The student loan industry is a giant scam if you ask me. Parents and students alike don’t realize the slanted arrangement they are about to take on when applying for these loans. Society places such a strong emphasis on education (for good reason) that the education industry and especially the lenders behind it stand to benefit tremendously. It’s a shame that so many of these organizations view a young person’s desire to better educate themselves as an opportunity to rip them off, but I can’t say I’m surprised, not after listening to the news for the past six months. The only way to come out on top and not cost oneself a fortune in interest and penalties over the years is to never miss payments on student loans and, when possible, pay considerably more than the minimums. This can be hard to do at a time when jobs are scarce and higher education is wildly expensive.
At the root of the problem are big banks which have lobbied Congress successfully to remove bankruptcy protection on both federal and private loans. What does that mean? For starters, lenders can charge steep penalties on late and missed payments with the reassurance that they’ll eventually get their money back, even if the borrower files for bankruptcy. The lenders can also be more amenable to deferment and forbearance options for students who can’t make payments immediately upon graduation. This makes the lenders look like good guys who offer extended grace periods but the reality is quite the opposite. Deferring your loans is perhaps the worst thing a borrower can do for their future. All the interest gets tacked on to the back of the loan most likely with added penalties and fees. Deferring a private loan is like paying the minimum on a maxed out credit card: ultimately the lender wins. Hopefully Obama can do something sooner than later about this system which cripples young workers and saddles them with debt.
I’m getting off topic here. My original goal for this article was to discuss the potentially negative effects the credit crisis may have on the student loan industry this year. Even with the one-sided loan agreements which currently exist, lenders will have no choice but to tighten their belts even more during 2009. Regardless of bankruptcy protection and the advantages to the lender of having some students default, there are major costs and headaches involved with excessive default rates. For that reason, lenders will continue to toughen up their borrowing standards and increase interest rates to offset an increase in risk. This effect will probably be most obvious in the less regulated and more risky private loan industry, rather than through federal loans programs such as Stafford and Perkins.
Rumors of private student loan providers asking for ‘government bailouts’ has already caused plenty of chatter. Do we want to support an industry that is poorly regulated and rips off students? Some say yes because at least they afford people the chance to get more education who don’t qualify for federal loans. If they do get help from the government, borrower protection clauses will likely be part of the bargain. Plenty of graduate students, particularly in the legal and medical professions have maxed out their ability to borrow federally subsidized loans. If private loan providers tighten their belts too much, it could dramatically limit access to funds or make them too expensive. It’s an unfortunate situation because many of these students can’t afford to get higher educations without these loans. Even so, lenders have to compensate for increased default risk by charging higher rates of interest. That’s not a great solution in my eyes because it saddles new workers with higher debts and monthly payments, resulting in lower rates of home ownership and, obviously, more stress in general.
On a positive note, federal loan programs have, for the most part, been successful over the last decade. Popular student loan programs such as Stafford, Perkins, and PLUS (Parent Loans for Undergraduate Students) have continued to increase higher education rates and often subsidize interest while students are in school. Even as the cost of borrowing from the government eventually rises, the strength of the programs has been a huge step in the right direction. While credit has dried up in most sectors of the shrinking economy, federally backed student loans actually grew 18.6% year over year in 2008.* The gloomy economy has encouraged a lot of people to go back to school, get more degrees, and hit the job market at a time when the opportunities are a little better.
I had to get all of this off my chest today. I keep reading articles about the effects of the credit crisis on the student loan industry. It just seems like any way you cut it, loans or no loans, high rates or low rates, the student gets the short end of the stick. While the government is busy bailing out the losses created by years of fraud and deception on Wall Street, how about we do something good for the people who will eventually control the economy of tomorrow.
As always, feel free to e-mail me with any questions or comments.
Russell Bailyn
—
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
* Wall Street Journal: January 9th, 2009