April 11, 2008

Why is there a student loan “crisis” brewing?

Posted in Student Loan News at 10:34 AM by Joe From Boston


I’ve had to answer this question a lot recently, as people are confused as to why this suddenly becamse a big deal.

Thankfully, the Washington Post recently ran a great article that explains what happened in layman’s terms.  Really, it’s just a perfect storm of bad timing, leading to companies backing out of the market, closing completely and laying off thousands of employees right as we hit a recession.

Here’s an excerpt from the Washignton Post.  You may need to set up a free registration to view the article.

Most lenders rely on the securitization of debt to generate enough cash to issue student loans. This process turns ordinary loans into securities, just like stocks, so they can be bought and traded on the debt markets. But lenders have been unable to securitize any loan made after Oct. 1, when a cut in federal subsidies to lenders went into effect. A few weeks later, the credit crunch that began among troubled mortgage securities started to ripple across the student loan industry. Both developments dried up investor appetite for student loans.

Then a second critical source of funds collapsed. Many student lenders receive funding through auctionrate securities — variable-rate bonds that are put up for bid as often as once a week to determine their interest rate. Normally, the bidding process produces a lower rate than that of traditional bonds. But over the past few months, as the credit crisis spread across the financial system, bidders have been unwilling to buy these bonds except at high rates.

Now, only student lenders with large cash reserves, such as banks, may be able to survive.

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5 Comments »

  1. Joe,

    I hate to break it to you, but they are legally allowed to garnish your wages. You my never intend to pay, but you may be forced to, without your consent.

  2. Joe the Filmmaker said,

    The student loan crisis is most likely caused by consolidation schemes. It’s basic corporate greed. The credit card companies, the student loans, the home lenders,… the debt is inflated due to aggressive fees, charges, and rising interest rates.

    When I graduated college, I owed $11k to the federal stafford loans. After a year, my principle went down to $7k. But I was soon ‘talked’ into lowering my monthly loan payments through the student loan corps’ consolidation loan. A ‘killer deal’ a ‘win-win for me’ they said . It was the same loan they said, except the student loan corp would lower the payments. After a year and a half of paying the new loan, my principle was still $7k. It appeared I was basically suckered into a huge interest rate loan and my monthly payment was broken down to 94% interest 6% principal.

    After making these crazy loan shark payments to the student loan corp, I decided to stop paying after they refused to renegotiate the loan. At this time, I still owed just under $7k and all my monthly payments were going to bank interest. Of course, they charged fees and penalties and the loan soon was back up to $11k. After 4 years of making payments and the year of default, I offered the collection agencies a cash payment of $7k if they would wipe away their penalties and fees. They enthusiastically told me NO. It’s been about 6 or 7 years since I stopped paying that loan and made the offers. The last time I checked, my student loan that started at $11k at graduation, was well over $17k. That’s more than 100% of the loan balance in just penalties and fees. Maybe in a few years, I’ll owe them a million dollars.

    I don’t have any plans to ever pay off that loan. Ever! I won’t get into the credit card companies raising interest rates and squeezing their customers with fees. To hell with them all.

  3. The immediate federal bailout may realistically occur in the student loan sector. Please read my story at http://www.citizeneconomists.com. As with the mortgage crisis, everyone from Wall Street to Main Street is to blame. Ultimately the U.S. educational system system suffers!

  4. wanieda said,

    Student loan consolidation rebate rebates are usually given by a private company when student loans are consolidated equaling more than $20,000. The more student loans consolidation, the higher the student loan consolidation rebate. This is usually a percentage of the principal loan balance that is either applied to the outstanding loan or sent to the borrower as a cash payment. This can be a very attractive offer, especially when in the form of a cash payment to the borrower.

  5. Yes, certainly all the storm clouds are on the horizon. One telling event was this Tuesday, April 15 when Senate Banking, Housing and Urban Affairs Committee Chairman Dodd, called for the Department of Treasury to consider tapping into the Federal Financing Bank to inject liquidity into the struggling student loan industry.


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