Friday, June 12, 2015
Government Overcharging for Student Loans (Michael Simkovic)
The Department of Education has been overcharging low-risk professional school students for federal student loans (relative to the market rate) while keeping rates low for undergraduates who are far more likely to default. (For previous coverage, see here, here and here).
Bloomberg BNA's Bankruptcy Reporter describes the predictable consequences of this politically driven mispricing: Professional graduates are refinancing into less expensive private loans and removing themselves from the government's risk pool.
There is a simple solution that will shut down what Bloomberg describes as an "exodus of top borrowers" while preserving student lending profits for the benefit of taxpayers. The government should charge low risk graduate students less.
Update, June 13, 2015: Jordan Weissmann at Slate covers the story.