Students

[KrazyHorse]

The price of the college goes up however since the loans are available to more people, thus people can pay more for college and more people are going to college, etc. So the government intervention increases the price college.

If I understand this correctly.

Yes, you have correctly identified the mechanism by which all subsidies increase prices. What does that have to do with "but you eventually have to pay the full price"?

Only true if supply perfectly inelastic, of course.

[Kuciwalker]

Actually I think part of the subsidy is that as it is a government guaranteed loan, it enables people to pay for college now who otherwise would not. Thus the demand for college increases not just because of the lower interest rate but because they can get the loan at all when a private moneylender would never consider them to have enough credit.

adfsdfjkl;askjdf;

This is the same thing as lower interest rates.

Think of it with supply and demand curves, with interest rates being the price. You are just speculating that the interest rates that would be required absent federal guarantees are much higher than students would be willing to pay...

[KrazyHorse]

For-profits make the rich richer, non-profits work for public benefit

What makes you think that?

[KrazyHorse]

Professors teach classes, what are the owners doing for me?

Providing the capital and administration to make it possible for professors to teach classes.

[Kuciwalker]

Only true if supply perfectly inelastic, of course.

Yes, yes, but we're talking about real objects...

[giblets]

What makes you think that?

I associate "non-profit" with charity. Maybe I'm wrong about non-profit universities.

[Hauldren Collider]

I associate "non-profit" with charity. Maybe I'm wrong about non-profit universities.

A lot of nonprofits, most likely the majority, are little more than tax arbitrage schemes. Many are legitimate charities, like the Red Cross and Salvation Army but others are just scams like those marathon rally ones that are basically just marathon companies where a small cut of the proceeds goes to some random medical research.

Universities have to be non-profit to be eligible for generous government subsidies and tax advantages, as I recall.

[giblets]

Sure you can, if you run out of money, what can they do to you? The government promises to pay the university in the event of default. That's why the interest is so low.

EDIT:

I'm pretty sure the government has measures against that.

They might, I'm not sure...but if you're bankrupt, what are they gonna do? Throw you in debtors prison? We don't have those anymore.

Okay, I know you can't get rid of student loans by declaring bankruptcy. If someone decided to avoid paying their student loans by staying poor forever, I guess the could, but that would be a pretty crazy thing to do.

[KrazyHorse]

The price of a loan is the sum of its discounted future cashflows.

Discounting should take into account both "pure interest" (say, gotten from the swap curve; let's ignore the credit risk in LIBOR) as well as the credit risk of the counterpart.

When the government guarantees a loan it gets rid of the credit risk that the lender sees, meaning that to price the loan at 0 NPV they offer lower rates. Meanwhile, the borrower may still default on his obligations, so he still prices his payments off his credit curve. The lender saw 0 NPV, thus the borrower sees positive NPV. The difference is the value of the subsidy.

Additionally, Sallie Mae gets implicit government guarantees of its own debt, so on the other side of its ledger it can book a profit even on student loans booked at 0 NPV to itself. The difference between SLM's debt and similar non-implicitly-guaranteed debt is the other end of the subsidy

[Hauldren Collider]

Okay, I know you can't get rid of student loans by declaring bankruptcy. If someone decided to avoid paying their student loans by staying poor forever, I guess the could, but that would be a pretty crazy thing to do.

Hmm, I didn't know that (the bankruptcy thing). Sorry. I remember listening to a discussion the other day about student loans (this is college admissions season right now at school) and I probably picked up some misinformation there.

[Kuciwalker]

gribbler is correct that student loans cannot be discharged by normal bankruptcy. It is possible to default on them, but it's comparatively difficult.

[KrazyHorse]

Okay, I know you can't get rid of student loans by declaring bankruptcy. If someone decided to avoid paying their student loans by staying poor forever, I guess the could, but that would be a pretty crazy thing to do.

Defaulting doesn't discharge certain types of student loans, but the recovery rate from people who default is generally significantly lower than 1

If this wasn't true, then the government guarantee would be worthless.

[KrazyHorse]

I associate "non-profit" with charity. Maybe I'm wrong about non-profit universities.

What makes you think that charities do more social good than for-profit businesses? Are you confusing stated motivation with effect?

[giblets]

What makes you think that charities do more social good than for-profit businesses? Are you confusing stated motivation with effect?

Why wouldn't their motivations influence their actions?

[Kuciwalker]

Why wouldn't their motivations influence their actions?

The relevant question is how good a predictor motivations are of consequences.