Teh Stoopid, It Hurts: Democrats and Student Loans Edition, Part 3.14

‘Puter and Czar frequently rail against government backed student loans, bitching loudly and lengthily at all who will listen. Czar posted about the issue three days ago, and ‘Puter presciently posted on student loans nearly three years ago, on December 3, 2010.

Student loans are uneconomic for any number of reasons. If you’ve read Czar and ‘Puter’s posts as all loyal minions must, you’d already know these by heart. For the sake of minions-in-waiting and minion wanna-bes, ‘Puter will repeat himself.

Student loans are uneconomic because:

· Student loans do not charge market rates for the significant default risk inherent in unsecured debt, particularly unsecured debt to unemployed borrowers without credit histories

· Student loans are not geared to creating workers in areas of greatest need, generally science, technology, engineering and mathematics.

· Student loans permit college costs to rise without regard to economic conditions, as seen in higher education costs significantly outpacing standard inflation measures over the last two decades

· Student loans shore up colleges and universities that would otherwise fail if they had to compete for students actually capable of graduating.

· Student loans permit bullshit university departments not only to exist, but to flourish, such as Wymyn’s Stydyys, Chicano Studies, Fill-in-the-Blank Studies, etc., by attracting undergraduates looking to party for six taxpayer funded years rather than learn useful skills.

· Student loans’ nondischargeability in bankruptcy exacerbates recent graduates’ financial woes by either forcing them to stay in jobs they hate or dooming them to a life of indentured servitude to their lender.

Today we learned that the Senate Democrats have a schism in their ranks regarding student loan interest rates. On July 1, 2013, because of Senate Democrats’ obstructionist behavior, student loan rates doubled from 3.4% to 6.8%. Both parties have promised to “fix” the student loan interest rates. Only the Senate Democrats are in disagreement over how best to do so.

The flamingly liberal Senate Democrat caucus wants to tie student loan rates to the federal funds rate, currently hovering between zero and 25 basis points (0.25%). The merely liberal Senate Democrat caucus wants to compromise with Republicans (and the White House) and set student loan rates at the 10-year Treasury note yield (currently 2.65%) plus 1.85%, with no cap (or maybe a cap; it’s still in negotiation).

In sum, Democrats are eating their own in a dispute over whether student loans are loans or welfare. If student loans are loans, they should reflect insofar as possible market rates. This is the position of House Republicans, the merely liberal Senate Democrats and the White House. If student loans are welfare, Democrats will have enacted without legislation yet another entitlement which will hasten America’s descent into bankruptcy. This is the position of the flaming liberal Senate Democrats.

Weighing in from the Senate Democrats’ flamingly liberal caucus, we have ~~Sen. Red Chief~~ Sen. Elizabeth Warren (D-MA). Sen. Pocahontas sputters that unless unemployed, uncreditworthy, uneducated undergraduates receive unsecured loans with no meaningful limit at interest rates equivalent to those at which the Federal Reserve lends short term funds to regulated, capitalized banks, the world as we know it will collapse, women and minorities hit hardest.

Thus, Sen. Warren’s impeccable logic flows, we have an absolute moral duty to treat unqualified students as the equal of a federally regulated, heavily capitalized lending institution in terms of default risk.

‘Puter doesn’t know about you, but he’d much rather lend Goldman Sachs short term money at a 25 basis point rate than Precious Q. Snowflake, LGBT Film and Dance Studies major at Directional State University. Sure, Wall Street firms are assholes, but they’re assholes who repay their debts. Precious Q. Snowflake is never, ever in a million years going to repay her debt unless she’s smoking hot and renting her services out by the hour on Craigslist. And even then, Ms. Snowflake only has a relatively short shelf life before her earnings curve heads South due to meth-induced psychosis and loss of teeth. So, in sum, Sen. Warren says your dipstick neighbor’s stoner kid has the same ability to repay debt as massive New York money funds. Right.

Weighing in from the Senate Democrats’ merely liberal caucus, Sen. Joe Manchin (D-WV) insists that taking Congressional politics out of student loan interest rates through indexing the rates to a market index (10-year Treasury notes) benefits both students and America. Students benefit from interest rate certainty going forward. Government benefits from an interest rate that at least pretends to bear some semblance to a risk-based rate.

At least Sen. Manchin acknowledges reality, even though politically he can’t bring himself to call a spade a spade.

If, in the immortal South Park analogy, we must choose between a giant douche and a turd sandwich, ‘Puter’s going with Sen. Manchin’s giant douche position on student loan interest rates. ‘Puter just can’t stomach Sen. Warren’s welfare turd sandwich.

That said, both positions are fatally flawed.

