Tag Archives for " Loans "
Certain profit based Colleges, such as DeVry University are set to lose federal government assistance unless they meet new guidelines on student loans as indicated by the United States Department of Education. This excludes non profit colleges such as DePaul University.
Students at non profit colleges make up 88 percent of those in school, but only represent about 1/2 of the defaulted student loans; therefore, the other half pertains to defaults from for profit schools. This is the reason why the “gainful employment” talk within the government has been in recent discussions where if graduates owe too much relative to their income, or too few former students are paying back their student loans, colleges may lose grants and federal tuition loans.
In order to hold federal assistance, for profit schools will have to show that their previous attendees have not defaulted on more than 65 percent of the loans and that the student loan payments do not equate to one third of their total income, or twelve percent of their annual income. Estimates predict that close to 20 percent of such colleges will fail to reach those requirements and only about 95 percent will get to keep such federal government aid programs which may leave up to 5 percent closing down.
Arne Duncan, Education Secretary, said, “We’re asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective. “This is a perfectly reasonable bar and one that every for-profit program should be able to reach.”
This will all set into place July of 2012; however, schools may not be ruled ineligible until 2015, giving 3 years for readjustment. Talk continues as the requirements are proposed to become more lenient as stocks for profit based schools increased.
September 12, 2011 – Although student loans can help finance a college education for many students who need the extra help, studies released today from the U.S. Department of Education show that student loans are increasingly throwing students in over their heads in debt.
“These hard economic times have made it even more difficult for student borrowers to repay their loans,” U.S. Secretary of Education Arne Duncan said in a press release.
The department’s data shows that the default rate for student loans rose substantially between the fiscal years 2008 and 2009. The overall national student loan cohort default rate rose from seven percent to 8.8 percent. Broken down by department, the data indicates that the rate rose from six percent to 7.2 percent for public institutions, from four percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools.
These rates account for students whose first loan payment was due between Oct. 1, 2008 and Sept. 30, 2009 and who defaulted before Sept. 30, 2010. There are 320,000 students that fall in this category, out of 3.6 million who took out loans at 5,900 different schools.
The increase in students that are unable to pay off their student loans will not only affect the students, but may also cause schools with the highest rates to face federal consequences, such as losing eligibility for federal aid programs.
Based on the data released today, five schools face possible penalties; these schools are those that had a default rate above 25 percent for three consecutive years, a rate that was more than 40 percent in the most recent fiscal year or both. The institutions are: Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston, Texas; Missouri School of Barbering & Hairstyling, St. Louis, Mo.; Sebring Career School, Houston, Texas; and Human Resource Development & Employment – Stanley Technical Institute, Clarksburg, W.Va.
In response to this increase in student default, the U.S. Department of Education has taken new measures to ensure that schools are accurately and extensively informing students about their financial decisions. These protective measures include a college affordability and transparency list, which shows “schools with the lowest and highest tuition and fees, their average net price and those institutions whose prices are rising at a particularly fast rate, and they allow students to compare costs at similar types of institutions,” the press release stated.
In addition to these changes, the department announced that it will begin measuring default statistics based on a three-year period, rather than the two-year one it has employed previously.
President Obama recently announced his proposal to reduce the sometimes excruciatingly high monthly payments current students and recent graduates owe on the loans used to pay for their education.
Recognizing the importance of education in a global economy, president Obama said in a news release, “until Congress does act, I will continue to do everything in my power to act on behalf of the American people.”
The administration hopes to live up to this promise by revising the current “Pay as You Earn” student loan payback program. Beginning next year, current students will have the ability to cap their monthly student loan payments at 10 percent of their discretionary income.
However, it is not only current students that are struggling with their student loan payments. Recent graduates, those who are trying to break into the extremely competitive recessionary job market, are finding themselves without any means to payback their student loans.
To tackle this problem, the administration seeks to grant graduates the ability to consolidate student loans at reduced interest rates and to forgive the balance graduates owe after 20 years of making payments on their student loans. This measure will offer a strong helping hand to graduates who have taken on lower-paying jobs.
By consolidating and reducing graduates’ monthly payments, these improvements to the “Pay as You Earn” plan are meant to work in tandem with the Public Service Loan Forgiveness Program, which forgives all student loan debt for public service workers after just 10 years of payment.
