No Year of Jubilee to Student Loans

Student Loan is the next bubble that will soon follow. This is a no brainer. Let’s take a critical look at the similarities between student loans and house mortgages. There are on the rise at a time when the hottest ticket (thing for that matter) was a house, the American dream is on the decline. Now that that is not the hottest ticket anymore and people are losing their shirts left, right and center jobs are disappearing and people are heading back to college to improve their skills. But here is the crux of the matter, when Higher Education Act Reauthorization (HR 4137) was passed a very little know part that had been sponsored by Rep. Davis (D -Illinois) which would have extended some bankruptcy protection to students holding private student loans was removed from the Bill. As you might have guessed this was lobbied by…you guess it!!! the same people who brought you NINJA loans the financial institutions. They argued as before that “…that bankruptcy protection would ultimately make private student loans more expensive because lenders would have to increase interest rates and fees to cover loans that were in default and discharged in bankruptcy”

In other words if one has a student loan they would NEVER be able to discharge it in a bankruptcy court come hell or high water. It will follow you to the grave and before that to your social security payments; they now have the power to garnish your income.
Okay that is not so bad since one can get a student loan from the government one would argue. But the problem is that the government doesn’t have that much money to lend out so most of the lending go to …surprise surprise the finance institutions who by the way don’t have good favorable interests …does anyone remember something called adjustable interest rate? Well guess what? They haven’t gone away but change their address (so to speak) from housing mortgages to student loans. Here is an example of what is happening Private Student Loans Vs Federal Student Loans.

Private Student Loans
• Variable interest rates
Interest Rates
A percentage (rate) of the original amount of a loan, including any accumulated interest, charged to the borrower for the use of borrowed money. Interest charged on a loan varies from loan to loan and lender by lender. The interest rate is usually computed on a monthly basis, and may compound over time (that is, the interest charged during month one will itself have interest charged on it during month two, and so on
• Higher borrowing limits
• Requires a credit check to apply
• Usually requires a co-signer

Federal Student Loans
• Fixed interest rates (set by the government)
• Lower borrowing limits determined by class year and student status
• No credit check required to apply
• No co-signer required
• Requires the FAFSA (Free Application for Federal Student Aid) for eligibility
• Some are subsidized based on need (the government pays interest while the student is in school)

What is going to happen is that since private student loan programs will become ubiquitous, everyone out of a job will get them and then when the economy recovers they will not be able to repay since the amount will be so high they will have to mortgage their house to pay off the student lone. As I have mentioned the government doesn’t have a lot of money to lend thus private firm will step-in with their exorbitant interest rate. Here is an example I ran trying to borrow $21,000. As you can see I only get $5,500 from the Fed and the remaining $15,500 from some private institution.

Loan Amount Distribution
Stafford loans have borrowing limits based on your year in school and status. Your total loan amount is split between Stafford and Private loans based on these limits. Tell me more.


Federal Stafford $5,500+ Private $15,500= Total Loan Amount $21,000


Some in the government have tried to raise the issue to no avail. From Market Watch (Last update: 12:47 p.m. EDT June 6, 2007)


“New York Attorney General Andrew Cuomo urged lawmakers on Wednesday to reform the $85 billion student-loan industry before another group of high school students heads to college in the fall, but an executive at lender Sallie Mae said the private-loan market is already operating under numerous rules… But Barry Goulding, senior vice president of SLM Corp.commonly known as Sallie Mae, said the market for private education loans is already "heavily regulated."

Where have I heard that before? Our industry is heavily regulated? And is Sallie Mae although a total independent from the government similar to Freddie Mac and Fannie May? Too big to fail?. Here is another quote from Market Watch “Richard Shelby of Alabama, the panel's top Republican, said lawmakers should also protect private loans.
"Because the cost of higher education will continue to climb, we should also make sure that we encourage the growth of private lending and the myriad of choices they offer those seeking advanced education," he said in an opening statement.