Tuesday, October 25, 2011

Obama Screwing the Bankers, Again

Students are about to get a break that will reduce their payments on government-backed loans issued by the private sector under the Federal Family Education Loan program and "direct loans" issued by the government, reports WSJ. It will teach students that contracts are not sacred and that government will be there to bail you out if you take on debt obligations It will also screw bankers on income they expected when making a loan, but that will now clearly result in significantly less income.

Specifically, the president also will announce an acceleration of an income-based repayment program. Existing rules allow graduates to limit their loan payments to 15% of their income, with all debt forgiven after 25 years of payments. Congress already has passed a change to that program that would allow borrowers in 2014 to pay 10% of their income, with all loans forgiven after 20 years. On Wednesday, Mr. Obama will announce that he is speeding up this program so it will affect students beginning next year instead of in 2014.

The change will not require congressional approval.


  1. The lenders (tax payers, really) get screwed, the tuition bubble gets more subsidies and students get enticed to take on more debt with unemployment for new graduates near 20%. It's the perfect plan!

    I certainly hope Obama doesn't break his arm patting himself on the back with this one.

  2. I realize that two wrongs don't make a right, but I'm not finding myself all that upset about this.

  3. How can you defend the banks? All these loans are made with fractional reserve (counterfeit) money. If I printed a billion dollars in my basement and lent it out, are the borrowers really obligated to pay me back? Would I have the right to sue them if they don't?

  4. It's funny how things work, when they bail out Wall Street everybody gets pissed, but when they bail out main street everybody is happy.

    I think the point missed is that government shouldn't be bailing anybody out. The government (theoretically) is supposed to protect the institutions of contract and private property, not interfere with it.

    A lot of people have so sense of principle these days. Instead, they play the us vs them game and say "I want mine".

  5. @ Michael P. Shipley

    Do you think the students gave a damn if what they borrowed was counterfeit money? As long as they got the money. So in essence they still made a deal under the conditions to pay back a loan.
    It's not a question of whether the banks should get that money back. But it is a question of a bunch of cry babies who want a free lunch, get it thanks to The Man With The Government Gun, and will now go on with their merry lives thinking that they've really earned that free lunch, which will translate itself in an entire lifestyle and culture of victimhood and freeloaderism that does not merely include counterfeiting banks.

  6. The good news is that the market will be less likely to buy student loan paper after this (save the cronies) which should put some limits on the government's ability to guarantee loans in the future as that guarantee will be not so golden. This is one time where the unintended consequences may actually produce a good result.

  7. Michael and Tony-

    I can see both sides here- the students signed a valid contract to pay back the money the borrowed for their "education" and now want the gov't to step in and invalidate those contracts. That's bad.

    The problem I have is that they were induced to sign these contracts via fraud (the promise that they would actually receive something of value- education- for their promise to repay) and that promise has not been delivered for the majority. Instead, they have a worthless piece of "sheepskin" that says they followed the rules for 4-6 (or 10-12 for a Phd) years but that has little value since their "education" was substandard and actually left them less able to navigate the world since the "roadmap" they got was fundamentally wrong. For more info on that idea, read "Zen and the Art of Motorcycle Maintenance" by Pirsig.

    The good outcome here is what anon@713pm points out- the market appetite for these fraudulent loans will be weak, meaning that fewer students will take on useless debt.

    The trillion dollar+ "student loan" debt market is huge, and many companies are invested- if these ex post facto changes continue, the impact will be huge, and result in major changes in the way education is funded.

  8. WTF Richard? Where was it on their loans that they were promised something wehn they finish their education (or hell, even if they didn't finish)?

    "The problem I have is that they were induced to sign these contracts via fraud (the promise that they would actually receive something of value- education- for their promise to repay) and that promise has not been delivered for the majority. ".

    There was no fraud, they new the costs when they applied and continued the sign up for courses each quarter of class. They should of done the math like I did in 1998 and drop out, employers want experience not a certificate. I got that experience and its paid off 100 fold over the certificate I would of got.

    The fact that you have to get a loan from the govt to go to college is communism, just like 90% of home loans are from Fannie/Freddie...more communism.

  9. It's not really screwing over the banks. It will turn out to be a net positive for the banks as more kids decide to go back to school. You really think that they would do anything to hurt the banks when they're the same people?

  10. If the banks can create money from nothing to lend to me, why can't I create money from nothing to pay them back? Why is my money not as good as their money when it comes to extinguishing their electronic reserve account at the Fed?

  11. anon@11:33PM

    The government, colleges, high school teachers and counselors, loan officers, financial aid departments ALL tell kids that they should take out loans because they will earn over a million dollars more if they get a BA or BS than if they just graduate from high school.

    The kids, naive, hopeful for the future, dumb and really don't know any better and they trust the adults who tell them this lie. Yes, it is fraud. The lenders push this deeply false promise of much higher earnings and the kids are not intellectually equipped to resist that promise. It is fraud.

    I was a high school counselor, but I enraged everyone when I said that loans are not worth it and that they will regret getting themselves into debt. And when I say that they were enraged, I mean losing-my-job-for-telling-the-truth enraged. I was nearly burnt at the stake because "everyone knows" taking out a student loan is a GREAT IDEA. I've never seen such a wildly and widely accepted form of fraud--and its worse when we who claim to be free market blame naive kids when very savvy adults cheat them out of their future. Fraud. Fraud. Fraud. Adults lying to children and taking their future money for easy money now. Fraud. Fraud. Fraud.