Compute how much the Federal Government is subsidizing loans.
Topic: Go as far as you can to determine likely Federal losses from existing student loans.
· Just address undergraduate Stafford loans – both subsidized and unsubsidized.
· Assume 97% guarantee
- Determine amount of loans outstanding
- Determine the default rate
- Calculate defaulted $ amount, multiplied by 0.97
- Multiply this by recovery rate – between 50% and 80%
Less naïve: Calculate how much the Federal Government is subsidizing loans.
· Given characteristics on loans: maturity, default probabilities, cost of funds, and profit margin, calculate rate that would/should have been charged by a private bank
· Actual rate, minus calculated rate = subsidy from government
Need the following information:
- Stafford loan issuance by year, with rates
- Loan amounts outstanding, by year
- Default rates, by year
- 10-year Treasury rate by year
- Recovery rate
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