Why Would A Government Sell Off Student Loans
This question was brought on by the recent news that government owned student loans in the UK are being sold off to a private company.
How is this financially beneficial for the government? The way I see it, a company would only buy the loans for less than what can actually be recovered, in which case the government could gain financially by just keeping the loans themselves.
- 5The buying and selling of debt is treated like the buying and selling of almost any financial asset. user1530Feb 6 ’17 at 19:05
- 2Feb 6 ’17 at 20:06
This kind of information is typically covered in a undergraduate finance class. You could probably get an older version of a text book inexpensively from Amazon. I’m not going to focus on the UK specifically, because this happens in many governments .
Getting Rid Of Student Loans
Maybe youve already taken out student loans and theyre stealing your peace of mind. Youre not alone. Most of us learn financial lessons the hard wayor as we like to put it: We pay the stupid tax. Its the price of admission to a new and better way of taking control of your money.
Getting out of student loan debt isnt as easy as getting into it, but the payoff is way better. To get started, check out Anthony ONeals 64-page Quick Read, Destroy Your Student Loan Debt. Hes going to teach you how to budget, create an emergency fund, and accelerate your debt snowball to pay off student loans faster.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
Nelnet: We Are Shocked
We are shocked that the two highest rated servicers and the dedicated employees who are responsible for achieving those rankings will not be considered by the Department for this contract, Nelnet CEO Jeff Noordhoek said. We are frustrated and disappointed by this decision and the lack of transparency in the process and will pursue every legal avenue available to ensure that students have the high quality service they’ve come to expect from us.
In June 2009, the Education Department awarded Nelnet student loan servicing contracts. As of March 31, 2020, Nelnet was servicing $185.5 billion of student loans for 5.5 million borrowers under its contract, and Great Lakes was servicing $243.2 billion of student loans for 7.3 million borrowers under its contract. These servicing contracts expire on December 14, 2020 with two optional six-month extensions through December 14, 2021. Separately, Nelnet services $48.7 billion in FFELP, private education and consumer loans for 2.1 million borrowers that are not impacted by the Education Departments decision.
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How Would Debt Cancellation Impact The Economy
Critics of loan forgiveness say it would lead to a loss in federal revenue that could hurt down the line, either in the form of higher taxes or less spending on other important government aid.
âBlanket loan forgiveness is not the answer,â said Republican Sen. John Thune, R-S.D., on the senate floor after Democrats first introduced their proposal. âI hope President Biden will resist Democrat calls to put taxpayers on the hook for billions of dollars in student loans.â
âIf the government takes in less revenue, the government has to either raise other revenue or cut spending. That means either taxes are going to go up, or other programs are going to be cut,â said Constantine Yannelis, an economist at the University of Chicago who recently published an analysis of which earners student debt cancellation would benefit.
âThere are other policies which target debt forgiveness to lower income individuals,â he said, pointing to an expansion of income-driven repayment plans as one solution.
Proponents, meanwhile, say forgiveness will boost the economy.
âWe want people to be buying homes, for example, which is the single biggest generator of wealth in this country historically,â Rep. Jones told Spectrum News.
Federal Student Loan Benefits
- You have flexibility. Though any student loanfederal or privateis a legal agreement and must be paid back with interest, federal student loans generally offer more flexible options than private student loans. For example, with federal student loans, the borrower can change their repayment options even after the loan has been disbursed .
- You can make payments based on your salary. Some federal student loans allow for income-driven repayment plans, which cap payments based on the borrowers income and family size.
- You dont need a strong credit history to get federal student loans. Unlike with private student loans, most federal student loans dont require the borrower to have a strong credit history. This can be especially helpful for recent high school graduates who plan on attending college but havent had enough time to build up credit of their own.
- You dont need a cosigner. With most federal student loans, other than Direct PLUS Loans, the borrowers credit is not considered, so its not necessary to apply with a cosigner.
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Q Which Student Loan Borrowers Are Most Likely To Default
A. Accordingto researchby Judy Scott-Clayton of Columbia University, Black graduates with abachelors degree default at five times the rate of white bachelors graduates21%compared with 4%. Among all college students who started college in 200304 , 38% of Black students defaulted within 12 years, comparedto 12% of white students.
Part ofthe disparity is because Black students are more likely to attend for-profitcolleges, where almost half of students default within 12 years of collegeentry. And Black students borrow more and have lower levels of family income,wealth, and parental education. Even after accounting for types of schoolsattended, family background characteristics, and post-college income, however, thereremains an 11-percentage-point Blackwhite disparity in default rates.
Gradplus Loans For Graduate And Professional Students
This loan is specifically for students seeking a graduate or professional degree.
Benefits: This loan is similar to the parent PLUS loan because it can cover the total amount needed for tuition and education-related expenses, minus other aid awarded, and payments may be postponed until after graduation.
