Subprime Mortgage and Student Loan Parallels

Just as the irrational exuberance of sub-prime lending and skyrocketing housing costs are blowing up in our faces, another credit crisis looms on the horizon. Fueled by back-room deals and misleading introductory rates, students with no credit history (or even bad credit in some cases) have been getting in under their heads, borrowing more than they can afford without understanding the consequences. According to a recent study by the College Board, almost one-out-of-five of graduates will not be able to make payments on the average undergraduate loan debt -- now a whopping $20,000.

The similarities between unregulated lending practices in housing and education are hard to ignore. People with risky credit histories (students) are being lent tens of thousands of dollars to pay for a commodity (higher education) whose price is increasing at unprecedented levels -- regularly doubling or tripling the rate of inflation each year. Third-party brokers (college administrators) are taking huge kickbacks in stock options and referral fees to lure uneducated borrowers (again, students) into signing up for loans with a low introductory teasers and adjustable rates. The government has done little to mandate this "wild west" of escalating college costs and unmitigated student borrowing. According to the Project on Student Debt, members of the class of 2006 saw their debt grow by 8 percent while their average starting salaries only increased by 4 percent. Young people are taking on debt twice as fast as they can pay it back.

It's not just that students are earning less and borrowing more, it's also who they're borrowing from. Private student lenders were responsible for about 25 percent of all student loans in the 2006-2007 school year compared with only 7 percent a decade ago. Private loans often come with higher interest rates, no relief for people who declare bankruptcy and can even be passed on to the next-of-kin should the borrower pass away. And unlike a house, you can't sell your education to try to pay down your debt.

The only good news about the looming student loan crisis is that we still have some time to do something about it. Last week, student-advocacy groups made their positions known at a two-day conference sponsored by the Department of Education. The meeting was scheduled to discuss new regulations to carry out a Congressional mandate that will reduce subsidies to private lenders and increase grant aid to students. The Department of Education -- the same organization that ignored the looming crisis for way for too long -- is now taking a good, hard look at the devious practices of many private student lenders. And, not surprisingly, they look a lot like the sub-prime mortgage guys who fooled some of the people some of the time, taking us all down with them.

Comments

[steveAC10]

"They aren't, because they can't get loans at all given private student loan credit criteria. But students with good credit or those who have parents with good credit can indeed borrow for school.
Is that hard to understand?"

Yes, Cardiffman it is hard to understand - because you're wrong. Sallie Mae, for one has custom private loan programs with some of their proprietary school partners for students with credit scores as low as 525, and as I stated above, two years ago the minimum qualifying score for a standard private loan was 575. Tell me how that's good credit?

Sure, you can't walk into your local Wells Fargo with shitty credit and get a private loan, but if your school does a lot of business with Sallie or one of it's major competitors it's an entirely different sport. They have special loans that essentially are "rewards" for the schools funneling all their Stafford loans through them. And if your ratio of Staffords to private gets out of whack, you hear about it and the riskier private loans threaten to dry up. Proprietary schools in this country would no longer exist if only "good" credit qualified for private funding because the customer base is largely lower middle class and below and the costs per academic year can approach fancy liberal arts levels.

[joshzee]

I think this article was less about private loans and more about burdensome student debt in general and how graduates are increasingly unable to afford their educational debt. Private loans and variable interest rates contribute to the problem, but the subprime analogy seems to make sense in terms of the borrowers not being able to pay back their loans.

And we've all seen the headlines about corrupt college officials being investigated. As Ms. Jager-Hyman says, the only good thing is that the government is starting to pay attention to this now.

[steveAC10]

"So on your first point, there is no truth at all to the notion that 'students with shaky credit histories are being lent tens of thousands of dollars.'"

No, you're the one who's wrong. I worked in financial aid for one of the big proprietary school conglomerates and the minimum credit scores required for most private loans from our primary lender were jaw-droppingly low. There were kids from dirt poor inner city families with with debt loads of nearly $40k for a 2 year program and only about a third of that debt was in low interest federal loans. Credit scores below 600 could qualify for the primary private loan offered (I believe it was 575), and there was one special program for adult students where it could go as low as 525 (and that's BAD credit). The interest rates were astounding, sometimes in the high teens - and even somebody with perfect credit would pay close to 10%. These private loans can not be consolidated, and of course the kids never found out what the monthly payments were going to be until shortly before they graduated (many of them walked out of their federally mandated financial aid exit interviews close to tears).

