Thursday, January 29, 2009

More Cash to Student Lenders

The US Treasury has committed up to $60 billion to a scheme cooked up by Citigroup and Morgan Stanley to funnel more money to student lenders, who have seen a credit crunch situation and drying up of the secondary market similar to other purveyors of consumer credit.
This is outside the auspices of the $700 billion bailout.

I've said it before and I'll say it again: the government should stop subsidizing the middleman! Instead, this is an excellent opportunity to shift to the direct loan program,where students get their funds directly from the Treasury without Citigroup or anyone else taking a cut in between. Colleges across the country are already voting with their feet for the simpler, cheaper, all-government program.

2 comments:

new york city garden said...

I am very frustrated with student lenders. In 1993, as a young, financially uneducated person, I consolidated my college debt at a rate of 9%. Not long after that the rates started to decline and have ever since stayed way below that. My graduate school debt was consolidated at 3.75% in 2000. I called Citibank to try to re-negotiate these terms given hard times and the recent bailouts of their own business. Of course, the person I spoke with had little sympathy for me and when challenged about the bailout (i.e. why should I pay your bailout and my debt at the same time?), she stated that college loans and Citibank's other business has nothing to do with eachother. If I default, the federal government will pay the loan and so Citibank has no incentive to work with me on lowering the rate (which is what I was trying to negotiate). After the government pays Citibank, they will then sell the loan to a collection agency and I will have to deal with them and the poor credit.

It seems that CItibank always wins-no matter what. But the little guy, just trying to get a break given the interest rates of the last 15 years, has no room to help himself out. My student loan debt is twenty five percent of my monthly earnings. Its not killing me, but its not helping the economy either. Citibank is getting 25% of my monthly earnings and the Federal Government (meaning all of us) is backing their business model and securing their debt. Who is securing my debt?

I know that I do not have the worst situation. But financial pain often the worst kind of pain -I do not know why. But it makes people angry. However, we can deal with it better when we are not paying responsibly up front while they're picking our back pockets.

Thanks for the opportunity to have a voice on a subject that so upsets. Keep up the good work.

Frank in Brooklyn

Doug Wollkon said...

How about the price of college education come down to the real world. It is only a matter of time now that the colleges start to go bankrupt because they based their revenue stream and expenses they could afford on the high level of debt their students where able to get from the government. Assuming the government would lend it, the colleges would have not problem raising their prices 5-10% per year.

As far as the middle man goes, whenever you have a subsidized program started from the top-down, you will face inefficiencies. The bigger the top, the bigger the inefficiencies. Even if you take the middle man out, it will only be a matter of time before someone else gets in the middle.