Finally, for borrowers who have both a Federal Direct Loan and a Federal Family Education Loan, the Administration will grant an option to consolidate these loans into a single payment. If borrowers accept the offer to consolidate these federal student loans, they will receive up to a 0.5 percent reduction on the interest rate these loans bear.
Between January 1 and January 30, 2012, the U.S. Department of Education (department) will offer Special Direct Consolidation Loans, which are designed to help borrowers manage their debt by grouping federal student loans into a single bill with a single payment.
This special short-term consolidation opportunity is available to those who have both:
While a borrower must have both a department-owned loan and a commercial-owned loan to qualify for this program, only the commercial-owned loans will be consolidated.
The eligible commercially-held FFEL loans include:
The loans must be in grace, repayment, deferment, or forbearance to qualify for the program.
The consolidated student loans will receive a 0.25 percent interest rate reduction then take on a fixed rate calculated from the average of all the loans, but cannot exceed 8.25 percent.
The repayment term on the consolidated loan will remain the same as the current terms on the borrowers’ existing loans, but since there will be an interest rate reduction, the total interest payment over the life of the loan will be smaller than a traditional consolidation program would allow.
If eligible, borrowers can still make use of the income-based repayment (IBR) program with these loans.
Finally, by turning commercially-held FFEL loans into Special Direct Consolidation Loans, they become Direct Loans, which allow eligibility for the Public Service Loan Forgiveness Program (PSLF). The PSLF grants full student loan forgiveness after 120 payments from an individual employed in an eligible public service job.
A survey commissioned by FICO expresses concern over the growing instability of the student loan market, and predicts future student loan delinquencies to weight the U.S. economy down.
Now that student loan debt has overtaken credit card debt with a total $750 billion outstanding, FICO’s survey revealed 67 percent of respondents expect delinquencies to rise.
“Evidence is mounting that student loans could be the next trouble spot for lenders,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs, in a FICO news release. “A significant rise in defaults on student loans would impact as well as taxpayers, who could be facing big losses due to these defaults. Our survey results underscore the ongoing challenges that millions of American households face as they true to cope with their debt during these uncertain times.”
Respondents were also asked about the affect global economies may cause on the U.S. economic recovery. When asked about what they believe could cause a double dip recession for the U.S., 38.8 percent of respondents said the Eurozone debt crisis was the most likely trigger.
The survey also revealed a stunning 65 percent of respondents feel the global influence of Chinese consumers would overtake U.S. consumers within 5 to 10 years.
“Whether it’s debt trouble in Europe or economic growth in Asia, there are significant implications for the near-term and long-term strength and health of the U.S. economy,” said Jennings. “There are risks, challenges and opportunities all around us. To compete in this increasingly complex global environment, we’re seeing more U.S. companies embrace innovative analytic technologies to help them understand and navigate the global playing field.”
FICO also reported the outlook on other lines of credit and financing. 47 percent believe mortgage delinquencies will rise in the next year, while 45 percent fear credit card delinquencies will rise. Auto loans were seen as the least volatile by FICO’s survey group, as only 33 percent expect those to rise.
As the nation’s student loan debt quickly approaches $1 trillion, it’s no wonder why the low interest rates on home mortgages aren’t providing the expected boost in home sales that experts initially predicted.
Roshell Schenck, a Ph.D graduate with a degree in pharmacy currently earns an annual salary of six-digits, but can’t qualify for a home loan to provide shelter for her daughter and herself, reported Bloomberg. Despite the fact that she makes $125,000 a year, she has more than $110,000 in student loan debt, which is putting a real strain on her income and potential borrowing opportunities.
“I’d love to buy and can afford to buy,” Schenck told Bloomberg.
Willing and able borrowers seem to be a rarity these days, but it seems that even if borrowers have the desire and the funds to purchase a house, banks want little to do with borrowers if they have outstanding student loans.
Since loans used for education are being viewed with greater scrutiny than other types of outstanding financing, Schenck is unable to get approved. “It’s almost impossible for me to get a loan,” she explained. “My debt is crushing my chances of purchasing a home.”