Eligibility: A modest credit check is required for this type of loan. An endorser may be required if the borrower has adverse credit.
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Private Student Loan Interest
Remember, how we said private student loan lenders are out to make a buck? Well, they make their money on the interest you pay. Private student loans almost always have a higher interest rate than federal student loans. And those higher interest rates mean more money in the lenders pocket.
While the interest rate on private student loans will vary from lender to lender, on average, fixed interest rates are around 4.2912.49%. Average variable rates run from 1.814.18%.4 You might be able to snag a lower interest rate than what the federal government offers if you have excellent credit. Dont count on it though. Private lenders dont need to compete with the government. Theyve got you right where they want you: federal aid maxed out and still in need of more money.
Student Loans In Bankruptcy Proceedings
United States federal student loans and some private student loans can be discharged in bankruptcy by demonstrating that the loan does not meet the requirements of section 523 of the bankruptcy code or by showing that repayment of the loan would constitute “undue hardship.” In contrast to credit card debt, which often can be discharged through bankruptcy proceedings, this option is not generally available for educational loan debt. Unless able to prove the loan was not an educational benefit, those seeking to discharge their student loan debt must initiate an adversary proceeding, a separate lawsuit within the bankruptcy case where they illustrate the required undue hardship. Many borrowers cannot afford the up front costs to retain an attorney or the additional litigation costs associated with an adversary proceeding, let alone a bankruptcy case. Further complicating matters, the undue hardship standard varies from jurisdiction to jurisdiction, but is generally difficult to meet. In most circuits discharge depends on meeting three prongs in the Brunner test:
In July 2021, The U.S. Court of Appeals Second Circuit ruled that private student loans are dischargeable in bankruptcy. This case was the third known case opening the possibility of bankruptcy protection for student debtors.
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The Problem With Government
Millennials are the most educated generation in American history, but many college graduates have tens of thousands of dollars in debt to go along with their degrees. Young Americans had it drilled into their heads during high school that their best shotperhaps their only shotat achieving success in life was to have a college diploma.
Secured financing of student loans resulted in a surge of students applying for college.
This fueled demand for the higher education business, where existing universities and colleges expanded their academic programs in the arts and humanities to suit students not interested in math and sciences, and it also led to many private universities popping up to meet the demands of students who either could not afford the tuition or could not meet the admission criteria of the existing colleges. In 1980, there were 3,231 higher education institutions in the United States. By 2016, that number increased by more than one-third to 4,360.
The governments backing of student loans has caused the price of higher education to artificially rise the demand would not be so high if college were not a financially viable option for some. Young people have been led to believe that a diploma is the ticket to the American dream, but thats not the case for many Americans.
There needs to be a major cultural shift away from the belief that college is a one-size-fits-all requirement for success.
The Federal Government As Creditor
As of July 8, 2016, the federal government owned approximately $1 trillion in outstanding consumer debt, per data compiled by the Federal Reserve Bank of St. Louis. That figure was up from less than $150 billion in January 2009, representing a nearly 600% increase over that time span. The main culprit is student loans, which the federal government effectively monopolized in a little-known provision of the Affordable Care Act, signed into law in 2010.
Prior to the Affordable Care Act, a majority of student loans originated with a private lender but were guaranteed by the government, meaning taxpayers foot the bill if student borrowers default. In 2010, the Congressional Budget Office estimated 55% of loans fell into this category. Between 2011 and 2016, the share of privately originated student loans fell by nearly 90%.
Prior to the administration of Bill Clinton, the federal government owned zero student loans, although it had been in the business of guaranteeing loans since at least 1965. Between the first year of the Clinton presidency and the last year of George W. Bush’s administration, the government slowly accumulated about $140 billion in student debt.
Those figures have exploded since 2009. In September 2018, the U.S. Treasury Department revealed in its annual report that student loans account for 36.8% of all U.S. government assets.
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Factyou Should Never Have To Pay A Fee For The Same Help That’s Provided For Free By Your Student Loan Servicer
- At times, it may feel like your student loans are an overwhelming burden. Remember, your servicer is there to serve you. Stay in touch. Ask questions. Lean on them for help and expertise. At Great Lakes, we look forward to making things go as smoothly as possible with your student loans. Learn more about the free services available to you.
Is Your Student Loan Being Sold The Answers We Must Get From The Government
If you started university between 1998 and 2012, the Government plans to sell your student loan to the City.
If you started in 2012 or beyond, chances are the same will happen to you. If you went before 1998 then your loan has already been sold, and you probably know there were substantial problems.
The House of Lords Economic Affairs Committee is due to meet Jo Johnson MP . I was written to and asked: Is there anything you would want the committee to consider in advance of the meeting?, and told to address my questions to the chairman.
Below is my response
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Pay As You Earn Repayment Plan
With the PAYE Plan, youll make monthly payments that equal 10% of your discretionary income, or what you can afford to pay based on the size of your family and your adjusted gross income. Your monthly payment cant be more than what it would be under the Standard Repayment Plan though. If youre married and file jointly, your spouses income will be factored in.
