Economics 101

[_subgenius]

Should Presidential Candidates have to take at least one economics class?

Bernie Sanders ✔@SenSanders
You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?
11:39 AM - 26 Dec 2015
2,056 2,056 Retweets 4,368 4,368 likes

Perhaps 4368 people think "nope"?

[_EAllusion]

Heh. Maybe Bernie has an innovative plan to repossess people's education if they default on their loans.

[_Kevin Graham]

The market doesn't set the rates for student loans, Congress does. And having been educated at the University of Chicago, I'm fairly confident he has a better grasp of this subject (and most others) than either you or any of your preferred candidates who keep maintaining silly refuted myths such as tax cuts for the wealthy always lead to higher revenues, more jobs, etc.

I agree with Sanders. It makes no sense to have student loan interest rates so high when the money used to finance those loans come from our tax dollars. The government has been profiting off of student loans at the tune of roughly $40 billion annually. So why not lower rates? Lower rates would almost certainly result in lower default rates.

[_EAllusion]

The market doesn't set the rates for student loans, Congress does. And having been educated at the University of Chicago, I'm fairly confident he has a better grasp of this subject (and most others) than either you or any of your preferred candidates who keep maintaining silly refuted myths such as tax cuts for the wealthy always lead to higher revenues, more jobs, etc.

Your understanding of how student loan interest rates are set is incorrect, but the "sense" in higher interest rates for student loans is that they are unsecured. The cost of lending is tied into the risk and cost of default. Or, if you prefer to reverse the matter, housing loans are relatively cheap because they are secured, which reduces the liability for the lender. It was an inane tweet. If you are going to simply revert to him having an education at the University of Chicago to make him above criticism, then it would seem you have to play this game with all sorts of candidates you don't like.

Donald Trump has a degree in economics from one of the finest business schools in the country. I guess we now all have to throw our hands up in the air anytime he asserts anything on the economy and just agree he probably knows best.

[_Kevin Graham]

I only brought up Sanders' education as a response to the title of this thread and the insinuation that Sanders wouldn't have taken a class. I never said his education makes him right. And incidentally, Trump agrees with Sanders on this issue.

Are you saying Congress doesn't determine the student loan rates?

[_Kevin Graham]

Your understanding of how student loan interest rates are set is incorrect

In what way? Congress sets the rate does it not?

but the "sense" in higher interest rates for student loans is that they are unsecured. The cost of lending is tied into the risk and cost of default.

This doesn't explain why the Stafford loan rate was set to double in 2013. It had nothing to do with risk and everything to do with a law expiring.

Or, if you prefer to reverse the matter, housing loans are relatively cheap because they are secured, which reduces the liability for the lender.

But the market determines those rates and the default rates for both student and mortgages are roughly the same, and from what I understand, someone can default on their mortgage and not have to worry about wages being garnished, whereas the government can garnish wages of those who default on their student loans. So in what sense are mortgages more secure really?

[_EAllusion]

I also get a kick out of the idea that because Sanders went to a university known for its economics dept., while studying a separate discipline mind you, we should respect his economics expertise on those grounds. This just expanded the topics I'm apparently allowed to assert authority on a whole heck of a lot. When I say something about nuclear engineering, apparently you can be confident I know what I'm talking about in comparison to you.

[_Kevin Graham]

I also get a kick out of the idea that because Sanders went to a university known for its economics dept., while studying a separate discipline mind you, we should respect his economics expertise on those grounds. This just expanded the topics I'm apparently allowed to assert authority on a whole heck of a lot. When I say something about nuclear engineering, apparently you can be confident I know what I'm talking about in comparison to you.

Good grief. Subgenius implied that anyone with any knowledge of economics would never have made this statement. I simply provided his educational background to debunk that claim. He loves to treat all "leftists" as if they're uneducated on the subject of economics. And neither of you have even begun to explain the anti-economics nature of his comment.

[_EAllusion]

In what way? Congress sets the rate does it not?

Student loans cover a mixture of public and private loan types and federal loan/subsidy rates are responsive to market conditions. I believe they are currently pegged to treasury notes. To say that the market isn't setting student loan interest rates isn't exactly accurate on either front. The 6, 8, and 10% comment is a direct reference to private lending. That's roughly what people are paying right now for student loans outside of federal aide.

e.g.

https://www.discover.com/student-loans/ ... rates.html

This doesn't explain why the Stafford loan rate was set to double in 2013. It had nothing to do with risk and everything to do with a law expiring.

It's a subsidy. We are talking about the "sense" of housing loans being cheaper than student loans. That does make sense when you consider housing loans are secured by valuable assets whereas student loans are not. You and Sanders may have a political preference that dictates loans for education operate at a loss, but that doesn't change there being a sense to why they would be more expensive.

But the market determines those rates and the default rates for both student and mortgages are roughly the same, and from what I understand, someone can default on their mortgage and not have to worry about wages being garnished, whereas the government can garnish wages of those who default on their student loans. So in what sense are mortgages more secure really?

The fact that an unsecured private loan for education is has a way higher interest rate than a housing refi should tell you something about the relative risk of those investments. If you don't think the higher cost of student loans is dictated by risk, then I'm not sure what you think is determining the higher price point. Anti-competitive cartel among all lenders? A universal anti-education agenda perpetrated by the banko-industrial complex? Aliens?

[_Kevin Graham]

Student loans cover a mixture of public and private loan types and federal loan/subsidy rates are responsive to market conditions. I believe they are currently pegged to treasury notes. To say that the market has nothing to do with student loan interest rates isn't really accurate on both fronts. The 6, 8, and 10% comment is a direct reference to private lending. That's roughly what people are paying right now for student loans outside of federal aide.

But I'm not saying the market has "nothing" to do with rates. I said the rates are set by Congress, and they are:

The answer is that Congress, not the market, sets rates for federal loans—which account for 85 percent of the roughly $1 trillion in outstanding education debt—and refinancing to a lower rate is rarely an option. Now some lawmakers and private lenders are looking for ways to give education borrowers more repayment and refinancing options.

Congress set the rates in 2001, when overall rates were higher—and hasn’t changed them since. For parents such as Szczepaniak, the rate on federal education loans is 7.9 percent; for students, the rate is 6.8 percent. Needy undergrads can get federally subsidized loans at 3.4 percent, but that rate is set to double this summer unless Congress acts.

But if what you say is true and the interest rates are tied to default and risk, as is the case with private lending entities, then we should expect to see some correlation between the two over the years. But that isn't what we see. For example, in 1992 rates were 6.2% and by 2001 they dropped to just 5.2%, even though the default rates had been cut in half over that same period. And rates increased during that period as default rates were dropping.

It seems the markets are only tied to these rates in the sense that Congress doesn't want to put private lenders out of the lending business. For instance, In 1993 Congress set the rates according to annual short-term U.S. Treasury bills + 3.1 with a maximum of 9%. In 1994 they passed a law to begin in 1998, tying variable rates to long-term U.S. Treasury bonds. This meant rates would equal what it costs the Treasury to borrow, plus 1%. But Congress twice delayed those rate cuts over ten years before nuking them in 2003, because they thought they'd be too low for private lenders to compete. Instead, they went with a fixed 6.8% to begin in 2006. Had we kept the variable rate that was already in place, interest rates would have been around 2-4% over the past six years.