The current tax debate in Washington has degenerated into a typical name calling fest. Trotting out class warfare slogans, saying it costs too much when it doesn't. The credentialed in DC are ignoring the real world.
Here is a short story of a brand spanking new company that exists in the real world. They are open and ready for business. It is also a story about how government agencies know little about what can be done by private industry in the marketplace.
People wonder what will happen if the wealthy keep their tax rate at 35%. Many will do what the 74 members of Hyde Park Angels (HPA) did. They will invest it in an entrepreneur.
Edulender applied to HPA for funding. After a due diligence process, they received it. Individuals wrote checks from their own checking accounts and put up their own hard earned money to take a risk on the success or failure of the fledgling company.
Here is Edulender's business. They are a student loan clearinghouse. What they do is bring transparency and order to a chaotic and opaque market. There are literally hundreds of new entrants into the student loan marketplace, but no one knows how to find them. Students don't even know if they qualify for certain lenders' loans. Edulender gathers daily information on fees, rates, and terms from nearly all active student loan providers. Then they allow you compare them on an apples-to-apples basis. Edulender shows borrowers only the loans for which they are eligible based on their school, degree, state of residence, and other criteria. They aim to be broad enough so that borrowers gain a good understanding of their options and their relative value, but narrow enough so that they don’t waste time applying for loans for which they would not be eligible.
This makes it a snap for a student to find the best loans at the cheapest cost for them.
On the other hand, schools, colleges and universities are nervous. There has been some back room dealing and graft in the student loan business. EduLender provides a comprehensive, unbiased, and independent site that is ideal for financial aid offices that want to refer their students to a neutral resource. Beyond the student loan search engine, they will soon roll out related products and services including a reverse auction system in which lenders bid and compete for the borrower's business, and student loan consolidation.
There are now more lenders competing in the marketplace than ever before, but schools are looking over their shoulders to the extent that many financial aid websites now merely show a list of all lenders that have served students in the past 5 years. Half of these lenders aren’t even in business anymore. The other half just link to the lender’s generic loan page. Perhaps most critically, merely showing a historical list like this eliminates from consideration many of the newest lenders in the marketplace, which often have some of the best rates. Independent studies have shown that the same borrower can end up getting a rate which as much as 6% higher than the best rate they could have gotten, depending on the lender they choose.
Governments have strongly regulated the people who are there to help students. Students end up going to Google, and what they find are the lenders with the biggest marketing budgets, not necessarily the options that make the most sense for them financially.
Edulender takes all the fear and liability away from the Financial Aid office at the institution. They are impervious to graft because its an unbiased computerized search engine.
Interestingly, the Government Accountability Office (GAO) said there was no way that something like this could be built. It was too expensive, too demanding, too complex, not needed.
A proposal to create a clearinghouse for federal and private student loans on the U.S. Department of Education's Web site would face significant implementation challenges, the Government Accountability Office concluded in a report released on Wednesday, noting that a new site might be unnecessary.
The Higher Education Opportunity Act, passed in 2008, required that the office conduct a review of the feasibility of developing a Web site to compare information related to student loans, such as interest rates and loan terms.
The report questions the need for such a site, given that all federal loans are now administered through the direct-loan program as a result of a student-aid overhaul Congress passed in March. Because of that law, students no longer need to choose among federal-loan providers. The report also notes that information on federal and private loans is already available through colleges' student-aid offices and online loan-comparison tools that already exist.
The GAO cited several barriers to creating a loan-comparison site, including getting enough private lenders to participate, and ensuring that information is complete, accurate, and objective to avoid the perception of bias.
While the report does not estimate a cost for the project, it suggests that creating and maintaining such a site would require a considerable investment, one that private lenders would be unlikely to cover and that might outweigh the value of the site.
Isn't private industry great! The government said it couldn't be done with a million dollars and some twenty something entrepreneurs did it with sweat equity and earned investments by delivering the result. Meanwhile, the Obamacare law wants to shut down all private lending for education. Of course, college costs are rising through the roof so there is more demand for loans than ever.
Additionally, a brand new company was created in Chicago, IL. Jobs were created. Commerce that wouldn't have been done easily is being executed, increasing GDP. This goes without mentioning the jobs and fees that were incurred in the forming of the company.
This is how you build an economy. Incent the entrepreneur. Give incentives to people that will fund the entrepreneur's idea. Companies form, jobs are created. If successful, the company grows and creates an dynamic ecosystem that creates more companies and jobs. The effect is exponential.
Let's hope the new House leadership understands this concept.
Many in Washington would rather kill it. Their ideas and plans are like a toxic waste dump for entrepreneurs.
UPDATE
After we posted this. President Obama held a press conference with former President Bill Clinton. After Obama leaves, listen to the question that the reporter asks Clinton. Paraphrasing, President Clinton, How do we free up the credit markets and get money into the hands of entrepreneurs? If the reporter were to read the above post, I think he'd have his answer.
Video at this link.
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