Author Topic: Why are student loan rates so high?  (Read 4524 times)

nobodyspecial

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Why are student loan rates so high?
« on: September 21, 2016, 10:33:25 AM »
Reading posts here is seems that student loan interest rates are often in the 5-9% range.
Economics 101 says that interest rates should be lower on long term, high amount loans with good collateral.
Given that student loans are all these, plus government backed/subsidized to some extent, and non-dischargeable shouldn't they be very-very low rate? I don't have student loans but my variable rate mortgage is < 2.25%

Is there something odd about student loans?
Are they fixed term and not refinance-able, if so what happens if you graduate in a year with 20% base rates rather than 0%?
 

v8rx7guy

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Re: Why are student loan rates so high?
« Reply #1 on: September 21, 2016, 10:55:08 AM »
I think that when you are seeing interest rates in the 5-9% range, that often means that the loan is a private loan -- an unsecured debt.  But you're right, federal loans which are guarenteed by the federal government, should have lower interest rates in my opinion.

nereo

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Re: Why are student loan rates so high?
« Reply #2 on: September 21, 2016, 11:19:31 AM »
IN terms of the federal student loans, you can thank congress for most of the rates you see fixed at/around 6.8%.  Up until 2013 stafford loans  (the most common type of federal student loans) were set at whatever rate congress approved until they decided to pass new legislation changing the rate to something else.  From 2006 until 2013 the rate was fixed at 6.8%, even though the market rate plummeted during this time period.  Also, up until the 2010 student loan reforms passed by congress and Obama, most federal student loans were actually dispersed through 3rd party lenders, who often bought and sold each otehrs loans much in the way that they did with mortgages.  Turns out this was a really bad idea and led to all sorts of problems.

Nowadays student loans match the 10y Treasure bills + 2.05% at the time the loan is taken out (they use the rate on July 1st of each year).  For the 2016-2017 school year the rate is set at 3.76%  The federal government is also the sole distributor of loans (via www. studentloans.gov) This has been true only since 2013.

Once you exit school and enter repayment you can refinance and/or consolidate your loans with a private lender.  Often this will lead to lower rates, but people being the stupid creatures we are with debt, some will instead choose an extended payoff plan or cash-up-front instead of the lower interest rate option because they see immediate benefits upfront and fail to appreciate that they will pay butt-loads more over time.

matchewed

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Re: Why are student loan rates so high?
« Reply #3 on: September 21, 2016, 01:01:17 PM »
You mean no collateral right?

tonysemail

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Re: Why are student loan rates so high?
« Reply #4 on: September 21, 2016, 01:15:15 PM »
this is a pretty good podcast/story, which blames it on privatizing sallie mae in 1994.
https://www.revealnews.org/article/who-got-rich-off-the-student-debt-crisis/

MasterStache

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Re: Why are student loan rates so high?
« Reply #5 on: September 21, 2016, 01:17:18 PM »
Hmmm I had about 20K in student loans (paid off some time ago) and about half of them were around 2% interest rate. I even got discounts for on time payments which knocked a couple of my interest rates down below 1%.   

nobodyspecial

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Re: Why are student loan rates so high?
« Reply #6 on: September 21, 2016, 01:25:08 PM »
You mean no collateral right?
No physical collateral true, but if you are paying for somebody to become a doctor or lawyer and they can't discharge it - that has to look pretty safe in your risk anaysis

nereo

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Re: Why are student loan rates so high?
« Reply #7 on: September 21, 2016, 01:27:00 PM »
ADding to what's been said above -
Student Loans are also one of the only kinds of loans where you make no payments for at least four years, and subsidized loans you accrue no interest during the period(s) that you are in school. It's no uncommon for a student to go 8 years before making his or her very first payment on a loan.

Slow&Steady

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Re: Why are student loan rates so high?
« Reply #8 on: September 21, 2016, 02:14:57 PM »
You mean no collateral right?

My thought exactly

I think that when you are seeing interest rates in the 5-9% range, that often means that the loan is a private loan -- an unsecured debt.  But you're right, federal loans which are guarenteed by the federal government, should have lower interest rates in my opinion.

This is not true.  I have federal student loans, subsidized and un-subsidized (paid off now) that carry (carried) a 7.5% interest rate.  See below for explanation.

IN terms of the federal student loans, you can thank congress for most of the rates you see fixed at/around 6.8%.  Up until 2013 stafford loans  (the most common type of federal student loans) were set at whatever rate congress approved until they decided to pass new legislation changing the rate to something else.  From 2006 until 2013 the rate was fixed at 6.8%, even though the market rate plummeted during this time period.  Also, up until the 2010 student loan reforms passed by congress and Obama, most federal student loans were actually dispersed through 3rd party lenders, who often bought and sold each otehrs loans much in the way that they did with mortgages.  Turns out this was a really bad idea and led to all sorts of problems.

