Say Anything Blog

“Excess financial aid” includes private loans like the Grad PLUS. The students have to repay it. I had to take it for grad school because I couldn’t be a full-time law student and pay my rent otherwise. So the calculated financial aid takes minimal living expenses into account (food and board). This is “excess” beyond tuition.

No one is running away from these loans (we couldn’t if we wanted to) so I don’t see how it is a “subsidy.” Most students who have “excess financial aid” are in good private schools and likely to not qualify for government subsidies like Pell and TAP grants.

“Behind Communism, Fascism, behind all occupations and invasions lurks a more basic, pervasive evil… a parade of people marching by with raised fists and shouting identical syllables in unision.” - Milan Kundera

Who do you think is subsidizing the low interest rates and delayed payments on those loans?

The purpose of government shouldn’t be to do good, but simply to refrain from doing evil.

Not only are we “over-subsidizing” the cost of higher education… which by the way only increases the cost of higher education… but as the vast majority of these students are public high school graduates, I can personally guarantee that the most of them don’t know squat about the proper use and long term management of credit.

Our government/union monopoly education system has trouble enough with reading, writing, ‘rithmetic, and day-to-day discipline.  Personal finance?  Forget it!

“Capitalism is optimism monetized.”

Education, along with health care, should be subject to market forces.
Compare the cost and quality of your first computer to the cost of your latest one.
Enough said!

No Free Lunch

Sallie uses high interest rates and fees to charge students as much as 28 percent annual interest on loans.

Student Loans

Who do you think is subsidizing the low interest rates and delayed payments on those loans?

It’s possible that I don’t know exactly what goes into my loans (if so, please feel free to educate me), but as I understand, only my Subsidized Stafford loan (about 15% of my total loans) was subsidized. I did not have a delayed payment on any of my other loans, the interest accrued while I was still in school.

Nevertheless, even if 100% of my interest was partially subsidized, my next tax payment would double the taxpayer’s investment in my education (which I wouldn’t have been able to afford otherwise). Good investment, no?

“Behind Communism, Fascism, behind all occupations and invasions lurks a more basic, pervasive evil… a parade of people marching by with raised fists and shouting identical syllables in unision.” - Milan Kundera

It depends on who your employer is.

No Free Lunch

Yea, I just looked it up (and once again, correct me if I’m wrong) but the most a graduate student can take in subsidized loans is $8,500 per year ($5,500 for undergrads). The “excess financial aid” that you are referring to comes entirely from unsubsidized loans (unless these are city college students and paying less than $8,000/yr in tuition).

“Behind Communism, Fascism, behind all occupations and invasions lurks a more basic, pervasive evil… a parade of people marching by with raised fists and shouting identical syllables in unision.” - Milan Kundera

Chewie, I’ll help out, since I work in the higher education industry (formerly as a recruiter, so explaining financial aid is pretty familiar).  The “subsidized” types of Stafford loans are probably better described as “fully subsidized” loans, meaning that the government (i.e., the taxpayer) pays for your interest-only payments until you drop out of school or reach the end of your post-graduation grace period (typically 6 months, if I remember correctly), which keeps the amount of your loan from growing every month.

“Unsubsidized” Stafford loans should be named “partially subsidized” - because you either make the interest-only payments while you’re in school, or the interest that is accruing capitalizes into the principal portion of the loan.

Here’s the crucial piece, though: the reason it would be more accurate to re-name the loans is because the government (taxpayer again) offers incentives to lenders (underwrites the loans and guarantees them in the event of default).  No lender in their right mind would offer 8% loans to high schoolers with no credit history - so the Stafford program makes up the difference between the program’s rates and the market rate (which, if supply and demand were allowed to work their invisible-hand-magic, would inevitably be somewhere between that 8% number and the 21.99% rate that credit card companies are overjoyed to hand out - with free t-shirt - to gullible college freshmen).

To offer my opinion on the thread, though, I think the best solution lies somewhere between the current hole-ridden system and limiting it to tuition-only expenses.  I’m with Hairy when he says that room and board (which were twice as much as my tuition and fees when I went to school - at U of Montana) would make college completely out of reach for many students.  I got as big a financial aid package as was allowed, since I came from a single-parent home with 2 siblings and a mom that made under $25K back then - early 90’s.  I came out of those 4 years with a degree, a maxed-out credit card (at 21.99% - yes, I was one of those gullible freshmen), and $16K in student loans.  My balance is about $2100 today.

The problem with the loan program, in my opinion, is the rampant abuse of it.  I’ve worked in higher ed for much of my professional life, and one of the most egregious offenses is when school employees, who often get either free or extremely reduced tuition rates, still take their full slate of financial aid awards, which they often use to take vacations, do home improvements, or even just sock away in a money market or other investment.

