Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

COCO, LAUR, RLRN and APOL All Playing DOE Carry Trade

US BUBBLE STUDENT LOANS was standing at $100+BN
RIP-OFF: Student Loan Subsidies Using A Loophole That Will Cost The US Gov't - Taxpayers - Billions In Interest)
By Kathy M. Kristof, LA Times Staff Writer} 9/3/2004
Students who need help paying college tuition bills this fall can get a federally subsidized loan that charges 3.37% interest —not a bad deal. The deal can be even better for lenders. The government guarantees some of them a 9.5% interest rate for the student loans they issue, no matter what rates the lenders themselves are charging. The difference, and therefore the federal subsidy, can be 6 percentage points.

"Taxpayers are being ripped off," said Luke Swarthout, higher education associate with the U.S. Public Interest Research Group. "It is clear that no one is safeguarding the rules that are governing the student loan playing field." Education advocates have been attacking the system for years, to no avail. Their cause could be helped by a new report that says the number of loans covered by the 9.5% subsidy is growing at a rapid clip as some lenders aggressively exploit what critics call a loophole in the law.

The report by the Institute for College Access and Success Inc., a nonprofit education research organization, says there are $17.5 billion of the 9.5% loans outstanding, up from $12 billion at the end of 2002 and from $10 billion in 1998...... The government expected the loans to slowly dissipate; instead, they've grown. The reason, Shireman said, is that the Department of Education issued a directive aimed at clarifying the law that instead opened a gaping loophole.

The directive allows lenders to "recycle" new loans into old tax-exempt pools, Shireman said.......
http://www.latimes.com/business/la-fi-loan6sep06,1,6179898.story?coll=la-headlines-business

PS: yes, banks offer overdraft facilities, but from what I know, in the US, the overdrafts authorizations amount to several hundreds of dollars. Last time Citibank told me that I could have such an agreement but the smallest overdraft authorized was something like 1,000 dollars. Of course we all know what happens when "easy money" encourages spending. I decline the offer therefore.