If we are to have government funded or guaranteed student loans, the following safeguards at a minimum should apply:

· Income derived from student loans should be taxable at the federal, state and local levels. This will at least partially compensate taxpayers for the soaring default rates, rapidly approaching one in every seven borrowers.*

· Student loans should only go to programs of study determined to be of national importance.

· Individual borrowers should be permitted to fully discharge the loans in bankruptcy.

· Recipients of student loan proceeds should guarantee half of all funds received from each student, and immediately pay the lender on default. This will cause universities to more critically evaluate the creditworthiness of each applicant and of each of its departments.

· Government guarantees of student loans should be guarantees of collection, not guarantees of payment. That is, lenders on government guaranteed student loans should only be able enforce the government’s guarantee after exhausting all possible collection efforts first. Currently, lenders can quickly recover on a federal guarantee after pursuing no, or relatively few and feeble, collection efforts. This puts more risk on lenders and less on taxpayers.

But it’s not necessary for government to provide college funding; the private sector will do just fine at it. Here are but a few of the upsides to divorcing government from higher education lending altogether:

· Uniquely private funding will cause student loans to bear interest at market rates, accurately compensating lender for the increased lending risk.

· Better, the taxpayer’s completely off the hook for any risk, and if you don’t think the taxpayer’s on the hook now, go back and take a look at Fannie and Freddie’s non-guaranteed guaranteed consumer residential mortgage loans.

· Student loans should be dischargeable fully in bankruptcy. There is no “right” to a college education. And colleges have no “right” to churn out kids without useful skills, or worse, string kids along for six or more years without getting them to graduate.

· Reduced funding availability at nonmarket rates will necessarily limit the number of students able to attend college, meaning the marginally qualified will seek work better suited to their skill set.

· Limiting the number of students able to attend college will lower college tuition as schools compete for survival over a significantly diminished applicant pool. This pool of qualified applicants will insist on lower overall tuition, significant aid or both.

· Limiting the number of students able to finance college will place risk on banks and students where the risk properly lies.

· Properly structured derivative markets (shut up already, they work well) are able to spread risk among willing participants as an investment strategy. Think of it this way. Bain Capital issues a portfolio of bonds secured by student loans, to be paid from the income stream generated by repayment of the student loans. Bain Capital could offer investment paper collateralized solely by student loans made to electrical engineering majors at the top 10 undergraduate institutions with a small coupon like AAA corporate debt. Conversely, Bain Capital could offer investment paper secured by student loans made to Wymyns’ Stydyys majors at bottom tier universities like junk bonds (or Greek government bonds). Regulated financial institutions would be prohibited from holding these investments.

There’s a million different ways for the private sector to get student loans, and therefore college costs, right. There’s a million different ways for politicians and government to get student loans, and therefore college costs, exactly wrong.

Of all the possible ways for government to get student loans wrong, ‘Puter never, ever imagined an allegedly intelligent politician like noted American Indian Sen. Elizabeth Warren would ever suggest treating student loans as a “let’s give free stuff to everyone” welfare program.

‘Puter guesses that Sen. Warren can now be accurately referred to as an Indian giver, since she’s giving away taxpayer money for free.

*In 2012, three year rolling average student loan default rates were at 13.4% and climbing. 250 schools have a default rate in excess of 30%. Public universities clocked in at an 11% default rate, and private schools at 7.5%.

'Puter

Always right, unless he isn’t, the infallible Ghettoputer F. X. Gormogons claims to be an in-law of the Volgi, although no one really believes this.

’Puter carefully follows economic and financial trends, legal affairs, and serves as the Gormogons’ financial and legal advisor. He successfully defended us against a lawsuit from a liquor distributor worth hundreds of thousands of dollars in unpaid deliveries of bootleg shandies.

The Geep has an IQ so high it is untestable and attempts to measure it have resulted in dangerously unstable results as well as injuries to researchers. Coincidentally, he publishes intelligence tests as a side gig.

His sarcasm is so highly developed it borders on the psychic, and he is often able to insult a person even before meeting them. ’Puter enjoys hunting small game with 000 slugs and punt guns, correcting homilies in real time at Mass, and undermining unions. ’Puter likes to wear a hockey mask and carry an axe into public campgrounds, where he bursts into people’s tents and screams. As you might expect, he has been shot several times but remains completely undeterred.

He assures us that his obsessive fawning over news stories involving women teachers sleeping with young students is not Freudian in any way, although he admits something similar once happened to him. Uniquely, ’Puter is unable to speak, read, or write Russian, but he is able to sing it fluently.

Geep joined the order in the mid-1980s. He arrived at the Castle door with dozens of steamer trunks and an inarticulate hissing creature of astonishingly low intelligence he calls “Sleestak.” Ghettoputer appears to make his wishes known to Sleestak, although no one is sure whether this is the result of complex sign language, expert body posture reading, or simply beating Sleestak with a rubber mallet.

‘Puter suggests the Czar suck it.