Another issue is the ridiculously long repayment schedule.  Again, I had $16K worth of principal to repay when I graduated in 1996, and I’ve got one year left (since I’ve started paying more than the required amount since my loan interest tax deduction dried up last year).  When was the last time you took out a car loan and got 12+ years from the bank to repay it?  And even new car loans (which have obvious collateral and most lenders run a standard credit history check) are more expensive than 8.020% (my actual rate - I just looked it up).

So the system comes with the obvious government inefficiencies built right where you’d expect them to be: all over.  The silver lining is that, at least in grad school loans, the private market is now offering loan terms that are actually competitive with the government-subsidized version (grad school only at this point because most grad schoolers have credit history or at least higher likelihood not to default).  Go figure, even with the government fat built into the system, privat industry figured out a way to out-compete the bureaucrats. 

Of course, that’s not without its potential for abuse, either - as we witnessed with the student loan “scandals” last year.  But really, how scandalous was it?  Lenders occasionally paid schools to position them higher on their list of lenders - not unlike Coca-Cola paying grocery retailers for the endcap of a supermarket aisle.  And financial aid officers occasionally took “consulting” contracts - largely to help the schools set up websites that would allow students to apply for aid online, which speeds up the process dramatically and reduces errors.  I’m aware of the fact that this comes with at least the appearance of a conflict of interest, but it wasn’t anywhere close to the scandal it was made out to be.

I can’t envision a scenario where the Stafford loan program can be completely abandonded, but the “unsubsidized” version of it, for grad school students anyway, could probably be abandoned without too much pain.  And there are plenty of loopholes that could be closed to keep the stupid-factor costs down.

Rob, I am currently a junior at NDSU and have quite a bit of student loans.  My parents couldn’t afford to help pay for college so I am doing it on my own.  I have federal loans but they are not subsidized.  I don’t have to start paying until I graduate (in about a year) but interest is growing from the time I take out the loan.  6.75% on this year’s loan is quite a bit more interest than there was in the past, but I am not crying about it begging to be subsidized.

My parents did not set up a trust fund for me to go to school and I for one as a student cannot find a job where I can earn $14,000+ dollars during 3 months in the summer and for the 3 weeks for Christmas break.  And that $14,000 includes only books, tuition, my dorm room, and meal plan.  No entertainment system, car stereo, new computer, nothing.

I will have a good engineering job after I graduate and will pay back the loans along with the $2000+ interest that has accrued over the 4 years I have been in college.  As a conservative I am offended to think that I am subsidized because I took out a student loan because the 80.5 hour a week manufacturing job I worked during the summer didn’t earn me enough to pay for school in cash.

Rob, if you were to refinance your mortgage after the government happens to cut mortgage interest rates so you could save a lot of money would it be fair for me to argue that the government is subsidizing you and your family’s living arrangements?  Of course not.

Companies shouldn’t go to bed with the government because the government has herpes.  You can try your whole life but you’ll never get away from that one night.

sonofasillyperson,

Thanks for taking the time to explain all that. In this case, as I understand it, a grad student can take out a max of $20,500 in subsidized loans (sub stafford + unsub stafford). Correct? So Rob’s “excess aid” post is really only applicable to people who go to grad schools that cost less than 20k… The rest of us are paying for room and board with those private loans you mentioned (Grad PLUS for grads and CITI-ASSIST for undergrads).

“Behind Communism, Fascism, behind all occupations and invasions lurks a more basic, pervasive evil… a parade of people marching by with raised fists and shouting identical syllables in unision.” - Milan Kundera

Hairy-

“Excess” is obviously the point where most reasonable people will disagree in defining on this matter, so I’ll stop short of agreeing that Rob’s post is “really only applicable” to anyone.  I just want everyone (Dougee included) to understand that even though one’s loan is called “unsubsidized”, it’s still made possible through subsidization by the Stafford loan program.

My point is that before we go off the deep end and start talking about abolishing a program that’s done a lot of good for a lot of people (and Dougee may have a fair point about his subsidization - though he won’t use that term - resulting in a net gain for gov’t tax revenues), we should instead focus on cleaning up the wastefulness and inefficiencies that exist in the system.

Dougee, I know it’s tough to reconcile to the fact that you’re subsidized even if you take “unsubsidized” Stafford loans - but you are (read my above commentary).  6.75% is well below the market interest rate for an unsecured (i.e., no collateral) loan to a person with a short (I’m assuming you’re around 20 years old, no?) credit history.  Banks who take on these loans are “subsidized” by the Stafford program to make up for that extra risk, which is the fundamental piece of the program.

