Isn’t interest associated with risk of the loan. Since student loans are guaranteed by the government why aren’t they at 0% or lowest interest possible.
Because the government wants to make money too. They have to pay specialist, bankers, lawyers, janitorial staff everything a company would since they have offices and employees too. Often they even lease buildings instead of owning them. Or are paying back bonds they took out to loan students cash.
Risk is one aspect. Unsecured loans have more risk than secured so interest rate of one is higher. Risk is also not zero. You may drink to death in a frat house. (The government guarantee is not 100% of principal, FYI) Use of money is another aspect. You’re using my (a Private Bank) money to invest in an education. I need a return for that money. A government guarantee doesn’t mean its the governments money. That money was entrusted to me by depositors/investors/shareholders. Edit: We can squabble about the amount of profit you think I should make. There are also maintenance costs. It costs me to hire someone to process your monthly payment. Or to garnish your wage when (if) you stop paying. Some things are just simple market economics. The larger question of government role in higher education is a political one and is not my bailiwick Edit: Inflation also means that my money value is decaying because I lent it to you.
Loans are the size of a mortgage for many. Like any mortgage have the borrower pre qualify. Want that $250k fine arts degree see if anyone will give you a loan against future earnings.
The choice of loan size is entirely on the borrower. Highest tuition for a public university is $19k/yr. Many fold living expenses into student loans. That’s ok if you choose to do that. But that’s a choice. Not a requirement. Many choose out of state schools (at a 25-40%) higher cost just to be away from their parents. Again that’s cool. But it’s a choice. I chose to borrow as little as I could (and work). My sister chose the reserves. There are multiple options. Don’t borrow a large sum and cry when the bill is due. And I have no issue with fine arts degrees. It’s a fine *choice*. It doesn’t have to cost $250k (in fact, it never really does)
Great point. They are incredibly low risk and given to nearly everyone so overhead should be minimal. The interest rate should be no more than the rate of inflation.
Giving a 19 year old kid 100+k in loans ain't low risk.
No one forces a 19 year old to take a loan. No school has a 100k tuition. The choice of a tuition+ loan is entirely done by the borrower. If we can trust a 19year old with an M16 and an order to go kill swarthy fellas, I see no reason to deny them a 100k loan.
There is still a need to cover the administrative costs of offering and handling the loan, the costs of late payments, et cetera. (I suspect these costs to be much much lower than the yield.) For a more thorough explanation, look into any theories about the interest rates on municipal bonds.
This is robbery. Lian has high interest 6-7% and loan fee as well. Most develop countries either have no interest ir very low interest and doesnt accrue from day one.
Interest is however much they can make off of broke students