Study: Private student loans parallel subprime

[dipsydoodle]

Source: Associated Press

WASHINGTON (AP) -- Risky lending caused private student loan debt to balloon in the past decade, leaving many Americans struggling to pay off loans that they can't afford, a government study says.

Private lenders gave out money without considering whether borrowers would repay, then bundled and resold the loans to investors to avoid losing money when students defaulted, according to the study, which is being released Friday.

Those practices are closely associated with subprime mortgage lending, which inflated the housing bubble and helped bring about the 2008 financial crisis.

"Subprime-style lending went to college, and now students are paying the price," said Education Secretary Arne Duncan, whose department produced the report with the Consumer Financial Protection Bureau.

http://hosted.ap.org/dynamic/stories/U/US_PRIVATE_STUDENT_LOANS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-07-20-00-30-13

Read more: http://hosted.ap.org/dynamic/stories/U/US_PRIVATE_STUDENT_LOANS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-07-20-00-30-13

[TheMastersNemesis]

1. Should Be Illegal To Bundle Or Transfer Loans.

The original lender should be forced to keep the paper. Bundling loans should be a federal offense.

[Jeff In Milwaukee]

4. Let me add....

That government-backed loans should be available only to state and non-profit institutions of higher learning. Students at for-profit schools have nearly triple the default rate.

[primavera]

5. Students at for profit schools probably have triple the debt

The more money you owe, the harder it is to pay it back, no?

[Jeff In Milwaukee]

6. And these schools have no interest in graduation...

I taught at one for about half of one class. Seriously.

These companies are just scamming money from taxpayers with no real intention of providing their students with an education, qualify or otherwise.

[Igel]

11. Let's be consistent. And look at the problem itself.

There are a lot of schools with high default rates. Some of them are not-for-profit.

That's pretty much any school with the same demographics as the student bodies of the for-profit schools with a high default rate.

You could rule all those schools out, but for-profit schools are not the problem in this case.

The problem is that the schools have a high default rate; it's that some schools have an abnormally high number of students that get loans that they can't repay. Tighten up the requirements for getting a loan and you'll find that the default rates will go down across the board, both at for-profit and not-for-profit institutions. And that those schools "with a high default rate" will suddenly have far fewer students that get government-backed student loans.

That, oddly, is the point of the OP.

[Psephos]

12. That's truly the heart of it. n/t

[Jeff In Milwaukee]

16. Well....

You won't find many private, non-profit universities with default rates as high as the for-profit companies. That's because we're really not talking about the same demographics. Private, non-profit universities are the likes of Notre Dame and a host a small, liberal arts colleges across the country. This isn't the same student population as what shows up at ITT or Kaplan.

But that being said, perhaps the criteria should be "Get your default rates below XX% over the next four years or you're cut off."

Tightening the requirements for a student loan becomes a Catch-22 situation. Before the student can qualify for the loan, he/she has to prove that they don't need the loan. Now many eighteen-year-olds have the financial means to make the payments on a decent used car, much less a college education.

I can tell you, because I've taught at public, private and (once) a for-profit institution, that the for-profits are just running students through with almost no regard for whether they'll graduate or eventually find a job.

[Igel]

13. Bad idea.

Sounds good, short-term. But the reason that they started allowing the bundling of loans was that a lot of loan providers ran out of cash. That's true for mortgage providers as well as student loan providers.

This was in the '90s. Many of those who ran out of money were smaller banks serving traditionally less-served neighborhoods. Others were government sponsored entities. The market for this kind of security was fairly good, but it was only a few years later that everybody got into the act and things got out of hand.

At the same time they also decided that you needed to relax lending standards. For mortgages, because of a racial skew in FICO scores and incomes. For student loans, because it was important to help every student who could attend college to attend college, esp. in a time of declining Pell Grant allocations. High lending standards meant those poor or with fewer assets couldn't get the loans, either for houses or for student loans. You probably know the correlations as well as I do.

[w4rma]

18. No. Bundle away. If investors want to be stupid with their money, it's their money

to be stupid with. Research, research, research before investing.

[xchrom]

2. Du rec. Nt

[liberal N proud]

3. YEP

[midnight]

7. I would like to see a serious reduction in this student debt debacle in the same manner given to

those bankers...

[limpyhobbler]

10. +1 We should help the people holding this massive debt.

[Fearless]

8. I guess this means Arne Duncan's broken clock gets to strike right one more time n/t

[Sirveri]

9. I thought that they couldn't default.

So how does the debt ever become bad?

[Psephos]

15. It becomes "bad" when it's not serviced.

The longer it's not serviced, the less likely it becomes that it will be repaid.

Collection efforts against people who don't have the ability to pay are pretty much futile.

[Sirveri]

17. They don't have the ability to discharge the debt though.

It just sits there for eternity until they either die or pay it off. Even if they kill themselves it would shift to a cosigner if they have one. They'll garnish social security to pay it. It will eventually get paid off, even if they aren't always current. Yeah, you might not be able to collect today, but you'll be able to collect tomorrow, or some other day in the future. In the mean time you just rack up the interest, then if they ever make a dime you come in and say "Fuck you, pay me". I guess we should be thankful they can't break our legs.