This is my chase, I graduated in 2006 with fixed interest rate a 7.25% and did something that caused it to be bumped up to 7.5%.  Although I have always budgeted and contributed to retirement accounts I only recently started paying more attention to finances and realized how horrible my rate is.  So I immediately paid off my un-subsidized loan. I am currently taking grad classes so my subsidized loan is at 0% for now, if I can't get it paid off before I finish grad school I will refinance to a lower rate at that time.

lordmetroid

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Re: Why are student loan rates so high?
« Reply #9 on: September 21, 2016, 02:57:50 PM »
I have no idea what you are talking about. My student loan, issued by the State of Sweden is at 0,6%. Very affordable!

Making Cookies

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Re: Why are student loan rates so high?
« Reply #10 on: September 22, 2016, 11:36:28 AM »
Well this is the United States of Money. Here we must turn profits before we consider the good of society as a whole. Must turn a healthy profit before we consider what the value of having an educated citizenry is.

Slee_stack

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Re: Why are student loan rates so high?
« Reply #11 on: September 22, 2016, 11:52:11 AM »
Its probably like health insurance.

You have folks investing in acquiring different skill sets.  Some are likely to be far more useful than others.

How much would you personally loan someone majoring in Underwater Basket Weaving from Party-U?  What rate of return would you want for it?

Now how much would you invest on someone going into Programming?  Less? 

But majors don't matter when it comes to loans, nor does likelihood of employment or true ROI on education.

How much value is that average college education REALLY worth today?  Loan rates might even be too low.


dude

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Re: Why are student loan rates so high?
« Reply #12 on: September 22, 2016, 12:10:59 PM »
My loans were taken out for law school back in '94-'97.  I consolidated my Subsidized and Unsubsidized Stafford Loans with Direct Loans (i.e., Dept. of Education) a year or two after graduation.  My rate is reset every July 1, and it's pegged in some fashion to the 90-day T-Bill rate, and capped at 8.25% (IIRC). At some point back then, my rate was in the 6-7% range.  It's been under 2.5% for as long as I can remember and is currently at 2.33%.  Not sure when or why Congress decided to change the formula, but I'm really fucking happy it didn't affect me.

I recently tried finding information online about my loans, and particularly the formula for determining my interest rates, and I couldn't find jack shit.

Corrected to add:  My rate reset on July 1 and is now 2.65% -- first increase I've seen in many years!
« Last Edit: September 23, 2016, 08:04:56 AM by dude »

nobodyspecial

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Re: Why are student loan rates so high?
« Reply #13 on: September 23, 2016, 06:58:34 AM »
Well this is the United States of Money. Here we must turn profits before we consider the good of society as a whole. Must turn a healthy profit before we consider what the value of having an educated citizenry is.
Where the banks should operate with enlightened self interest which suggests competing to off the lowest rates
The current  system seems to be as if the government had decided that all car loans should be 10%, whether for an old junker or a doctor's new mercedes.

nereo

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Re: Why are student loan rates so high?
« Reply #14 on: September 24, 2016, 08:46:06 AM »
Well this is the United States of Money. Here we must turn profits before we consider the good of society as a whole. Must turn a healthy profit before we consider what the value of having an educated citizenry is.
Where the banks should operate with enlightened self interest which suggests competing to off the lowest rates
The current  system seems to be as if the government had decided that all car loans should be 10%, whether for an old junker or a doctor's new mercedes.

A key difference is that in the United States, student loans cannot be discharged through bankruptcy, and unlike with car or home loans the less a person or his/her parents) earns the more he/she can take out in student loans (up to a point). Combine that with the lack of tangible assets that can be siezed and they can't be treated like a conventional loan. Stafford student loans today are ONLY disbursed through the federal government because there were too many instances of private lenders mucking things up and screwing over people.

With the 2013 student loan adjustments the rates are super competititve (currently 3.76%).  They were too high IMO in the period between 2006-2012 when they were fixed at 6.8%, and there was blowback that the federal government actually profited from student loan interest.

seattlecyclone

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Re: Why are student loan rates so high?
« Reply #15 on: September 24, 2016, 09:01:33 AM »
The non-dischargeability means that the banks will probably get their money back eventually, but that doesn't mean they won't have to go through some expensive debt collection exercises before they get it back. The interest rate takes this charge into account in addition to any risk of non-payment.

Laserjet3051

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Re: Why are student loan rates so high?
« Reply #16 on: September 24, 2016, 11:41:49 AM »
Inability to refinance high interest government subsidizedd student loans to current lower interest rates is nothing short of criminal. Before you jump on me and say it can be done, once a person has consolidated their govt subd loan, there is no possibility to refinance, short of going back to school, taking out a new loan, then consolidating the lot of em.

Why cant I take advantage of current lower student loan interest rates?

nobodyspecial

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Re: Why are student loan rates so high?
« Reply #17 on: September 24, 2016, 12:12:59 PM »
Why cant I take advantage of current lower student loan interest rates?
What do you think this is ? A free market economy or something ?

GetItRight

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Re: Why are student loan rates so high?
« Reply #18 on: September 24, 2016, 12:24:35 PM »
Inability to refinance high interest government subsidizedd student loans to current lower interest rates is nothing short of criminal. Before you jump on me and say it can be done, once a person has consolidated their govt subd loan, there is no possibility to refinance, short of going back to school, taking out a new loan, then consolidating the lot of em.

