I was sorry to get this news. More than 50 years ago, American businesses discovered that they could rake in more cash from loaning money to their customers than from selling products. Prior to filing bankruptcy, for example, General Motors generated more profits from GMAC, its lending arm, than it did from selling cars.
In fact, the common joke at the time was that GM was not a car manufacturing company; it was a bank that happened to sell cars. And of course that slight change in focus from building quality automobiles to lending money at interest partly explains why GM went bankrupt.
Amazon already sells just about everything in the world. I recently purchased a couple of bags of wood chips for my electric smoker from Amazon; and I bought them cheaper than I could have gotten them at my local grocery store. Amazon's success has made Jeff Bezos, its founder, the third richest man in the world. He's worth about $65 billion.
Do Jeff and Amazon really need to get into the student loan business? Doesn't Jeff have enough money already?
But what is wrong with Amazon getting into the private student loan business, you might ask? What makes peddling student loans different from selling books, CDs, and appliances?
At least three things. First, most banks and lenders require student-loan borrowers to obtain a co-signer who will guarantee repayment of the loan. Thus, when Johnny and Sallie take out private student loans, Mom and Pop are also on the hook. In my opinion, it is reprehensible for banks to force students to get parents or relatives to cosign student loans.
Second, private loans generally carry higher interest rates than federal student loans, and they don't provide alternative payment options if a borrower runs into financial trouble and can't make monthly loan payments. Without exception, people would be better off borrowing in the federal program than the private program.
Private lenders argue that they provide loans to people who need more money than they can borrow through the federal program. But in my view, people who can't finance their educational program solely through federal loans are in the wrong program.
Finally, the banks managed to get Congress to revise the Bankruptcy Code in 2005 to make private loans as difficult to discharge in bankruptcy as federal loans. Senator Joe Biden was the chief architect of that sweetheart deal for the banks.
So if you take out a student loan from Wells Fargo and suffer a financial catastrophe, you will find it virtually impossible to discharge your Wells Fargo loan in bankruptcy. This is another good reason not to take out a private student loan.
In sum, the private student loan business is a sleazy industry. And so I ask again: Jeff Bezos, don't you have enough money already? Does Amazon really need to associate itself with the unsavory commerce in private student loans?
|Jeff Bezos: Say it ain't so, Jeff|
Ann Carne. Student Loan Co-Signers Face Tangled Path to a Release. New York Times, July 10, 2015. http://www.nytimes.com/2015/07/11/your-money/student-loan-co-signers-face-a-tangled-path-to-a-release.html
Karen Silke Carty. 7 Reasons GM is Headed to Bankruptcy. ABC News. Accessible at http://abcnews.go.com/Business/story?id=7721675&page=1
Annamaria Andriotis. Amazon tiptoes into the banking business through student loans. Wall Street Journal, July 21, 2016. Accessible at http://www.wsj.com/articles/amazon-tip-toes-into-banking-business-1469093403
Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15 , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664