Should Student Loan Interest Rates Be Lowered Below 4%?

I don't think the government should have ANYTHING AT ALL to do with student loans.

Either they qualify for them in the open market or they get help from private endowments/educational 'charities' or they are out of luck.

And no, I don't really care if that means some broke nobody cannot take Elizabethan Poetry in college at the taxpayer's ultimate expense.
If he wants to go to college, either earn it or get a private sector 'grant'.

DA60 said:

I don't think the government should have ANYTHING AT ALL to do with student loans.

Either they qualify for them in the open market or they get help from private endowments/educational 'charities' or they are out of luck.

No doubt many will freak out at that idea...good.

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I like my state-owned bank, but the feds are nicer with the loans. A private bank? No thanks.

TheDemSocialist said:

Most student loan interest rates are at 7% or above. There has been some legislation introduced in congress that calls for student interest rates be lowered to below 4%. Do you support these rates?

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Personally, I believe education is very important so I would encourage any country's government to make access to higher education as accessible and affordable as possible. That said, I'd support minimal or no interest rate charges on loans directly related to tuition fees and class materials but market rates charged for loans for other related expenditures. A lot of students have loans that they use to fund their lifestyle while in school as well as spring break vacations and trips to Europe, etc. which are allowed under the US's current student loan system. Why should a student get a preferential interest rate on such expenditures? If they want to rack up lifestyle debt before they have full time employment, let them pay credit card interest rates like everyone else.

RabidAlpaca said:

You seem to think that the free loans for banks started and stopped a few years ago with TARP, yet it has occurred for the past 100 years and it occurs every single day. The federal reserve is not just a lender of last resort, it's become a lender for everything. "Approved" institutions can borrow from the fed at near zero interest, at which point they can loan out that free money to people like you and me for a massive markup.

The government should not be in the loan business, but as long as we are, how is lining the pockets of rich bankers with a few extra percent of profits? Having an educated society is far, far more important than having richer people looking after our money.

Rich bankers in this context I have defined as pretty much all bankers. Do you not see an issue with taxing Bob to loan to bankers for free so that they can loan the same money back to Bob for his mortage at 6%?

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Actually, central bank lending is a tool to maintain orderly markets. As all tools can, this one too can be misused. The mechanism is rather straight forward, but there are details that are easily missed. In simple terms the lending rate is determined by the central bank according to the money requirements of the underlying economy, its transaction levels and the inflation target. This is a rather valuable public good that has been okay in itself. The rate is usually not zero and Bob is not involved here at all. And comparing it to Bob's mortgage rate seems to indicate that you have some other agenda than optimizing welfare in the economy.

As to the "pretty much all bankers" it would be nice to be more precise, at least to the status of owner, manager or secretary.

joG said:

Actually, central bank lending is a tool to maintain orderly markets. As all tools can, this one too can be misused. The mechanism is rather straight forward, but there are details that are easily missed. In simple terms the lending rate is determined by the central bank according to the money requirements of the underlying economy, its transaction levels and the inflation target. This is a rather valuable public good that has been okay in itself. The rate is usually not zero and Bob is not involved here at all. And comparing it to Bob's mortgage rate seems to indicate that you have some other agenda than optimizing welfare in the economy.

As to the "pretty much all bankers" it would be nice to be more precise, at least to the status of owner, manager or secretary.

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If the fed creates more money than the proportional growth of GDP, inflation will occur. They intentionally overshoot this to cause a several % inflation a year. That means Bob's account is devalued by several % a year, hurting his savings potential. This money has to go somewhere, and it goes into providing sub market loans for banks.

Why should they not have to get funding the way the rest of us do? By paying someone to borrow it. Why would they ever pay me 5% interest when they can loan from the government at .5%?

You for some reason seem to think lining the pockets of banks with hundreds of billions of dollars of essentially risk-free money provided by Bob's loss is ok, but doing the same for struggling students would be just nonsense.