[Psephos]

20. There's semi-serious talk in Congress of making it dischargeable in bankruptcy.

One can hope.

The universities ought to have some skin in the game, too. I.e., if a student discharges in bankruptcy, the school assumes some liability.

[Sirveri]

21. What would putting the school on the hook do?

All they'd do is raise rates even higher forcing people deeper into debt and closer to default.

Either that or schools would become only about what jobs made money and you'd see art, music, the humanities and a bunch of other stuff dumped so everyone could become engineers.

Want to do anything, stop the banks from leveraging so hard. If they're worried that they'll lose 1/4 or 1/3 of their investment they'll be a hell of a lot more careful giving out money in the first place.

I doubt we'll see them modify the bankruptcy rules though, I mean they have the perfect captured debt slavery system setup right now. Some of these kids will never get out from under it. They'll die paying the minimums. They'd probably bring back debtors prisons first. Force them to work it off in the fields for pennies.

[limpyhobbler]

14. They should allow people to consolidate private student loans into Dept. of Ed. loans

Or at least do what Sec. Ducan suggested and provide some protection from the banks. And please hurry.

[proverbialwisdom]

19. "Since '78, the price of tuition at U.S. colleges has increased over 900%, 650 pts above inflation."

Repost:

http://www.zcommunications.org/welcome-to-the-2012-hunger-games-by-rebecca-solnit

EXCERPT:

According to the website for Occupy Student Debt ( http://occupystudentdebt.com/ ), 36,000,000 Americans have student debts. These have increased more than fivefold since 1999, creating a debt load that’s approaching a trillion dollars, with students borrowing $96 billion more every year to pay for their educations. Two-thirds of college students find themselves in this trap nowadays. As commentator Malcolm Harris put it in N + 1magazine ( http://nplusonemag.com/bad-education ):

“Since 1978, the price of tuition at U.S. colleges has increased over 900%, 650 points above inflation. To put that number in perspective, housing prices, the bubble that nearly burst the U.S. economy, then the global one, increased only fifty points above the Consumer Price Index during those years. But… wages for college-educated workers outside of the inflated finance industry have stagnated or diminished. Unemployment has hit recent graduates especially hard, nearly doubling in the post-2007 recession. The result is that the most indebted generation in history is without the dependable jobs it needs to escape debt.”

About a third are already in default. You can only hope that this bubble will burst in a wildcat strike against student debt, and if we’re lucky, a move to force tuition lower and have a debt jubilee.

The rest of us, the 99%, need to remember that, when it comes to public education, the crisis has everything to do with slashed tax rates -- to the wealthyand corporations in particular -- over the last 30 years. We went into bondage so that they might be free. Getting an education to make your way out of poverty and maybe expand your mind is becoming another way of being trapped forever in poverty. For too many, there’s no way out of the hunger labyrinth.

<...>

http://nplusonemag.com/bad-education

25 April 2011

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What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?

During the expansion of the housing bubble, lenders felt protected because they could repackage risky loans as mortgage-backed securities, which sold briskly to a pious market that believed housing prices could only increase. By combining slices of regionally diverse loans and theoretically spreading the risk of default, lenders were able to convince independent rating agencies that the resulting financial products were safe bets. They weren’t. But since this wouldn’t be America if you couldn’t monetize your children’s futures, the education sector still has its equivalent: the Student Loan Asset-Backed Security (or, as they’re known in the industry, SLABS).

SLABS were invented by then-semi-public Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion. The number of SLABS traded on the market grew from $200,000 in 1991 to near $250 billion by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments—the kind financial advisors market to pension funds and the elderly.

With the secondary market in such good shape, primary lenders have been eager to help students with out-of-control costs. In addition to the knowledge that they can move these loans off their balance sheets quickly, they have had another reason not to worry: federal guarantees. Under the just-ended Federal Family Education Loan Program (FFELP), the US Treasury backed private loans to college students. This meant that even if the secondary market collapsed and there were an anomalous wave of defaults, the federal government had already built a lender bailout into the law. And if that weren’t enough, in May 2008 President Bush signed the Ensuring Continued Access to Student Loans Act, which authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In 2010, as a cost-offset attached to health reform legislation, President Obama ended the FFELP, but not before it had grown to a $60 billion-a-year operation.

Even with the Treasury no longer acting as co-signer on private loans, the flow of SLABS won’t end any time soon. What analysts at Barclays Capital wrote of the securities in 2006 still rings true: “For this sector, we expect sustainable growth in new issuance volume as the growth in education costs continues to outpace increases in family incomes, grants, and federal loans.” The loans and costs are caught in the kind of dangerous loop that occurs when lending becomes both profitable and seemingly risk-free: high and increasing college costs mean students need to take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders can offer more loans with the capital they raise, which means colleges can continue to raise costs. The result is over $800 billion in outstanding student debt, over 30 percent of it securitized, and the federal government directly or indirectly on the hook for almost all of it.

<...>