Loan Payments

It may sound impossible to make loan payments while you’re still a college student and not earning a significant income, this is why it is recommended to use a student loan calculator before deciding on taking out a student loan, you need to make sure you’ll be able to make your payments in the future. 

We have seen an alarming increase in student loan defaults. According to the New York Federal Reserves National Student Loan Data System, the number of college students who defaulted on their loans has risen by more than one-third from 1999 to 2008. These statistics highlight the lack of oversight on the part of the Department of Education and its sub-agencies. They also demonstrate the lack of consequences for lenders.

We have learned that the U.S. Department of Education doesnt monitor lenders as it should, for example, monitor how loans are allocated across borrower classes or how loans are processed by the Internal Revenue Service. Indeed, this oversight is largely ignored by lenders as they allocate student loans to borrowers.

The Federal Reserve says the current student loan default rate is 10 percent, but the data doesnt cover a full eight-year period and includes loans issued before the current cycle of changes to student loan policies. It is worth noting that this rate is less than the average for the last fifteen years and there has been no other period of a student loan default rate above 10 percent since the 1980s.

The current crisis in the student loan market can be traced to three factors:

1. The deregulated system of the banking industry led to a boom in private student loan servicing.

2. Subprime lending became more aggressive in the mid 2000s. 3. The government began subsidizing student loans in a misguided attempt to stimulate the economy. The second factor, subprime lending, is the most obvious. More than 13 percent of undergraduate loans are now originated by subprime lenders. It is difficult to know what portion of these loans would be purchased by students with a credit score of 640, the median student credit score in 2011-2012. Some borrowers with poor credit may qualify for subsidized loans from the government. The third factor is the new law that allows the government to guarantee student loans at 3 percent interest. The first step in this process was to expand the existing Federal Family Education Loan Program (FFELP) to include private loans. This was a well-intentioned move, but it created problems. First, private loans are not subject to the same underwriting criteria. Second, the program does not provide for the same types of federal protections as the FFELP. 3. The first effect of the government guaranteeing student loans is that it will increase demand and make loans even more costly. Students that are already behind on their payments and those that need the most financial help will have to take on greater and greater debt to finance their education. This means that they will have more than a chance of paying back their loans, they will not be able to pay back their loans in a timely fashion, and they will end up paying higher interest rates.

Posted in fx