Student Loans: Malpractices, Frivolous Lending, and Helpless Lendees - Research Paper Example

? Loans: Malpractices, Frivolous Lending, Helpless Lendees Introduction As of a research (H.C. Whisett discovered that there are 37,000,000 Americans with outstanding student loans. Over 7,000,000 USA students borrowed from the biggest student loan provider, Sallie Mae. That company’s investment in lending to students was roughly estimated at $ 100 billion as of 2005, according to Harvard Business Review (7). .By 2010, total student loans in the USA exceeded $1 trillion. The total student loan figure was greater than American debts through credit cards, said Tim Iacono (timiacono.com) who got the report from New York’s Federal Reserve Bank. Growth of student loans has been very noticeable yearly. Chart A shows the uptrend since the year 2000. Chart A In 2008, the number of borrowers in default of their monthly amortizations had accumulated $ 60 billion worth of default, according to Jen Haley (money.cnn.com), “about 2% - 4% of delinquent student loan debt is owed by students abroad”. That means they left the country to avoid debt payment they felt they could not afford. But Alan Collinge had written a book in 2009 describing student loans as the most oppressive debts. From actual experience of regularly paying his own student loans, he discovered that his account had been charged penalties for late payments each month even while he paid on schedule. He asked for the removal of those unwanted penalties by Sallie Mae. But that lender refused to do so. In his research, he discovered what appeared to be a scam in the Student Loan Industry. There was “lack of consumer protections…beneficial for student loan companies” (A. Collinge, 5) resulting in Sallie Mae’s $920 million profits in 2005 or a 228% increase in profits compared to the year 2000. The bulk of profits came from penalties charged to students. A review of this book by A. Collinge was made by Frederick S. Goethel, author of Legalized Loan Sharking Courtesy of Congress. He highlighted among other comments the fact that student loans cannot be removed by the filing of bankruptcy. Government allowed the actual interest rates to reach 29.9%. Another significant observation and comment came from Loyd E. Eskildson who said that as a result of the student’s burdensome debts, wages, Social Security, and even the disability benefits can be garnished at the expense of the borrower. The CEO of Sallie Mae had received the highest salary and the company was 2nd to the most profitable business in the USA while student borrowers are oppressed. The facts about student loans are first of all described in this project. Thereafter, various feedbacks should be considered in order to have an objective end-user assessment of the schemes currently made available to the students and parents. Both facts and feedback will then be analyzed in order to point out the logical recommendations to rescue borrowers from actual and potential difficulties. 2.Facts about US Student Loans as of the Present The Global Economic Intersection reported (ecointersect.com) that a survey was conducted by The Los Angeles Times in 2011 with 1.8 million borrowers of student loans. Findings showed 15% had defaulted while 26% were delinquent although not in default. And the lack of orientation of students and parents who borrow explained why borrowers were not well aware about the terms and conditions. This was considered a cause for the difficulties. A survey was conducted wherein 680 bankruptcy attorneys were the respondents in February 7, 2012, and the topic was about student loans. The National Association of Consumer Bankruptcy Attorneys (NACBA, 1-2) released the results of their survey, with 81% of them saying that student loan cases have increased significantly over the past 3 to 4 years. The average student loan in 2010 was $25,250. Those in the age bracket of 35-49 have increased their debt by 47%. Even parents who availed of student loans experienced growth in the average of their debt from $34,000 to $50,000. Those who defaulted can lose their properties, as pointed out by Dave Ingham, who agreed to be co-signatory to a student loan for his son (NACBA, 1). In a more recent survey, Healy C. Whisett (1) researched and discovered that there are “37 million Americans and counting” with student loans. 60% of those indebted are within the age bracket of 18-39. The survey (H. C. Whisett, 2) unveiled that 65% misunderstood the implications of their student loans as well as the processes involved. 2/3 of those who borrowed from the private sector did not see the differences between Federal Student Loans and Private Student Loans. 80% got their student loans from websites of colleges or through the counsellors of colleges. There was lack of proper measures that can prevent lack of awareness pertaining to the important facts, e.g. repayment amounts, options, rights, obligations. As of 2012, the total amount of student loans in the USA has reached $ 870 billion, higher than auto loans which have reached $730 billion, and higher than credit card debts which are about $ 693 billion (H.C.Whisett, 4). Student loans are expected to exceed $ 1 trillion within 2012. The 2012 survey was made possible by the participation of a youth organization made up of those between 18-34 years of age, and who called themselves Young Invincibles (YIs) claiming to represent the interest of the youth, e.g. in matters pertaining to Student Loans. 