RabidAlpaca said:

If the fed creates more money than the proportional growth of GDP, inflation will occur. They intentionally overshoot this to cause a several % inflation a year. That means Bob's account is devalued by several % a year, hurting his savings potential. This money has to go somewhere, and it goes into providing sub market loans for banks.

Why should they not have to get funding the way the rest of us do? By paying someone to borrow it. Why would they ever pay me 5% interest when they can loan from the government at .5%?

You for some reason seem to think lining the pockets of banks with hundreds of billions of dollars of essentially risk-free money provided by Bob's loss is ok, but doing the same for struggling students would be just nonsense.

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You did not answer the question of what you meant by "bankers" which is important to what you mean by "banks". That is central to the part of the question that deals with the emotions involved. But it also is pertinent to the question of the reason lower rates seem to be systemically necessary at certain times.

Yes of course theory and a large amount of empirical research say that in the long run more money will bring about higher prices. The operative term there is "the long run". It can be shown, that pushing the system monetarily or fiscally can activate the economy in the short term, however. That is where Bob lives and telling him that in the long run we probably will get inflation so that he cannot have a job now in the short run is tough.

It is also difficult, as we do not know, whether subsequently reduced fiscal or monetary activity will eliminate the risk of inflation without recession. We think so, but I admit, I have not seen very robust research on that question.

And yes. It is justified in my opinion to stop systemic collapse, while pursuing welfare optimization in education.

joG said:

Who takes the defaults?

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Same thing when what happens when you default now: Consequences of Default

TheDemSocialist said:

Most student loan interest rates are at 7% or above. There has been some legislation introduced in congress that calls for student interest rates be lowered to below 4%. Do you support these rates?

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given what the feds give to the banks now, absolutely!!

TheDemSocialist said:

Same thing when what happens when you default now: Consequences of Default

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Not quite. If the loans were given at the the Fed Rate, that would mean they would have been given without credit margin to protect against the losses from default. Someone would have to take the hit, though. So who wrote the credit default swap? The government?

joG said:

Not quite. If the loans were given at the the Fed Rate, that would mean they would have been given without credit margin to protect against the losses from default. Someone would have to take the hit, though. So who wrote the credit default swap? The government?

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Havent read the exact piece of legislation but since its written by a progressive i dont suspect that it would use the same punishment without these proections.

Cephus said:

Many people think "default" means you stop paying and never start again. It's like declaring bankruptcy, where you settle your debts and are no longer required to pay on them. That's not the case with government college loans. You can never get out from under them, they can never be erased, even if you stop paying for a while, they just get worse and worse and there is no legal relief. It's not like a credit card where you can declare bankruptcy and the credit card company writes the debt off. These debts can never be written off. That's the point.

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If you have to mandate an artificially low rate, then they are high risk. Why is the government even in the student loan business if there's almost no risk?

FederalRepublic said:

If you have to mandate an artificially low rate, then they are high risk. Why is the government even in the student loan business if there's almost no risk?

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I don't think they should be, but there would be no similar private loan business because the government can mandate that you cannot get out of your loan no matter what you do, private companies don't get that, therefore the majority of students wouldn't be able to get loans at all because there would be too much risk. When the government can eliminate their own risk, there's no risk. Private companies can't do that.

Cephus said:

I don't think they should be, but there would be no similar private loan business because the government can mandate that you cannot get out of your loan no matter what you do, private companies don't get that, therefore the majority of students wouldn't be able to get loans at all because there would be too much risk. When the government can eliminate their own risk, there's no risk. Private companies can't do that.

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There are still private student loans. I doubt they are at 4% interest though...Student Loans, Private Student Loans, cuStudentLoans | Credit Union Student Loans

FederalRepublic said:

There are still private student loans. I doubt they are at 4% interest though...Student Loans, Private Student Loans, cuStudentLoans | Credit Union Student Loans

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They're not guaranteed by the government though. There are private lenders that carry the same protections and I think they have to have the same rates but don't quote me because I haven't looked it up.