The Trillion Dollar Mark
Because the demographic that makes up most of the “first-time” homebuyers tends to be of the younger generation, they often carry student loan payments. Graduates or not, this higher education financing has found commonplace amongst the nation’s new adults, but as banks are seeing defaults rise, they’re very wary about issuing mortgages to those indebted with these loans.
“Students coming out of college are burdened with more debt than traditionally they have been, and they are also coming into an economy that is underperforming previous recoveries,” said Rick Palacios, a senior analyst at John Burns Real Estate Consulting LLC in Irvine, CA, to Bloomberg. “These things pile on each other and tell us it’s not going to help the housing recovery right now.”
Particularly as the $1 trillion mark comes closer and closer, and experts are predicting a student loan bubble being formed.
“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and rtenders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” said John Rao, vice president of the National Association of Consumer Bankruptcy Attorneys, in a Bloomberg article.
Driving Away the Fix
But cautious or not, driving away first-time homebuyers from the mortgage market is crippling the housing world.
“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” said Ben Bernanke at a homebuilders conference last week, according to Bloomberg. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”
Despite the fact that current student loan borrowers are being turned away from the mortgage market, some remain optimistic.
“The dream feels like it’s farther out of reach than I ever thought it would be,” said Shenck. “[But still,] I haven’t given up hope of one day owning my own home.”
While protests rage on and students plead with lawmakers to ease their student loan burdens, the last thing the younger generations want to hear is that college costs may again be on the rise.
The California State University Board of Trustees received horrible news regarding the impact that state funding cuts would have on their institutions. If a November ballot fails to be passed, the Cal State system could lose up $200 million in funding for the 2012-13 academic year, reported the LA Times.
If such a slash occurs, thousands of faculty and staff positions would be in jeopardy, some academic and athletic programs would have to be eliminated and student loans may rise.
F. King Alexander, the president of Cal State Long Beach (CSULB) believes his campus will lose $26 million if the November legislation falls through. Such an enormous funding slash would result in CSLB being forced to eliminate 400 jobs and 1,800 classes.
“We already are spending so little on our students,” explained Alexander. “We can no longer spend less on them and give them a quality education unless we reduce enrollment.”
The enrollment to CSULB is expected to impact 23,000 applicants that Alexander believes will be wait-listed in fall of 2013.
With such alarming numbers facing closed doors at colleges, high school counselors are having difficulty advising their students on what to do after graduation. Sylvia Womack, a college and career center supervisor for Polytechnic High School in Long Beach, told the LA Times that the enrollment uncertainty will drive students to private or out-of-state schools.
“This will them think, ‘Why should I wait for Cal State Long Beach when Whittier College will take me in right now?’ ” explained Womack.
In addition to those being turned away, the burden of such costs could fall on attending students as well. When the state cuts funding to its higher education institutions, the individual campuses will need to extract that money from other sources. One such possibility is raising prices for students. Raised fees would directly affect the cost of student loans.
Dan Nannini, the director of the transfer center at Santa Monica College, expressed his concerns of rising student loan costs. “The kid who is not of means or can’t enough to pay, they have to wait around until someone opens up their door.”
Many already feel higher education opportunities cater to the upper class, and place an unfair burden on those in the middle and lower brackets. Some believe the rising costs of student loans will expand that gap while others feel a price hike may deteriorate the California state university system to such a degree that future generations will simply avoid it.
21-year-old CSULB women’s studies major named Sara Castledine seems to be losing hope. “I graduate in May and if this is how it is now, how is it going to be in five years when my siblings and others are graduating and going to college? Is there going to be a school worth going to?”
Her questions raise a good point. Will there be high school graduates willing to borrow expensive student loans for what appears to be an inevitable subpar educational system, or will they simply leave California for other states’ institutions?
JPMorgan Chase, the largest bank in the U.S., announced that it will stop originating private student loans for non-customers beginning on July 1, 2012, according to Bloomberg.
Customers must have a relationship with JPMorgan in the form of a deposit, loan or credit card if they hope to secure a private student loan from the bank. While no new non-customers will be given student loans, those with existing financing from the bank will continue to be serviced.
“The private student loan market has continued to decline and government programs have expanded to help more students and families,” said Steve O’Halloran, a spokesman for JPMorgan, told Bloomberg in an email, hinting that the industry is losing its profitability.
