These federal programs have historically offered loans at rates lower than those offered by most private lenders, on terms that are more attractive to student borrowers, and without adjusting the pricing on loans according to the risks inherent in different courses of study or lending to different types of borrowers. Most student loans are extended under Federal Student Loan programs administered by the Department of Education. Although risk-based pricing is standard in business loan markets, and may be increasingly common in consumer credit markets such as mortgages and credit cards, risk-based pricing is seldom used in the market for student loans. If creditors are well informed and analytic, and borrowers respond to financial incentives, then risk-based pricing - compared to uniform credit pricing - leads to a more efficient allocation of society’s limited resources. Conversely, risk-based pricing should lead to higher costs of capital, and therefore less investment, in high-risk activities with relatively low rewards. ![]() Ideally, risk-based pricing should lead to lower cost of capital for lower risk investment choices with larger rewards, and therefore more investment in such promising activities. This process is known as the “risk-based pricing” of credit. ![]() Credit markets serve a vital function in capitalist economies: evaluating the riskiness of a range of possible investments and channeling resources toward those investments that investors believe are most likely to prove successful.
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