6,654 qualified respondents participated. Their qualifications included (H.C. Whisett, 6) their being graduates of a degree, no longer enrolled for further education, and tied to federal or private loans. 54.1% had both private and federal loans. 43.5% were tied to only federal loans. 2.4% had only private loans. The survey discovered that the average respondent owed $ 75,000 Figure A shows the breakdown of loan amounts spread over to students and parents and expressed in terms of the percentage of total borrowers. The distribution of debts classified under Federal, Private, and Dual Loans is shown in Figure B. And since it is important to know whether or not the borrowers themselves believe they can pay off loans, the degree of belief should be considered. Figure C shows the distribution of that degree of belief. Only 7.6% strongly believed they could eventually pay off their debts. 25.8% simply agreed that they can pay. The greater majority or about 65.6% did not have faith in their ability to pay off debts. One of the important criteria for lending is the ability to pay. If the greater majority does not even believe in having that ability to pay, then their chances of ending up in a default can be expected to be high. Lenders should first enlighten borrowers about the rationale of lending and how they can eventually pay, in order that they will have adequate confidence in their ability to pay, even before students and parents decide to borrow. There are many types of student loans according to the American Student Assistance (asa.org), namely, (1) Stafford Loans, (2) Perkins Loans, (3) PLUS Loans, (4) Consolidation Loans, (5)Institutional Loans, (6) Private Loans, and (7) State Loans. Federal loans received by most students, whether subsidized or not, are called Stafford Loans. Both US citizens and qualified non-citizens may borrow from government up to $ 23,000 for undergraduates and up to $ 65,000 for graduate students. Repayment starts 6 months after graduation or after withdrawing from studies or when the student drops out. Postponement of payments is allowed. But there will be interest accruing and adding up to the original debt balance. Postponement of payments is allowed. But there will be interest accruing and adding up to the original debt balance. The usual payment period is 10 years although borrowers may choose a plan. Those who are able to pay ahead of time will not be penalized. During the time that students are in school, or within the grace period, or under an approved deferment period, government will pay for the interest on the loan. Interest rates vary from 3.4% to 6.8% for undergraduate students. For graduate students, the interest rate is fixed at 6.8%. If the borrower allows interest to accrue, it will be capitalized, meaning that the interest will be added to the principal. Perkins Loans are also available for US citizens and non-citizens in order for them to finish undergraduate and graduate courses. For undergraduates, $27,500 is the maximum loan for the entire course, or $ 5,500 per year. The maximum for graduate courses is $60,000 or $ 8,000 per year. This type of loan has a repayment scheme that starts 9 months after graduation of withdrawal, unlike the 6 months of lead time for the Stafford Loans. It is a 10-year repayment plan, with grace period or deferment period approved by the lender. However, postponement may be allowed if the borrower asks for postponement. Another advantage of the Perkins Loans is its lower interest rate at only 5%. For natural parents or legal guardians of students, there is the Parent Plus Loans, the option for them (instead of the students themselves) to be the borrowers of their dependents who need the education. Their credit standing should be good. And a co-borrower should back up the main borrower. They may be US citizens or non-citizens for as long as qualified. But unlike Stafford Loans and Perkins Loans that are based on financial need, the Parent Plus Loans is based on the guardian’s capacity to pay, character, and availability of the qualified co-borrower. In case of difficulties with paying, the terms and conditions include the option of deferment or forbearance of payments. But just like in the earlier types of loans mentioned, interest will be accrued and added to the principal. Interest rate for Parent Plus Loan is higher at 7.9%. US citizens or non-citizens who already graduated but would like to study further can avail of the Grad Plus Loans. They must have good credit standing and must also have a co-signer. Loan limits depend on the required amount to cover for the cost of education. Six months from the time they end their education, payments would have to start. Similar to the Parent Plus Loans, the Grad Plus Loans charges an interest rate of 7.9%. Consolidation Loans are for students