Your point to Rob about mortgages and the government cutting interest rates is not fair, in my opinion.  Until recently, Congressional cutting of mortgage rates was unheard of - the only interest rate the government had control over was the Federal Funds rate, which is directly controlled by the Federal Reserve Board, which is personified by Ben Bernanke and formerly Alan Greenspan.  That is the rate at which the federal reserve system will make short-term (usually a matter of a handful of days) loans to banks so the banks can maintain liquidity.  Other interest rates tend to follow the federal funds rate because banks build their business models on the concept of rate and risk gaps - i.e., if it’s riskier for them to borrow money overnight from the fed (“riskier” defined by the notion that higher interest rates imply higher risk), then in order to accommodate that risk, they need to in turn pass on higher rates of interest to their own borrowers (and cut rates for their “lenders” - i.e., depositors).

A borrower taking advantage of reduced market lending rates is hardly subsidization, until you get to the point of Congress forcing the freezing of mortgage interest rates or creating lending programs like SallieMae or FreddieMac.  These programs are the housing equivalent to the Stafford student loan program, so if that’s what you’re referring to, then yes, accepting financing under those programs amounts to subsidization.  But the vast majority of homeowners don’t qualify for nor accept those programs, since they come with other strings (higher-than-prime loan rates, mortgage insurance requirements, added inspection requirements) that make them unattractive to most consumers.

My point was more that since $20k is the most in “subsidized” loans a grad student can ever take out (the rest being entirely private loans), there are not enough people whose tuition is small enough that they can even have “excess subsidized aid” to warrant concern.

“Behind Communism, Fascism, behind all occupations and invasions lurks a more basic, pervasive evil… a parade of people marching by with raised fists and shouting identical syllables in unision.” - Milan Kundera

True, but then you get zealots like Pelosi fighting to reduce even further the already incredibly low interest rates on the loans.  Of course, that line of thinking is counterintuitive, since that equates to a price reduction, which allows schools to raise tuition, since they now have more buyers for a limited-availability product, which negates the price-reduction-via-interest-rates anyway. 

But that’s another thread…

In many cases, the “excess” funds have absolutely nothing to do with loans.  Those fuinds can come from scholarships.  For instance, it is possible for a student to earn a full scholarship to a college paid by the school.  Additionally, the student can earn locally (or state or nationally) provided scholarships, e.g. National Merit Scholars.  That money is sent to the college and deposited in the student’s name.  Since the student owes nothing to the college for tuition, fees or room and board, this money is now “excess.”  What should the school do with it?

If they turn it back to the scholarship provider aren’t they robbing the student of its benefits?  By Pilgrim’s reasoning, if the money is given to the student, that’s wrong, too.  Many of these type scholarships specify where they are refundable or not.  If they are not, the school has to return the money if it is not used for the specifics of the scholarship.  If it is refundable, it should be returned to the student.

The money that comes from the schools is not refundable.  It can only cover the exact costs as specified in the scholarship.  While they often mention a value, there is no real dollar amount beyond what the student needs.

“Although I can accept talking scarecrows, lions and great wizards in emerald cities, I find it hard to believe there is no paperwork involved when your house lands on a witch.”
- Dave James

I worked, indirectly, for a student loan company for a few years after college.  While they only sold “private, unsubsidized loans” they were still quite reliant on federal subsidies like risk insurance programs.  In the early part of Bush’s admin, they raised the profit margins significantly and it was pretty obvious that the taxpayers shouldn’t foot the bill for guaranteed profits. 

Of course, this doesn’t mean Pelosi & Kennedy’s “fix” did anything but turn the industry into a guaranteed LOSS!  Selling a loan outside of the preferred lender list became a lot harder, and the only “fix” to the corrupt relationships between lenders & schools is that each school is now required to keep more lenders on those lists.

A lot of companies saw the writing on the wall and sold off loan portfolios.  The one I was with did the same and started looking toward credit cards since they were allowed to actually charge what the debt risk is worth (and this number is very high when you’re talking about student loans).  The companies left realize they can’t make a dime, especially through a liquidity trap like the overall financial system is experiencing. 

So of course, the talk now is of a new bailout, to save the subsidized lenders from all this government meddling - with more government meddling!  The last proposal I heard was a debt swap like the Federal Reserve was offering investment & savings banks.  This would allow student loan companies to trade defaulted loans for the face value, and would skip Congressional funding by going straight to the Fed.

What a huge, incalculable mess.  Compared to the current system, I almost wonder if a more direct bureaucracy would be slightly less wasteful than the indirect profits for everyone model.

I completely agree that this is simply abusing higher education aid. If the aid was in excess, then it wasn’t needed in the first place.