When Government Competes with Private Enterprise

This is an example of the failure that is the inevitable outcome of “competition” from Government, a competition that just as inevitably dooms the private enterprise.

Amazon.com Inc and Wells Fargo & Co had teamed up to offer student loans at discounted interest rates to members of Amazon.com’s “Prime Student” facility.  But the Federal government and others favoring Big Government objected to this free market entry into Government’s lucrative business.

TICAS [The Institute for College Access & Success] called the partnership “a cynical attempt to dupe current students who are eligible for federal student loans with a record low 3.76% fixed interest rate into taking out costly private loans with interest rates currently as high as 13.74%.”

Never mind that this was access that wouldn’t otherwise have been available, or that no one was forcing the prospective students to choose amazon.com-Wells over the government.  The government’s lower rates should have been an effective competitive factor, but Government didn’t want any competition.  Of course, Government caps how much a student can borrow, even if the allowed borrowing doesn’t cover the student’s total college costs—limiting the student’s ability to repay even that much by limiting his ability to finish school and get the requisite job making, thereby making the borrowing done a waste of money.  Maybe those higher rate loans might have been competitive after all.

Critics of private student loans claim they are riskier for borrowers than federal student loans, which charge the same fixed interest rate to all borrowers regardless of how low their credit scores are.

Government made this claim, too, as it moved to interfere with the amazon.com-Wells hookup to the point they ultimately were forced dissolve the partnership and the offering.  The claim is either completely disingenuous or breathtakingly ignorant of the realities of economics and of risk.

Charging all student borrowers the same interest regardless of the quality of that borrower is…suboptimal.  A student borrower’s ability to repay is not governed solely by the student’s current financial status, unlike, for instance, a mortgage borrower.  A student borrower’s ability to repay also is governed, and more strongly so, by the prospective future financial status of that student borrower, which is driven by whether the student is pursuing a course of study likely to lead to a job with an income capable of supporting loan repayment.

The likelihood of inability to repay when every borrower is charged the same interest rate independently of risk simply drives up the interest rates for all: other, lower risk, borrowers are simply forced to subsidize the higher risk borrowers’ loan costs.

With Federal student loans, that higher cost is borne by us taxpayers.  Higher cost, despite the lower face rates on the loans?  Yes, because we’re all paying the taxes that support these otherwise uneconomical loans.  And when a student defaults on his loan, we’re the ones who pay.  But Government doesn’t care about that.

The regulatory and political opposition to private student loans has had an effect. Private student loans are among the smallest volume-producing categories of consumer loans.

Indeed.  Which is what Government has wanted.

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