with an existing loan or more than one student loan, but are in need of financial means to be able to pay all their loans. The strategy is to prolong the payment period so that the monthly payments will be smaller. Repayment may be extended up to 30 years. However, the disadvantage is that accrued interest will increase the debt since the borrower will be paying for many more months. This type of loan may be utilized in cases when the borrower sees a need to pursue higher education in order to become more competitive in the job market. Also in times when existing loans cannot be conveniently amortized and the amount of payments have to be lowered, Consolidation Loans can serve the purpose of a borrower. Interest rates are computed based on the projected weighted average of rates during the term of the loan. In the event that a student or parent does not qualify for federal loans, the alternative would have to be the Private Loans. Interest rates vary. Repayment options are less. Another alternative would be the State Loans. These are not Federal Government student loans because it is the State that approves or disapproves that type of loan. 3.What Borrowers of Student Loans Did Not Understand & What Was Understood In the NERA Survey conducted by H. C. Whisett, feedback was gathered to find out what was in the minds of borrowers who were obliged to pay. 65% claimed that they did not quite understand some provisions of the student loans. They knew there would have to be amortizations to be paid after graduation. But they underestimated the interest on debt that had become burdensome. Only about 25% admitted to knowing the implications of borrowing through student loans. There were those who felt worried or hopeless about being able to fully pay the loan (15). In choosing Federal Loans over Private Loans, about 40% realized that the interest rates are lower with the former, while the latter did not have any government subsidized options. Furthermore, many people say that it is easier and highly recommended for students to choose Federal Loans because of its easier access. Those who favoured Private Loans were borrowers not qualified for Federal Loans. Students whose parents are earning income in the higher bracket will not qualify for Federal Loans. 50% of dual borrowers pointed out the need to borrow from Private Lenders because Federal Loans could not subsidize some of the expenses that would have to be incurred during the time that students would be studying. A problem identified in connection with dual loans was about two trends, namely, (1) that higher education is becoming more and more expensive, and (2) that higher income can be gained by completing higher education. The youth are forced to borrow in order to pursue education that can realize an income capable of meeting needs, including the need to pay debts. They will maximize use of Federal Student Loans and might have to tap Private Student Loans. This implies there may be a trend towards getting buried in loans. And the percentage of delinquents and defaults could rise. People who can help out US students and parents of students were identified to be the college counsellors, administrators of the college websites, or both. The other source of information concerning student loans has been the banks, although the preferred has been the school. The recommendations of that NERA Survey therefore advised college counsellors to seriously educate the potential borrowers about the implications of alternative loans to finance the education of the youth. Lack of information was one of the feedback from those who complained of experiencing difficulties with repayments. 4.Further Analysis Based on Different Surveys & Facts About Alternative Student Loans Apparently, the NERA Survey did not bother to find out whether or not there is any truth in the reported scam by Alan Collinge. It only reiterated the difficulties of some borrowers who found it difficult to repay. It did not address the findings of bankruptcy attorneys which said that there has been a rising number of cases involving student loans with borrowers facing bankruptcy. However, the NERA Survey identified college counsellors, college websites, and bankers among the people who should be held responsible for not providing some borrowers with clear and adequate information about the terms and conditions of loans, their implications, compounding interest rates, comparative analysis of student loans alternatives to allow for better choices by the borrowers. So far, it appears that no comprehensive solution has been recommended so far to resolve the issue on how heavily burdened borrowers of student loans can rise out of their difficulties and successfully repay. In the light of all these, hereunder are further recommendations based on the above mentioned facts and survey results: A] Government should provide free legal assistance, free financial auditors, and free financial counsellors for all Federal Student Loans and Private Student Loans. They should serve the purpose of protecting the consumer rights of borrowers. If, for example, the allegations of Alan Collinge which mentioned