The scramble to "package" these students with marginal to poor credit was frantic. Aging grandparents, aunts and uncles and family friends were all strong-armed in an attempt to dig up somebody whose credit score wasn't completely in the toilet and get them to co-sign.

The kids roped into the various trade schools that are run for profit are being duped. They're taking on massive, high interest debt to line the pockets of the shareholders of the schools and lenders. The average graduate is going to be pretty damned lucky to snag a job for more than $12-15 an hour when they graduate in most fields, and have total student loan payments in the $700/month range (and I've seen them as high as $900) if they had less than great credit.

[cardiffgiant]

It's hard to tell what you're trying to accomplish with this mismash of misinformation, screwed up metaphors and poor research, but you might want to consider thinking about writing about the real problem in education - not enough financing help for families.

If you're a traditional student with little or no credit and you have parents with bad credit, you simply can't find loan products to help you pay for college. Sure, you can use federal loans but the limits are so low you can only go to a community college. If you have any interest in a private 4 year school, forget it. You are blocked out of school because your parents have unsatisfactory credit. That's the reality of the situation - it's nothing like subprime at all.

[cardiffgiant]

Third, there are no student loans that offer 'low introductory teaser' rates like many sub-prime mortgages did. None. Just because you write it in this poorly researched 'article' doesn't make it so. Most private student loans are variable rate and will change as interest rates change, but that can move up or down (as they did with last week's interest rate cut by the Fed.)

Next, you write that 'private student lenders' were 'responsible for about 25 percent of all student loans in the 2006-2007 school year compared with only 7 percent a decade ago.' Again, you have it wrong because you don't understand the topic you're writing about.

Private student lenders dominate the marketplace now (making over 90% of all student loans) as they did a decade ago (when it was actually about 100%). What you mean to write is that private student LOANS represented about 25% of all student loan volume in 2006-07 compared with only 7% a decade ago. You see, private student lenders make both federal student loans and private studnet loans. It's the private loans that are growing so quickly because college costs are rising much faster than federal loan limits. So, wrong again.

Private loans do have higher interest rates than federal loans because they are not subsidized by the federal government so you did manage to make one accurate point, but in the same sentence you imply that private loans can't be discharged through bankruptcy while federal loans can be. That's not the case. Borrowers can neither escape private loans nor federal loans through bankruptcy.

And neither federal student loans nor private student loans can be passed on to your next of kin in the event of death. Indeed, that's such a startling lie it's remarkable it's even printed on a site of this caliber.

[cardiffgiant]

First, do you have any evidence that 'students with no credit or bad credit' have been getting in 'under their heads' in student loan debt? (By the way, the hackneyed methaphor you're searching for is 'over their heads.')

You see, students with bad credit or no credit can generally only get federal student loans (which require no credit check) and are limited to no more than $5,500 a year (and that's for juniors and seniors). It's difficult if not impossible for students with bad or no credit to get private student loans which offer higher loan limits, unless, of course, they bring creditworthy cosigners with them on their loan application. Obviously, if a student has a qualified cosigner on their private loan debt, that debt both informed by the cosigner (who should help students avoid bad loan products and too much debt) and effectively guaranteed by the cosigner as the lender will go after both parties to pay back the loan.

So on your first point, there is no truth at all to the notion that 'students with shaky credit histories are being lent tens of thousands of dollars.'

Your second point - that third parties are taking 'huge kickbacks in stock options and referral fees' - is also unsubstantiated. See, while all the recent investigation into the student loan business has turned up 1 company that paid schools a referral fee for loans and 1 other company that provided stock options to loan officers at universities. That's two companies out of approximately 250 student loan companies in the US. Not pervasive and not particularly meaningful.

[drkazmd65]

Exactly Ms. Jager-Hyman!

My wife & I managed to get though both our Undergrad degrees, all of my doctoral degree, and all but one year of her doctoral degree without taking out a loan.

The last year of that degree - we had to as her assistanceship dried up. Man do we regret that choice now. The interest rate (a private loan of course) goes up with any whim of an increase in prime,... and I have yet to see it drop with the rate over the course of now 3 years' payments. It is insane that 'our' govenment has let the banks get away with this crap.

If your Congressional Representative is an Incumbant,... seriously think about voting against him/her this primary. We need to do some serious housecleaning folks.

[realitytrumpsbull]

I may not be formally educated, but I'm not a COMPLETE idiot, either, at least I was smart enough not to sign either one of those papers...