Loanership

by digby

One of my trusted readers wrote in with this in response to my post yesterday about the fact that the Democrats can’t seem to muster 50 votes to pass the Student Loan bill:

One thing that isn’t being currently reported regarding the student loan skimming, for lack of a better term, came out during the NYstate investigation into the pay for play nature of student aid staff steering students to the for-profits, rather than to the Dept of Ed back in 2006-2007. It also came out a couple years before that when Congress tried to fix the interest rate issues pertaining to student loans. What came out then was that when the student loan program was instituted the government didn’t want to loan directly, but the banks were skeptical: give potential 100s of thousands of dollars to people with no credit history. So the government threw in a HUGE sweetener: whatever the fixed interest rate on the loan is, the government would reimburse the lenders the difference
between it and the maximum they were allowed to charge by law, which is around 19% if I recall correctly. So not only was the Federal government guaranteeing the loans, it was making sure that the banks weren’t just making their expected profits, but profits plus the difference up to the maximum interest rate against the loan principle amount.

This was fixed back in 2005-2006, but loans before that, or at least some of them, were grandfathered through. So, for instance, I have a 4.26% fixed interest rate on my loans which are in repayment. They cover my BA, two masters, and a PhD.
So when I pay my loans every month I pay the interest, I’m fortunate well off enough to pay into the principal. So the lender makes its money back. They then turn around and charge the government another 15% or so times my principle. So I’m paying my loan back responsibly and then all of us are paying an essentially usurous subsidy to the lender out of our taxes.

So the scam is even worse than most people think. Not only that, but student loan debt can’t be reworked through bankruptcy and falls to my survivors if I die. So had I been killed during my tour in Iraq, my family would’ve been on the hook to pay of my loans in full.

This is one of those obviously corrupt lobbying deals, like the bankruptcy legislation, which the Democrats are happy to give to their local and regional patrons in return for big, fat donations.

It doesn’t get any more obvious than this.

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