| 来源类型 | Article |
| 规范类型 | 评论 |
| Annually Adjusted Rates Would Avoid Catastrophe | |
| Kevin A. Hassett; Robert J. Shapiro | |
| 发表日期 | 2004-06-18 |
| 出版年 | 2004 |
| 语种 | 英语 |
| 摘要 | More than 60 percent of postsecondary students receive some form of government-backed loan at some point during their undergraduate careers. Just about everybody thinks that is a good way to provide access to higher education for all qualified students. Private lenders alone might be reluctant to offer students the financial resources for college at affordable interest rates, because information about the drive and talent of different students–and therefore the risk in lending to them–is hard to come by. By filling that gap, our student-loan programs have done a magnificent job of getting cash to young people who need it, at interest rates that make their choice to invest in a college education a rational one. As a result, student-loan programs have attracted impressive bipartisan support for decades. That support makes it all the more troubling to discover a serious flaw in the design of one part of the programs: The provisions encouraging students to consolidate their student loans once they leave college have given rise to massive and potentially catastrophic financial liabilities for American taxpayers. Students often take out several loans, usually one per year, during their academic careers. Those loans are typically of relatively short duration (less than 10 years), with annually adjusted interest rates. As students enter the work force, they often have to struggle to meet their monthly payments, so Congress created the “loan-consolidation program” that allows them to aggregate their various debts into a single loan that can stretch out for up to 30 years. The longer term of consolidated loans significantly reduces a student’s monthly payments. The problem is that Congress decided to make the interest rate on those long-term loans a fixed one, equal to an average of the most recently adjusted interest rates on the original loans. As a result, former students can borrow at fixed rates for the long term, based on interest rates that are short term and variable. Anyone who has ever purchased a house, especially recently, knows what a great deal that can be. For example, the Washington Post’s mortgage-interest-rate table lists one lender ready to make a one-year, adjustable-rate loan at an interest rate of around 2 percent, while demanding about 5 percent for a 30-year, fixed-rate loan. Imagine if you could get the 30-year loan at about 2 percent. The pattern is common: Short-term, variable-rate loans generally have much lower interest rates than long-term, fixed-rate loans. That’s because if economic circumstances change and interest rates rise, a lender who has agreed to accept a low fixed rate will get hammered. To help balance the risks, lenders who provide funds for extended periods usually demand a higher fixed rate or a rate that adjusts annually. When interest rates rise, lenders who have written long-term, fixed-rate contracts at short-term rates lose money. For the student-loan program, the taxpayers are the lenders left holding the bag when interest rates rise. The calculations are simple. Right now, our government has guaranteed lenders a rate of return that is about equal to the rate of return on commercial paper (a rate commonly used to establish a corporate cost of funds) plus 1.5 percentage points. If the lender has made a fixed-rate loan, and the commercial-paper rate increases to a rate higher than that on the student loan, the government pays the lender the difference. Suppose you are a student-loan consolidator, and a former student pays you a fixed interest rate of four percentage points. If the commercial-paper rate rises to five percentage points, then the government will send you a payment equal to 2.5 percentage points on the loan, to make up the difference and ensure you a profit. Since the commercial-paper rate today is near an all-time low, most economists–and the Congressional Budget Office, as well–expect that rate to increase sharply in the next few years. When it does, the government will have to start making some hefty payments to lenders. Just how big will those payments be? Brace yourself. Former students, needless to say, have been quite smart about the process and, when interest rates began to fall a couple of years ago, rushed to consolidate everything they could possibly owe. The total stock of outstanding consolidated debt is now in the neighborhood of $100-billion, according to our estimates–and still rising fast because interest rates remain low. We recently added up the potential future costs to the taxpayers of the loan-consolidation program, and they are enormous: more than $12-billion, if the budget office’s forecast for interest rates turns out to be correct. Even more disturbing, the costs could be much higher. Even if the consolidations ended today, an increase in interest rates of just one standard deviation from the most likely case would drive the costs to more than $48-billion; an increase in rates equal to two standard deviations would leave the taxpayers with a bill of almost $82-billion. If we allow consolidations to continue under such terms, and we have the same bad, but not unprecedented, luck with interest rates, the costs could easily top $100-billion. If the program can be bankrupted by interest-rate movements like those–and we’ve seen them time and again in the past–it is poorly designed. Some people have argued that fixed-rate loans for students are preferable to loans with variable rates, but while that may be true at this exact moment, it is not as a general principle. Indeed, a recent study by the Congressional Research Service found that a student would have been better off with a variable-rate loan in 14 of the last 18 years. The situation is not fair to former students. Because the interest rate charged for new consolidated loans changes each year but remains fixed for the life of the loan for each borrower, the long-term cost to a former student depends on precisely when he or she happens to consolidate. That produces gross inequities among the young borrowers. For example, if you consolidated $22,000–which is the average amount that students, in fact, consolidate–into a 20-year, fixed-rate loan, and did it sometime between July 1, 2000, and June 30, 2001, you would end up paying almost $22,000 in interest. But if you waited until July 1, 2001, your long-term interest bill would have declined to $15,829. And those lucky enough to consolidate the same-size loan this year would end up paying just $8,600 in interest over the 20-year term. That’s fair? The current consolidation program breeds inequities and carries potential costs that dwarf those of the underlying student-loan system. These costs may even approach those associated with modern financial catastrophes such as the savings-and-loan crisis. Congress should act quickly to shift the terms of the consolidation program from fixed to annually adjusted rates, like typical student loans. Doing anything less would be the fiscal equivalent of playing Russian roulette. Kevin A. Hassett is director of economic-policy studies at the American Enterprise Institute. Robert J. Shapiro is chairman of Sonecon LLC and former under secretary for economic affairs at the U.S. Commerce Department. |
| 主题 | Economics ; Public Economics |
| 标签 | fiscal ; Student loans ; Tax reform |
| URL | https://www.aei.org/articles/annually-adjusted-rates-would-avoid-catastrophe/ |
| 来源智库 | American Enterprise Institute (United States) |
| 资源类型 | 智库出版物 |
| 条目标识符 | http://119.78.100.153/handle/2XGU8XDN/239770 |
| 推荐引用方式 GB/T 7714 | Kevin A. Hassett,Robert J. Shapiro. Annually Adjusted Rates Would Avoid Catastrophe. 2004. |
| 条目包含的文件 | 条目无相关文件。 | |||||
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