What the Mortgage Meltdown Might Mean to College Students
It all started with the subprime mortgage crisis. “Subprime” mortgages refer to mortgages lent out to high-risk borrowers. In the years before the crisis, banks started lending money to people with low credit scores, unreliable income, and a history of bankruptcy under relaxed underwriting standards. Many of these borrowers were given adjustable-rate mortgages that started off with low fixed-interest rates, turning into variable-rate mortgages after a few years.
When those fixed-interest loans became variable-rate loans, the interest jumped—often past what borrowers could afford. This caused a large number of borrowers to default on their loans. In response, lenders tightened their loan requirements to the point where even people with decent credit were having trouble getting a mortgage. Fewer buyers could get financing, and this caused trouble in the housing market.
Lenders don’t just loan out mortgage money and collect the interest. They package the loans in a trust, and then they sell shares to investors. This gets them back the money they lent out, plus some up-front profit. In turn, the investors get to collect the interest payments. This process is called securitization, and the loans for sale are called securities. When so many borrowers defaulted on their loans, investors became reluctant to buy securities—so lenders didn’t have a quick way to make back the money they lent out.
So how does all this affect student loans?
Student loans are also sold as securities. And investors didn’t just get worried about subprime mortgage loans; they got uneasy about all securities. Education lenders began to have trouble making back the money they lent out for student loans as well.
The student loan market hasn’t crashed yet. However, we’re already seeing the effects of the subprime mortgage crisis in student loans. Here are some possible effects financial experts are speculating the mortgage crisis might have on education financing.
The rate on your private loan may jump.
Most private student loans are variable-rate, meaning the lender can change the interest rate. After so many defaulted on their loans during the subprime mortgage crisis, lenders and investors alike are worried that their loans may go unpaid. To ensure they get the most possible amount back before a default—which seems more likely now to them than it did a few years ago—it’s expected that they’ll raise the rates on their private loans this year.
See Also: Distance Education Colleges
It may be more costly to borrow from the government.
The government offers subsidized loans to students. However, most students access these loans through private banks that receive subsidies from the government—and a 99% guarantee against default—for offering the loans. The 99% guarantee means that the government will pay back $.99 per dollar for loans that go into default.
About the same time the mortgage market started to fall apart, Congress passed the College Cost Reduction and Access Act. This act reduced the amount of subsidies the government paid to lenders, as well as the default guarantee. Because of this, lenders may become more reluctant to offer government loans—and more likely to charge higher fees to make up for the cut in subsidies.
See Also: Online Financial Planning Courses
You may have trouble getting a loan at all.
Approximately a dozen lenders have already pulled out of offering student loans altogether, including the Pennsylvania Higher Education Assistance Agency. Other firms, such as Sallie Mae, are tightening their requirements for borrowers.
Students at lower-ranked schools may be hit harder.
Lenders are expected to look at the success rate of your college’s graduates to determine the interest rates they charge you. Students who attend prestigious colleges with low default rates among their alumni may be considered lower-risk and more likely to land a high-paying job—and lenders may charge them lower interest rates. Students who attend community, for-profit, and low-ranking colleges may be hit with higher rates and fees.
The fallout from the mortgage crisis is only beginning to affect student loans. It’s more important than ever to reduce your college tuition costs in any way you can—whether that means choosing a less expensive school, living at home while you attend, or working in addition to attending classes. The more debt you can avoid now, the more freedom you’ll have when you graduate.
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch