Right now, there is a battle raging over whether the federal government, when providing college student loans, should charge 3.4% or 6.8% interest. Most people who aren’t the servile lickspittles of the lending ‘industry’ think we’re better off as a nation when we don’t saddle an entire generation with debt. That, of course, is no guarantee we’ll do the right thing. But what’s truly disgusting is the reason why government loans might be so high–deficit reduction (boldface mine):
How does the government profit from student loans? In two words, yield spread.
Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the yield spread just keeps on coming. Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities….
So what are the President and Congress arguing about? They are arguing about how much of the federal deficit to plug with student loan interest money. The current “baseline” budget assumes that the rate will jump up to 6.8% for 2013 loans, yielding another $30 to $40 billion return to Treasury. Congressional Republicans see the expiration of the rate cut as a given, and any extension as increasing the deficit (by reducing student borrowers’ subsidy to all other federal programs). They are demanding offsetting cuts in other programs before agreeing to keep the rate at 3.4%.
Even if you’re not a full wackaloon post-Keynesian like me, this is really stupid. Japan, which relative to the size of its economy, has twice the public debt the U.S. does, and it has no problem borrowing money. Meanwhile, in the ol’ U.S. of A, debt sales are massively oversubscribed, even with interest rates at zero.
Worrying about deficits is a non-issue. Unless, of course, you’re a student struggling with debt. Then it might be kinda important. Just saying.
mikethemadbiologist
sign me up for a dose of that “full wackaloon post-Keynesian”…
I am a mail carrier, and if you didn’t know, the Post Office is under attack from the Austerians, and has been since the Reagan Years. In 2006 the Repubs passed legislation that mandated that the PO pay its employee health bennies forward; that took billions of what might have been profits out of the equation, and then when the Bush Recession hit, our revenue fall put us into the red big-time. That money went into the General Fund, as does SS payroll tax (indirectly), and therefore the deficit calculations are less than they would be if these monies were not part of the equation. So when it comes to relieving the PO of this burden, the bean-counters dig in their feet, because relief would mean the deficit increases by X billion dollars as a result. So the Postal Commission austerians tell us to tighten our belts further, we postal workers are just too greedy and need to find additional “savings” to balance OUR budget.
Welcome to gubmint accounting.
It’s all part of the plan to keep themselves in power longer. Saddle the young and more liberal with tons of debt and hope they can be kept nice and compliant. Don’t think it will work, but what else do they got. I think the best they can hope for is a nice orderly transition into irrelevance, but trying things like this makes that unlikely.
This is Starve the Beast at work. With a fiat currency, it should not work at the Federal level. But it does politically. It is not the Republicans who are gouging college students for deficit reduction. They do not want people to go to college who do not have the money to do so, that’s why they are gouging the students. It is the Democrats who are gouging students for deficit reduction because they have bought into the premises of Starve the Beast. The surface debate is not about student loans, but about what to sacrifice in exchange, when nothing needs to be sacrificed.