Dear John: I have two kids in college right now. Recently there was a big squabble in Washington between President Obama, a Democrat, and John Boehner, the Republican leader of the House, over keeping subsidized federal student loans at a low rate.
Supposedly, if Congress does not pass a bill soon, then this rate will double from 3.4 percent to 6.8 percent.
I would like to know what the profit margins are on these student loans, and who makes the profits. I know that currently I get no more than 1.8 percent annual interest income from a five-year bank certificate of deposit.
Also, what happens to these student loan profits if interest rates jump from 3.4 percent to 6.8 percent? L.K.
Dear L.K. The profit, obviously, jumps. It doubles. And it’s government money — taxpayer money — so that’s who will make the extra profit.
The debate to which you are referring is over Federal Subsidized Stafford Loans.
There are two types of Stafford Loans — subsidized and unsubsidized — according to Gary Carpenter, executive director of the National College Advocacy Group.
Under the subsidized Stafford program, the US government pays the interest on the loan during the time that the student is in school. With Unsubsidized Stafford Loans, the interest is not paid by the government but accrues and is added to the loan when it enters repayment, says Carpenter.
All Federal Stafford Loans and Federal PLUS Loans disbursed after June 30, 2010, have been funded by the US Department of Education.
Carpenter explained that the Department of Education has several servicing companies to bill and collect payments on these loans.
The profits on these loans come back to the government. But as you would suspect, there are expenses involved with these loans, such as the fees charged by the companies who service the loans, internal costs for the department to set up these loans and the interest subsidized on the Stafford Loans.
Dear John: I was just reading your response to a homeowner who was looking to refinance his property. This person has another option.
He can go to any major lender and see if he qualifies for the HARP program, which stands for Home Affordable Refinance Program.
I would recommend either Wells Fargo or Chase. They will refinance up to 130 percent of the total value of the home (which will help people whose house value has dropped below the amount owed). Thanks. Dave Skolnick, National Account Executive, Liberty Title.
Dear Dave: Thanks. I’ve mentioned HARP before in this column. It’s so big it has to be administered by two government agencies: the US Treasury and Housing and Urban Development.
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