The company’s student financing portfolio shrank 15 percent from 2009, all the while doubling their bad debts. Uncollectable loans rose 72 percent, and JPMorgan’s profits declined significantly.
In 2009, the bank made $4.2 billion on student loans. In 2011, they’re profits dropped to $300 million.
The rising default rate on college loans has raised concern in more than just the banks losing money. Some experts fear this trend is leading to yet another economic bubble, which, if burst, could hinder our already weak recovery.
The Consumer Financial Protection Bureau (CFPB) reported student loans are now the largest source of unsecured consumer debt in the nation, surpassing $1 trillion.
That number is growing not only by new originations, but by students who are unable to make timely payments on their borrowing. As graduates enter one of the weakest job markets in the United States’ history, our nation’s youth is unable to make adequate enough pay to satisfy their high monthly bills. Consequently, their student loans are growing at exponential rates due to the interest accruing.
In the words of Rohit Chopra, the CFPB’s student loan ombudsman, “It seems that this market is too big to fail.”
The political party leaders appear to unanimously agree on the issue of student loans, as both of the party front runners have announced their support for extending the interest rate legislation that is scheduled to expire on July 1, 2012.
With the number of students borrowing student loans closing in on 60 percent, both democrats and republicans have announced that they believe the interest rate reduction should be extended.
The interest rate reduction legislation, which was originally passed in 2007, is artificially holding the interest rate for government-backed college financing down at 3.4 percent. However, come July 1 of this year, that legislation is set to expire, and the interest rate will spring up to 6.8 percent—something both students and politicians say is unmanageable right now.
“I support extending the temporary relief on interest rates for students [due to] extraordinarily poor conditions in the job market,” said Mitt Romney this week, according to the Examiner.
President Obama has been very vocal about his support for the interest rate extension, as this year’s State of the Union address contained a whole segment in which the president pleaded with Congress and lawmakers to unite and extend the legislation.
“At a time when Americans owe more in tuition debt than credit card debt, this Congress needs to stop the interest rates on student loans from doubling in July. Extend the tuition tax credit we started that saves millions of middle-class families thousands of dollars,” the president demanded in his State of the Union speech.
But Ron Paul, who has a huge college-aged following, surprisingly supports a move that’s directly opposite of what the majority of his constituency wants. Paul has vowed to try to end federal student loans all together if he were elected president.
“Just think of all this willingness to want to help every student get a college education,” began Paul, as he started to explain his thinking behind a proposal to end federal student loans, close five government departments—including the Department of Education—and ultimately eliminate all of the government entities that are, in his opinion, causing the high cost of a college education. “I went to school when we had none of those. I could work my way through college and medical school because it wasn’t so expensive.”
Paul believes his plan would cut $1 trillion from the federal budget.
The academic year of 2012-13 is bringing with it a new avenue of college financing. This week Sallie Mae announced that it will be offering fixed-rate private student loans.
The new fixed-rate options are going to be available to both undergraduate and graduate students at degree-granting institutions on May 21, 2012. The interest rates will start at 5.75 percent and they will come with no origination fees.
Private student loans typically come with variable interest rates that are re-evaluated once a year. Those variable rates can fluctuate up and down, emitting an air of uncertainty.
Fixed-rate student loans have typically been exclusive to federal college financing offers, and have been rarely originated by private lenders.
“With the addition of fixed interest rates on our private loans, Sallie Mae offers a full range of payment options to families who need to fill a gap after exploring federal financial aid,” said Joe DePaulo, executive vice president of Sallie Mae, in a release. “Whether you want the guarantee of a fixed interest rate or you’d like to benefit from today’s extremely low interest rate environment, we offer you a loan with transparency and family-friendly consumer protections.”
The introduction of these private fixed-rate student loans may not have come at a better time.
The federal student loan interest rate is currently being artificially held by legislation at 3.4 percent. But that legislation is set to expire on July 1, 2012. If Congress doesn’t grant an extension, those interest rates will double, resulting in federal college financing being offered at 6.8 percent.
While Republicans and Democrats continue to block the student loan interest rate bill with their political bickering, students and parents may find Sallie Mae and the private sector as a better and more profitable avenue for college financing.