Who Can Get Federal Student Loans
Anyone attending a four-year college or university, community college, or career school can apply for federal student aid, including:
- Grants, which dont need to be paid back
- Work-study, which is part-time work that allows students to earn money while in school and
- Federal student loans
Most federal aid is decided based on financial need. Students must submit the FAFSA® and meet several other basic eligibility requirements to qualify.
Parents may also apply for federal student loans, called Federal PLUS Loans. These loans can also be applied toward the students educational costs.Types of Federal Student Loans
|for Loans Disbursed Between July 1, 2021 and June 30, 2022|
|Direct Loan for Dependent Undergraduates||Direct Loan for Independent Undergraduates||Direct Loan for Graduates|
1Limit of combined subsidized and unsubsidized funds. back2Additional unsubsidized eligibility available for student whose parent is unable to obtain a PLUS loan. back
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Q Who Is Doing All This Borrowing For College
A. About 75% of student loan borrowers took loans to go to two- or four-year colleges they account for about half of all student loan debt outstanding. The remaining 25% of borrowers went to graduate school they account for the other half of the debt outstanding.
Most undergrads finish college with little or modest debt: About 30% of undergrads graduate with no debt and about 25% with less than $20,000. Despite horror stories about college grads with six-figure debt loads,only 6% of borrowers owe more than $100,000and they owe about one-third of all the student debt. The government limits federal borrowing by undergrads to $31,000 and $57,500 . Those who owe more than that almost always have borrowed for graduate school.
Where onegoes to school makes a big difference. Among public four-year schools, 12% ofbachelors degree graduates owe more than $40,000. Among private non-profitfour-year schools, its 20%. But among those who went to for-profit schools,nearly half have loans exceeding $40,000.
Among two-year schools, about two-thirds of community college students graduate without any debt. Among for-profit schools, only 17% graduate without debt .
Why Lenders Sell Student Loans
The lender you initially borrow with can also be the same company that services your loans. That means it’s the same company you make your monthly payments to.
That’s not always the case, however.
Sometimes, you might borrow your loans from one company, then they sell your loan to someone else and you make your payments to that company instead.
Both federal and private student loans can be sold at any time, to any loan servicer.
But why do lenders do this? It has to do with the lender’s ability to make new loans to new borrowers.
Lenders need capital to make new loans, so they sell off your student loan to another servicer. The servicer effectively buys out your loan and the lenders use the money they receive from the sale to lend to another student.
Bottom line, there’s nothing you can do to prevent your loans from being sold.
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Make Sure Payments Are Being Applied Correctly
Paying extra towards your student loans each month will get you out of debt faster and cut down on what you pay in interest. The trick is to make sure those extra payments are being applied properly.
Unless you specifically ask your new loan servicer to put the extra money towards the principal, theyll typically credit it towards your loan balance as a whole, starting with the interest first.
If youve been making extra principal payments to your old lender, youll need to make sure your new loan servicer is on-board.
Otherwise, you could end up on Paid Ahead status. That means the additional money you pay is credited as an advance on your monthly payments.
While youd still be paying down your loan sooner you wont be chipping away at the interest as quickly.
How do you know if your account is Paid Ahead? If your first statement from the new servicer shows a $0 balance or lists your next due date as several months in the future, thats a big tip-off.
Youll need to contact your new servicer to tell them how you want extra payments to be applied.
Tip: Ask your new loan servicer if there are any restrictions or limitations on how often additional principal payments can be made.
Q Whats With All These Proposals To Forgive Student Debt
A. Some Democratic candidates are proposing to forgive all or some student debt. Sen. Elizabeth Warren, for instance, proposes to forgive up to $50,000 in loans for households with less than $100,000 in annual income. Borrowers with incomes between $100,000 and $250,000 would get less relief, and those with incomes above $250,000 would get none. She says this would wipe out student loan debt altogether for more than 75% of Americans with outstanding student loans. Former Vice President Joe Biden would enroll everyone in income-related payment plans . Those making $25,000 or less wouldnt make any payments and interest on their loans wouldnt accrue. Others would pay 5% of their discretionary income over $25,000 toward their loan. After 20 years, any unpaid balance would be forgiven. Pete Buttigieg favors expansion of some existing loan forgiveness programs, but not widespread debt cancellation.
Forgivingstudent loans would, obviously, be a boon to those who owe moneyand wouldcertainly give them money to spend on other things.
But whoseloans should be forgiven? What we have in place and we need to improve is asystem that says, If you cannot afford your loan payments, we will forgivethem, Sandra Baum, a student loan scholar at the Urban Institute, said at aforum at the Hutchins Center at Brookings in October 2019. Thequestion of whether we should also have a program that says, Lets alsoforgive the loan payments even if you can afford them is another question.
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