that even as he regularly paid monthly, the lender continued to charge penalties, can be substantiated to be factual, the government lawyers can file cases against those erring lenders to collect damages in favor of the borrowers who were abused. In order that illegal charges of penalties by lenders can be fully substantiated and formally presented as evidence in court, the free financial auditors of government should be tapped to back up the claims of borrowers. And in situations when borrowers simply have to find ways and means to meet their financial obligations within means, government should be ready with free financial consultants who can guide the borrowers towards consolidating their debts and arriving at lower monthly payments that borrowers can afford. There are Consolidation Loans capable of stretching the payment period of student loans and other loans combined to 30 years instead of 10 years. Although total debts will increase as a result of accrued interest converted into additional principal, provided that borrowers will find it to be within their means to pay, the thought of being able to pay will eliminate the feeling of hopelessness. It can increase their confidence in their ability to fully pay debts. B] Since payments of student loans greatly depend on the income from employment months after graduation, there should be a rational policy similar to the UK Student Loans policy (BIS, bis.gov.uk) wherein students who fail to earn at least ?21,000 need not pay the amortization of their student loans. Federal government should bear the responsibility of generating enough lucrative employment opportunities for graduates to work shortly after studying. There are times when economic crisis will be beyond the control of households. And definitely, the government has better control over the changes to alleviate economic crisis. Students obliged to repay should have limited obligation in the sense that the best they can do is to keep looking for a job and to ask for assistance from government to guide them in looking for those job opportunities, if they cannot find one. If adequate effort is exerted by the students, yet they fail to secure their source of income, there should be guidance counsellors to help solve the problem. C] There ought to be a government manual defining the authorities with corresponding responsibilities and accountabilities to the public in serving the public with solutions to problems of 37,000,000 people in America with student loans. People with such difficulties in repayments ought to know where to go, who to deal with, why, and the services they can expect to receive as taxpayers who deserve a peaceful, progressive life instead of a hopeless quality of life. With sincere concern for borrowers coming from government, this issue can be resolved. Works Cited Alan Collinge. The Student Loan Scam : The Most Oppressive Debt in U.S. history, and How We Can Fight Back. Boston, MA: Beacon Press, c2009. ISBN 9780807042298  . Print. American Student Assistance. “Types of Student Loans.” 2012. . Last accessed April 18, 2012. BIS. “Student Finance.” 2012. Department for Business Innovation & Skills. . Last accessed April 21, 2012 Global Economic Interaction. “More Than 40% of Student Loans Have Payment Problems.” 2011. The Los Angeles Times. April 23, 2011. . Last accessed April 20, 2012. Healey C. Whitsett and Jen Mishory. “High Debt, Low Information: A Survey of Student Loan Borrowers.” 2012. NERA Economic Consulting. March 21, 2012. . Last accessed April 20, 2012. Jen Haley. “Loan Fugitives: When Faced With Unaffordable Monthly Payments and Relentless Creditors, Some See Leaving the Country as Their Only Way Out.” CNN, October 24, 2008. . Last accessed April 19, 2012. NACBA. “Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis,” 2012. National Association of Consumer Bankruptcy Attorneys. February 7, 2012. . Last accessed April 20, 2012. Rob Cross, Jeanne Liedtka, and Leigh Weisss, “Best Practice: A Practical Guide to Social Networks.” Harvard Business Review. March 2005: 7. Reprint. Tim Iacono, “Dramatic Increase in Student Loans.” Our Culture, October 19, 2011. . Last accessed October 19, 2011. Figures Figure A. Statistical Breakdown of American Student Loans (Source: Healey C. Whitsett and Jen Mishory. “High Debt, Low Information: A Survey of Student Loan Borrower.” 2012. NERA Economic Consulting. March 21, 2012. p.4) Figure B.1 – Breakdown of Student Loans Into 3 Classifications (Bachelor’s Degree) In the 2012 Survey of 6,654 Borrowers Conducted by NERA Economic Consulting Figure B.2 – Breakdown of Student Loans Into 3 Classifications (Graduate & Priofessional Degrees) In the 2012 Survey of 6,654 Borrowers Conducted by NERA Economic Consulting (Source of Figures B.1 & B.2: Healey C. Whitsett and Jen Mishory, “High Debt, Low Information: A Survey of Student Loan Borrowers.” 2012. NERA Economic Consulting. March 21, 2012. p.8) Figure C – Degree of Belief in the Ability to Pay Off Loans (Source: Healey C. Whitsett and Jen Mishory, “High Debt, Low Information: A Survey of Student Loan Borrowers.” 2012. NERA Economic Consulting. March 21, 2012. p.9) Read More