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So you are suggesting that you take the T-bill rate and multiply it by, say 1.5 to get the rate? How does that make it "more transparent?"

Yes.

Student loans are not commercial loans. When a bank makes a commercial loan it assumes a risk of default by the borrower. Student loan lenders are shielded from default risk by federal guarantee programs. Without these guarantee programs banks would never enter the student loan business - since there is no tangible collateral to retrieve in the event of default - and assessing risk profiles for each potential borrower would be impractical.

Legislation establishing student loan rates should be blind to the servicing industry's costs of operation. Afterall, the purpose of having a student loan program is not to create busines opportunities for the finance industry - but rather to promote educational attainment in the national social and economic interest. When SL rates exceed what is sufficient for the government to recoup the costs of the program they are unwarranted and pose an unjustifiable burden on the citizen borrowers. Financial institutions - both lenders and servicers - engaged in student lending are rightly permitted to profit from regulated issuing fees and service charges. Their profitabilty should not be further supplemented through interest rate surcharges above a market driven benchmark. If such a surcharge is merited to fund the governmental program then it should be proportional to the cost of funds (i.e. a % of the benchmark) and not an arbitrary percentage tacked on to the benchmark. Rate legislation with an arbitrary (market independent) surcharge component opens the legislative process to special interest pressures - and ultimately creates higher SL borrowing costs which only serve to sustain the inefficient lending and servicing industry.


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