Friday, May 29, 2009

Nightmare of the Day #1

People who know your boy Ol' Fred know that he has been a bit of a Roubini in his outlook. I've been saying "the Inflation is a-coming" for a while-- any Econ major who DIDN'T go get his degree from an Ivy would tell you that keeping interest rates below 3% for months at a time eventually results in monetary inflation.

Well, ladies & gents, without much further ado, I bring you what I term "The Scariest Article In The World Today". While I don't agree with the final argument (that we will soon be seeing $100 Trillion bills), I do embrace the qualitative end-result.

My Question to you, dear BBLers, goes like this:

(1) Assume you are the average law graduate in 2010 with a mixed debt from undergrad and law school of approximately $110k (80k federal, fixed; 30k private, variable). Assume, also that the Fed has increased target rates to a reasonable 4% (so, given the historical spread, private lenders are going for between 6-7.5%). Your fed loans are capped at 6.8% per the Stafford agreement; your private loans are all over the place (some are at 2%, some are at 6% depending on when you originated them).

What steps, if any, can you initially take to (a) cut your interest rates; and (b) consolidate your loans into "one simple monthly payment."? I guess my question is-- can you go to Bank XYZ and say "I'm 110k in debt at a weighted average of about 6% (regardless of fixed v. variable). If you lend me 110k to pay it all back right now, I'll agree to pay you back at 6% fixed for a term of 10 years"? If so, what steps need to be taken; if not, why not?*

* I realize that there is a potential for transaction costs needing to be incurred. Notwithstanding that problem, I'm wondering what kind of pro-active solutions law students can take to stay ahead of a potential sky-rocketing interest rate in the near term?


  1. I think you can do that, but the transaction costs would be high as you note. If interest rates soar as expected, we're all in big trouble. Even the subsidized federal loans which are more or less stable will become more expensive. It's tricky. Good post.

  2. @7:17

    How high would the transactions costs be? Also, if interest rates soar, our Federal loans become bargains, not more expensive. My understanding is that the Stafford is a fixed rate loan.

  3. It's fixed, but it goes up based on inflation etc. Meaning it will be fixed at higher levels. Not good for law students or college grads.

    Transaction costs would be high. Time is money and all that

  4. Sounds like Applebaum's student bailout may be worthwhile


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