Stop me if you’ve heard this one before:
Guy walks into a bank looking for a loan. It’s the mid-2000s, lending standards are loosey-goosey and loans are flying out the door. They’re going to people with weak credit scores. You know: subprime loans.
Lenders aren’t worrying whether borrowers can repay. It doesn’t matter to them, because as soon as the papers are signed, the loan is just going to be bundled with a bunch of other loans and then resold to investors as an asset-backed security.
Hey, the guy’s breathing and can hold a pen, so let’s just give him the loot.
Oh, by the way: this guy hasn’t done his homework, either. He doesn’t really understand the ins and outs of the loan he’s getting. (Not that he gets much help from the lender, who tells him not to worry so much and to grab a slice of the American dream when he can.)
So he signs on the dotted line, over borrows, and when he starts missing payments a couple of years down the road (especially if his variable interest rate went up), he can’t seem to find anyone at the bank who can help him figure out a workable way to refinance or modify his debt.
Not only that, but now he discovers his loan was transferred from one loan servicer to another, some of the original paperwork has gotten lost and besides that new loan servicer has a new set of terms he never agreed to in the first place.
Pretty soon, the guy is being harassed by third-party debt collectors the new lender has hired to get its money back.
Students Paying Steep Price for Schools Loans
Just an often-told, nearly worn-out joke, right? Hardly.
According to a new report from the Consumer Financial Protection Bureau (CFPB), what I’m talking about here is not the mortgage crisis from the mid-2000s but today’s private student loan industry, which has the same bad smell about it as the home loan mess did.
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Says U.S. Education Secretary Arne Duncan, “Subprime-style lending went to college and now students are paying the price.” And according to CFPB student loan ombudsman, Rohit Chopra, “Student loan borrower stories of detours and dead ends with their servicers bear an uncanny resemblance to problematic practices uncovered in the mortgage servicing business.”
Although the overall amount of private student loans in default — $8 billion of about $150 billion outstanding – is small compared to the size of home loans in arrears, there’s a twist.
Unlike the mortgage crisis, the student loan crisis has a particular wrenching detail about it: student loan debt cannot generally be liquidated in bankruptcy.
Congress made private student loan debt non-dischargeable in 2005, just about the same time the private lending market for these loans was in overdrive. (Private student loans jumped from $ 5 billion in 2001 to more than $20 billion in 2008).
It gets better: Unlike federally backed student loans, which can be postponed or reduced if a borrower is unable to pay, similar options for private loans are few and far between. Also, it turns out students did not always understand the difference between federal and private loans and were often unaware that they may have been eligible for cheaper, safer government ones.
I guess that the 850,000 former American students who hold defaulted private student loans from the banks, credit unions, state and non-profit agencies, schools and other financial companies that lent them money they will never be able to repay, are in a pretty bad financial pickle.
Impact Bigger than Loan Numbers
Despite the relative low numbers of borrowers, the impact here figures to be bigger to the overall economy than some might think. Because the money these students use to repay their debts is money they can’t spend on themselves or on their future spouses and families, or on homes, cars, etc., they won’t be able to help the economy grow much.
Where is this headed? One can only guess.
But we now have another bubble here that (a) is going to consign part of an entire generation into debt slavery and (b), if past is prologue, at some point the lenders will just get bailed out with money that the government will have to borrow from a bunch of other lenders.
And that’s no joke, but hey, don’t shoot me, I’m just the messenger.
Wait, I got another one: A guy walks into a bar . . .
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at firstname.lastname@example.org.
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