In today's episode, we have two opponents who both have strong claims to idiocy:
In one corner is the Wall Street Journal editorial page, which has been wrong about nearly everything related to Iraq for almost four years running.
In the other corner, you have me, your humble blogger, who once had to call someone to ask, "how bad is it to pour hot oil down your drain if you have a garbage disposal?"*
Now, on to the battle.
Yesterday's Bloomberg article about student loans says this:
The U.S. House of Representatives, as part of a legislative package it has promised to enact in its ``first 100 hours'' after taking control this year from Republicans, plans to cut in half over five years the 6.8 percent rate on federally backed college loans.The plan also has drawn criticism from banks, which oppose provisions that would make them pay the estimated $6 billion cost of the lower rates, and congressional Republicans, who want more pressure on colleges to reduce costs.
[...]
Affected student lenders include SLM Corp., Bank of America Corp., Citigroup Inc. and Wells Fargo Bank. They aren't opposed to cutting the rate, since the federally backed loans provide a guaranteed return, though they have criticized Democrats for proposing that they bear the cost.
The size of the cuts proposed by Miller could force some banks out of the student lending business, said Moshe Orenbuch, a banking industry analyst at Credit Suisse AG in New York. Orenbuch, in a note last week to investors, predicted Bush wouldn't sign such a measure into law.
My understanding of this situation is that the government backs student loans, so the banks have no risk and earn almost pure profit (minus time costs and inflation) of the nearly 7 percent they charge. It's basically free money, which the Democrats are trying to cut down on, to the chagrin of the banks. Asking a business to do what it already does at a profit while insuring against all risk strikes me as a subsidy. My belief is bolstered by claims by banks that they are unhappy at the possibility of cutting short the free ride.
The WSJ has an opposite take:
Rather, lowering the rate will simply boost the federal subsidy for loan repayments after graduation. That's because the financial institutions that handle these loans are guaranteed a rate of return, regardless of the interest rate. Halving the rate that lenders can charge borrowers means larger government (read: taxpayer) subsidies for the banks.
But...but...but... if the interest rate (but not the attendant risk) goes to the bank, wouldn't cutting that rate while maintaining the risk protection cut the subsidy to the bank and increase the subsidy to the student? Halving the rate lenders can charge (and pocket) means larger subsidies for the people who pay the interest, not the people who collect it.
In the end, I'm confused. Is this some form of reverse-psychology by which the Bushie dead-enders convince me to keep subsidizing banks at the expense of pansy grad student poets by creating the mistaken impression that the proposed rate cut does just the opposite? Am I just an idiot? You decide.
* After being told that pouring hot oil down the drain was a bad idea, I said "thank you," hung up the phone and called another friend, who I didn't know was standing next to the first, to ask what one does after having poured hot oil down the drain. My feeble attempt to mask this stupid move failed, and they both had a laugh at my expense. I never attempted to make samosas at home again.
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