a story that makes sense, but yet i've heard nothing about.
Rob | Homepage | 03.25.08 - 9:45 pm | #

With the prospect of adopting my girlfriend's 9 year-old and 1 year-old daughters, I just hope they are both brilliant or win the lottery on their 18th birthdays. Because otherwise we'll be looking at a refi on a house to pay for college.


Though the promise of easily and cheaply financed education is what has caused college cost to skyrocket, it isn't a problem that's going to be fixed by cutting the legs out from under the current system and ignoring it bleed all over the floor.
Area Man | 03.26.08 - 3:07 pm | #

Only problem with your analysis is that Sallie Mae and Wells Fargo have NOT dropped out of the student loan market--they both continue to make federal and private loans. Sorry.
Contrarian | 03.27.08 - 9:44 am | #

I don't even know where to begin with the errors in this post. The biggest flaw is a complete confusion of the difference between federal loans made by private lenders within the Federal Family Education Loan Market and private loans made by private lenders. The subsidy cuts blamed on knocking Sallie Mae and Wells Fargo out of the market (more on that in a minute) were on FEDERAL student loans, which carry a guaranteed rate of return for lenders. These loans remain widely available for students and the government is taking action in case that changes. The Department of Education has already said it could easily accomodate an expansion of Direct Lending, in which it fulfills the same role as a private lender does in the FFEL market. Moroever, there is also a lender of last resort provision, in which entities called guaranty agencies have to provide federal loans if students are denied by other lenders.

The post's next major flaw is a misrepresentation of what is going on in the private loan market--a point Contrarian correctly made in an earlier comment. Here's another WSJ article that specifically says Sallie Mae has only tightened standards for private lending, not dropped out of the market. And do you know where those standards are tightening? On subprime loans often given to students at expensive, low-quality for-profit schools -- loans that Sallie Mae has been subject to class action lawsuits. These loans, moreover, do not receive a single penny from the federal government, hence subsidy cuts have absolutely no bearing on their availability.

In short Rob, the reason why you haven't heard much about this is that Lenoardo's analysis is off. Private loans represent a small percentage of the student loan market, with the vast majority of borrowers taking out federal loans. As for the loan limits, students can actually take out significantly more debt, in the form of unsubsidized loans and PLUS loans. Both of these contain slightly higher interest rates, but they are still well below the astronomical private loan rates (imagine using your credit card to pay off a 30 year college loan and you've essentialy taken out a private loan).

Finally, the issue of the Department of Education having "caused" this crisis -- a laughable notion on so many levels. First, the cuts were passed by Congress, not the Department, so even if they were at fault, you can't blame Margaret Spellings and company. Second, you ignore the fact that the problems in the market are coming from the use of auction rate securities, a risky way of financing debt. The market for auction rate securities has completely blown up -- and not just for student loans. What's going on in the student loan market is a far more nuanced issue than you present here. If you really want to speak to the people, perhaps you should provide them with more accurate information.
Ben | Homepage | 03.27.08 - 10:42 am | #

"If you really want to speak to the people, perhaps you should provide them with more accurate information."

snarky blog comment aside, it's probably important to remind people who make it a habit to ignore the constitution that the blog title is in reference to that document and where our undefined rights lie.

you would have thought the excerpt under the blog title would give it away..
Rob | Homepage | 03.27.08 - 11:48 am | #