Michael Kinsley has a seriously disturbing piece on student loans, private lenders, and interest rates:
Here's how the program works: Banks and other private companies lend money to students. The federal government pays part or all of the interest -- currently 7 percent or 8 percent. The government also guarantees the loans.Later he goes on to describe a system of kickbacks that has arisen as a result, but it's interesting that there aren't any more direct attempts to lure in students. Maybe it's illegal, but so are the other inducements... I suppose with students it's easier to get caught? By paying off loan officers, you capture a lot of business with only one collaborator.What is wrong with this picture? Well, the government itself borrows the odd nickel to finance the national debt. This borrowing, obviously, is also guaranteed by the government. For that reason, it carries an interest rate of only 3 percent or 4 percent. If the government can borrow money at 3 percent or 4 percent, why should it be paying 7 percent or 8 percent for the privilege of guaranteeing loans to someone else? Wouldn't it make more sense for the government to loan out the money itself?
Once I took a computer class for government workers and had a couple of folks from the Student Loan Administration as classmates. They advised me always to ask to see the promissory note before repaying, because in a high percentage of cases the government can't produce it. I wonder if this is the case for the banks and other private entities.
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