Compute how much the Federal Government is subsidizing loans.

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.

Assumptions:

· Just address undergraduate Stafford loans – both subsidized and unsubsidized.

· Assume 97% guarantee

Naïve approach:

  1. Determine amount of loans outstanding
  2. Determine the default rate
  3. Calculate defaulted $ amount, multiplied by 0.97
  4. 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:

  1. Stafford loan issuance by year, with rates
  2. Loan amounts outstanding, by year
  3. Default rates, by year
  4. 10-year Treasury rate by year
  5. Recovery rate

Links:

  1. http://www2.ed.gov/offices/OSFAP/defaultmanagement/lga.html
  2. http://www2.ed.gov/offices/OSFAP/services/data4schools.html
  3. https://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html

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