Term Paper on "Mortgage Industry Impacts on New College Graduates"

Term Paper 8 pages (2465 words) Sources: 1+

[EXCERPT] . . . .

MORTGAGE INDUSTRY IMPACTS on NEW COLLEGE GRADUATES: STUDENT LOANS, JOB MARKET, & HOME BUYING OUTLOOK

For-profit student loan lenders are being compared to mortgage industry lenders in terms of the impacts that lending practices have had on the U.S. population. The reason for this is because these lenders have students locked into financing on student loans that will see large increases in payment amounts due to subprime lending tactics in the student loan industry. Students who accepted these loans in order to go to college will graduate and face seeking employment in an economy that appears to be in a major recession and likely to head into a depression in the near future. Impacts on these students include delaying homeownership due to some much of their income being spoken for by monthly student loan debt payments.

PURPOSE of the STUDY

The purpose of this study is to examine private lending practices of institutions that provide private funding for college expense to students and the resulting impacts from these loans relating to how these high-price student debt repayments will likely impact new college graduates in terms of their standard of living relating to credit, home ownership, income to debt rations and other factors associated with repaying high-price student loans.

IMPORTANCE of the STUDY

The importance of this study is the information and knowledge that will be added in this area of study and in the solution that will be sought for addressing the impending high-price student loan disaster.

METHODOLOGY

The methodology of this study will be qualitative in nature and will be through a review of the literature in this area of study found in peer-reviewed journals and articles of an academic and professional nature.

LITERATURE REVIEW

In the work entitled: "Student Loans Sow Seeds of Economic Ills" published in USA Today stated is that the "near doubling in the cost of a college degree in the past decade has produced an explosion in high-priced students loans that could haunt the U.S. economy for years. While scholarship, grant money and government-backed student loans - whose interest rates are capped - have taken up some of the slack, many families and individual students have turned to private loans, which carry fees and interest rates that are often variable and up to 20%." (Gordon, 2008) the next generation of new college graduates is expected to be overburdened with debt that homeownership will be delayed. The case of a young college graduate is highlighted in this report who states that she feels trapped by her student loans since her monthly payment of $660 which already takes a quarter of her salary each month will jump to $800 in the next twelve to eighteen months. This young woman is a worker for legal aid and states that it is likely that she will be forced to seek employment in a law firm "doing something that I'm not read dedicated to, just for the sake of being able to live." (2008) the report additionally notes that students gambled that the high-price loans would be a good investment on the American dream however "high-paying jobs are proving elusive for many graduates." (Gordon, 2008) Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers states: "This is literally a new form of indenture...something that every American parent should be scared of." (Gordon, 2008) Complaints are on the rise about private loan marketing which have been heard by lawmakers who have acknowledged a need for regulation of "the highly profitable and diverse group of companies and the loans they make to college students."(Gordon, 2008) the Senate Banking Committee is stated by Gordon to have approved a bill mandating "clearer disclosure of rates and terms on private student loans. The bill would also require a 30-ay comparison shopping period after loan approval, during which time the offer terms could not be altered." (Gordon, 2008) Gordon states: "New York Attorney General Andrew Cuomo said many graduates who borrowed owe as much if not more than most homeowners owe on mortgages. Unlike mortgages with clear consumer disclosure requirements -- even from non-bank lenders, private lending is 'the Wild West' of the student loan industry." (2008) Gordon states that according to critics "what happened in the mortgage market could happen in the student loan market...the parallels between the two markets are 'provocative'." (Gordon, 2008) However, as of yet the student loan-backed securities have not been impacted by "noticeable effects of a global credit squeeze that was triggered this summer by a mortgage meltdown of borrowers with risky credit." (Gordon, 2008) However, bankruptcy court will not serve these students heavily burdened by student loan debt as "a 2005 change to bankruptcy laws puts private student loans on par with child support and alimony payments: Lenders can garnish wages if someone doesn't pay." (Gordon, 2008) There have even been reports of kickbacks from lenders to college administrators in "revenue-sharing plans and trips...in exchange for recommended lender status." (Gordon, 2008) There are predictions among some experts that student loan delinquencies and student loan defaults on outstanding loans are likely to occur in waves. Gordon states that according to Luke Swarhout at the U.S. Public Interest Research Group: "Should private student loans suffer the same sort of failure as (subprime) mortgages, as students graduate or drop out and find themselves unable to pay, we will do serious damage not only to the lives of many students but also to the economic and social fabric of our country that depends on college graduates for its strength." (Gordon, 2008) the work entitled: "The Dirty Secrets of the Privatized Student Loan Industry" states that privatization of student loans have put college students and their parents "at the mercy of an $85 billion industry that is all too content to make students pay dearly for a college education." (Education Portal, 2007) Reported is a recent poll by Matthew Greenwald & Associates of 1,508 college students. Findings of the survey show that 44% of had stated that they had "postponed buying a house because of student loans." (Education Portal, 2007) Another 32% were "forced to move back in with their parents after college because of students loans." ((Education Portal, 2007) of those surveyed "28% delayed in having children because of student loan obligations." (Education Portal, 2007) the survey further shows that 27% of students surveyed "skipped medical and dental procedures because they couldn't afford to pay for the procedure and pay their student loan payment in the same month." (Education Portal, 2007) the report additionally states that the industry has been rocked due to recent scandals in lender practices "after student aid officers across the nation have been caught accepting perks from private lender. Others have been caught owning stock in various student loan firms. The corruption goes as high as the Department of Education itself, where one federal employee (a financial aid staffer, or course) was put on leave after admitting that he owned a very significant amount of stock in Education Lending Group." (Education Portal, 2007)

In 1980, Congress enacted a law in which the U.S. government assumes the risk of a privatized loan while the lender realizes a profit that is guaranteed. The example is provided that should a student default on the loan "...it's no biggie for the lender because government has guaranteed that the lender will get his money." (Education Portal, 2007) the problem is that this law has what is known as the '9.5% rule' which is a rule under which the lender collects 9.5% interest even if the lender made the loan to the student at 6.0% interest. Therefore, should the student default on the loan the government pays an additional 3.5% interest. This practice is known as a subsidy and in 2001 "taxpayers shelled out $209 million in subsidies to these lenders. In 2006, the amount rose to $630 million. (Education Portal, 2007) Those who are staunchly opposed to privatized students loans note that the problem "lies with the government officials who have accepted millions in campaign contributions from student loan lenders." (Education Portal, 2007) in fact it is noted that the lending industry "spends just as much on campaign contributions as oil and pharmaceutical industries..." (Education Portal, 2007)

The work entitled: "55 Colleges Under Investigation for Unethical Student Loan Practices" published by Education Portal November 2nd 2007 states that the U.S. Secretary of Education Margaret Spelling states that new regulations for students loans had been enacted on the 1st of November, 2007. Specifically stated is: "Under these regulations institutions are allowed to use preferred lender lists, but must include at least three lenders on the list along with the criteria for the ranking. The regulations also strictly prohibit lenders from seeking placement on the lists through gifts or other forms of bribery. Spellings said she was 'pleased' with the new rules and considered them a 'major step forward' in improving transparency in the student loan process." (Education Portal, 2007) the College Cost Reduction and Access Act "is a… READ MORE

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