the banks the students choose from which to receive the loan. The bank merely cuts the check. So much for their cost of doing business.
And if a student at some point defaults the bank doesn’t even have to undertake the collection work—it is done via the college and the U.S. Department of Education.
There is one further crooked wrinkle. Typically, the loan form that students receive from their FA offices has pre-printed on it a list of three or four “preferred lenders.” From this it would appear that the college took students’ best interest into consideration when making these recommendations.
Well, it turns out, in most cases for a bank to get listed they have had to make “contributions” to the colleges. Not quite a bribe, but . . . Help me, please, I can’t think of an appropriate way to describe this.
For example, my old institution, New York University, for years listed Citibank as one of its preferred lenders. Three years ago the New York Attorney General caught NYU and other colleges banking money they received from Citibank; and though the university didn’t admit they were participating in pay-for-play hanky-panky, they still agreed, quoting the Times, to “make payments of more than $3.2 million to student borrowers who received loans from banks that paid money to the institutions to steer students their way.”
Say no more.
posted by Steven Zwerling at
3:28 AM
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