The risky lending practices of the home mortgage market may have close company soon from student loans industry. These debt obligations, which are supposed to help people advance financially after graduation, are becoming an increasing concern for the burden they put on those who have them. No matter if the borrower is now over 40, and still paying down debt from many years ago, or just out of college and not yet able to find a job.
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While many students may have government backed debt, a growing concern has been reported by the Department of Education (PDF link) to the large private student loan industry. These creditors have been using many of the same practices connected to the mortgage crisis, including sub-prime offers and bundling, in order to cause a boom in private borrowing in just the past decade.
However, as Time Magazine observes.
These loans are also time bombs for the borrowers who are saddled with them…. “The [private student loan] was designed to mimic a Stafford [federal] loan during school, but it has key differences which create risks for consumers if the future path of interest rates, the economy, and the labor market vary beyond initial expectations,” the report says.
Many students and their families don’t understand the difference between federal and private loans and unwittingly get locked in to private loans that have much less favorable terms, even if they’re eligible for federal aid. Federal student loans have fixed rates and don’t require borrowers to meet creditworthiness standards, while private ones tend to offer variable rates and use borrowers’ credit to determine the rate they’ll receive, which can be as high as about 20%.
There are also critical differences when it comes to repayment. Federal loans are more lenient and provide low-income or unemployed graduates with options, while private lenders offer, at most, short-term forbearance. Defaulting on a private student loan can happen much more quickly — it takes only 120 days of nonpayment, a short time frame in an economy in which many people are out of work for months. In 2009, the unemployment rate for people with private student loans was over 16%.
The debt burden can be crushing: in 2009, 5% of all students who took out private student loans and 10% of students who took out those loans and earned a bachelor’s degree owed more than 25% of their monthly income.
(Read the full story at Time Magazine)
In order to address the problem, the Administration is suggesting a number of remedies to cut down on the marketing and sale of these privates loans. But more controversial, they are also including suggested changes to the bankruptcy code which might give a chance for borrowers to address a private student loan the same as any other consumer debt. Current law does not afford such protection, leaving some to actually pursue bankruptcy on their other debts just so that they can focus solely on old student loans.