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.