Why cant I take advantage of current lower student loan interest rates?

Because government, that's why. Personally I paid off my government loans as quickly as possible. Private loans I was able to transfer portions to 0% CC offers a few times and refinance to better rates several times. If I knew what I knew now I would have only taken private loans, or rather would have never gone to college at all and saved a fortune but that's another story.

It doesn't make sense that student loan interest rates are higher than other loans. They should be lower since the government makes them not dischargeable in bankruptcy and will pay the bank back with money stolen from taxpayers if the debtor doesn't pay them. Student loans are extremely low risk for a bank. My guess is the market for student loans is so warped from government intervention in education and loans that they charge more because they can and the government protects them. After all, government backing and protection of student loans is why college prices have skyrocketed. Schools make out like bandits, the banks will loan virtually any amount, but perhaps charge more because they don't want to miss out on the gravy train the government has given the schools.

Cathy

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Re: Why are student loan rates so high?
« Reply #19 on: September 24, 2016, 02:38:01 PM »
Given that student loans are ... non-dischargeable ...
... you are paying for somebody to become a doctor or lawyer and they can't discharge it ...
[I]n the United States, student loans cannot be discharged through bankruptcy ...
The non-dischargeability means that ...
They should be lower since the government makes them not dischargeable in bankruptcy ...


The correct statement of the rule is that "student loan debt [is] presumptively nondischargeable" in bankruptcy. United Student Aid Funds v. Espinosa, 559 US 260, 277 n 13 (2010) (emphasis mine). This presumption can be overcome by a showing by the debtor of "undue hardship on the debtor and the debtor’s dependents". 11 USC § 523(a)(8). It continues to be untrue to state without qualification that student debt is nondischargeable in bankruptcy in the United States.

nobodyspecial

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Re: Why are student loan rates so high?
« Reply #20 on: September 24, 2016, 03:23:52 PM »
In practice the levels for showing undue hardship are so high as to be impossible

Last year, the U.S. Government Accountability Office estimated that student debt held by borrowers 65 or older grew from $2.8 billion in 2005 to $18.2 billion in 2013. All told, 706,000 households headed by a person at or near retirement age had student debt, and 36,000 individuals 65 and older were having their Social Security benefits garnished to pay off that debt.



dang1

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Re: Why are student loan rates so high?
« Reply #21 on: September 24, 2016, 03:28:54 PM »
No one is forced to take government loans to pay college, is that right? A person is free, if that person wants to, for example, to whip out a credit card and pay for college that way, is that right? As for the student loan industry, I suppose it's just another special interest https://www.opensecrets.org/industries/indus.php?ind=F1410

BudgetSlasher

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Re: Why are student loan rates so high?
« Reply #22 on: September 25, 2016, 05:48:27 PM »
You mean no collateral right?
No physical collateral true, but if you are paying for somebody to become a doctor or lawyer and they can't discharge it - that has to look pretty safe in your risk anaysis

No they lend money for an education not paying to become X profession; there are any number of reasons that the loan will not pan out.

Perhaps they fail-out/drop-out part way through, perhaps they do not pass the licensing exam, maybe they do not pass the required background investigation, perhaps they choose an underpaying role or choose not to utilize the degree, perhaps a change in how insurance is handled reduces what doctors are paid or a recession sees a surge experienced lawyers applying for jobs (and getting them over recent graduates), others in the same pool of loan will die before the loan is repaid(or even the first payment is made, which with college, masters, PhD/JD/MD could be years down the road).

All of those risk and more are spread across the pool of applicants.

MrsPete

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Re: Why are student loan rates so high?
« Reply #23 on: September 25, 2016, 06:51:10 PM »
Simple:  People are willing to sign on for loans at these rates.  If they weren't, the product would cease to exist. 

nobodyspecial

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Re: Why are student loan rates so high?
« Reply #24 on: September 25, 2016, 08:56:21 PM »
You mean no collateral right?
No physical collateral true, but if you are paying for somebody to become a doctor or lawyer and they can't discharge it - that has to look pretty safe in your risk anaysis

No they lend money for an education not paying to become X profession; there are any number of reasons that the loan will not pan out.

Perhaps they fail-out/drop-out part way through, perhaps they do not pass the licensing exam, maybe they do not pass the required background investigation, perhaps they choose an underpaying role or choose not to utilize the degree, perhaps a change in how insurance is handled reduces what doctors are paid or a recession sees a surge experienced lawyers applying for jobs (and getting them over recent graduates), others in the same pool of loan will die before the loan is repaid(or even the first payment is made, which with college, masters, PhD/JD/MD could be years down the road).

All of those risk and more are spread across the pool of applicants.
Fair point, but lending money for professional degrees at Ivy league colleges is a long way from junk-bond or sub-prime mortgage territory

Tjat

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Re: Why are student loan rates so high?
« Reply #25 on: September 26, 2016, 07:30:52 AM »
So if you were a lending institution and were confined to lending money to individuals with no/limited income, no/limited skills, no guarantee of either of those changing in the future, and no other collateral or recoupment means...you'd select a LOW rate to lend at?