Archive for June, 2015

Non-Discriminatory Lending

According to this article, the USG’s student loan portfolio is worth $1.2 billion trillion and is “the biggest pool of U.S. debt,” second only to government loans for mortgages.

The debt has soared for an obvious inflated reason: “The government writes loans for any student who enrolls in an institution eligible for federal aid.”

USG will fork over tens of thousands of dollars to the high-IQ individual accepted to Wharton as readily as it forks over tens of thousands of dollars to the low-IQ individual who demonstrates her low IQ by borrowing tens of thousands of dollars to earn an associate’s degree in Office Skills at Fly-By-Night Online College.

The outcome is predictable. The government cannot discriminate in regard to its investments and has thereby provided an amusing object lesson in the value of discrimination:

The Wharton grads are good to pay back their loans. The others are not. The Wharton grads are subsidizing those who have not paid back their loans as well as the fresh blood applying for student aid every year. Which would not be an issue if the government loan interest rates were as low as what private investors could offer. But they are not.

Chris Winiarz, a 31-year-old money manager with a Northwestern MBA, jumped at a student-loan deal of a lifetime.

A startup called SoFi offered to refinance his $45,000 in federal debt, slashing his interest rate to 2.69 percent from 6.55 percent. Winiarz will pay off his obligation three years early, saving about $9,500 and helping pay for an engagement ring for his girlfriend. The company even threw in a free bottle of artisan olive oil.

“I really should have done this a lot sooner,” said Winiarz, who helps oversee the University of California’s endowment and pension investments.

Where the government will not discriminate between borrowers, the private sector will:

In a growing refinancing boom, a new generation of private lenders — backed by hedge-fund billionaires and Silicon Valley royalty — is targeting successful graduates with professional degrees and student loans. For the borrowers, “it’s an uncashed lottery ticket,” said Brendan Coughlin, head of education finance for Citizens Financial Group Inc.

Private lenders have refinanced about $3 billion to $4 billion so far, according to Stephen Dash, chief executive officer of Credible.com, a website that compares refinancing rates.

That number is sure to rise, since better-quality borrowers have no logical reason to stay put and subsidize others, said Vince Passione, founder of Lendkey Technologies Inc., which connects students online with private student-loan lenders.

An exodus of loan-payers to private refinancing companies could leave the USG student debt portfolio with nothing but individuals who will never repay their loans.

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To solve the problem, a good Keynesian would argue that the government should reduce its interest rates on the student loans. A good socialist would argue that the government should reduce the interest rates to 0%, asking nothing more of the poor decision makers than to repay the original amount of the loan over the next 60 years.

But, of course, America is a communist country, so other options are being explored:

For now, taxpayers will be funding a greater share of borrowers like Noelle Liptak, who lives near Akron, Ohio, and makes $40,000 a year as a marketing representative for a plastic-bottle manufacturer.

Liptak, 31, has almost $100,000 in federal student loans from college and an MBA from Point Park University in Pittsburgh. A government program currently lets her pay $46 a month, and her loans may be forgiven after 25 years.

“I don’t expect to ever pay them off,” Liptak said.

And from the comments to the article:

I saw what they did for my daughter, now in her early 30s. 2 BA degrees and one MA as long as she works for [a] non profit, of which she’s not making anything she can have this loan where she pays a small amount monthly for 10 year’s then the rest is “forgiven” (it’s not a small amount it’s 10 years worth of student loans).

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So what have we learned here? We have learned that non-discriminatory investment should be an oxymoron, and that non-discriminatory investment by the government will lead to the good debt discriminating itself from the bad debt anyway. The government will be left only with the bad. What the government decides to do with this bad student loan debt will be an excellent test case for the AIACC thesis. If we may judge by these early indicators (which I have seen with my own academic eyes), the thesis will be proven true. The debt will be magically erased.

. . . but not forgotten, of course. Private actors who were audacious enough to make money on student loan debt or to pay off their loans will find themselves subsidizing the defaulters anyway. Some how, some way, the progressives will make sure of that. The show must go on and you’re going to pay for it, whether or not you want to see it.

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