Tag Archives: student loans

Parent Plus Student Loans: How to Screw Parents and Kids in a Single Shot

It’s easy to get student loans thanks to the aptly named “Parent Plus” program, a subprime loan trap that ensnares parents plus their college-age children. The program was enacted by Congress in the 1980s, but president Obama promoted it heavily.

The results speak for themselves: Nearly 40% of the loans are subprime. The default rate exceeds the rate for U.S. mortgages at the peak of the housing crisis.

Kids graduate from college with useless degrees, plus parents and kids are stuck with massive bills that cannot be paid back.

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It’s Easy for Parents to Get College Loans—Repaying Them Is Another Story.

Student loans made through parents come from an Education Department program called Parent Plus, which has loans outstanding to more than three million Americans. The problem is the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores or ability to repay. Then it extends loans that are nearly impossible to extinguish in bankruptcy if borrowers fall on hard times.

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As of September 2015, more than 330,000 people, or 11% of borrowers, had gone at least a year without making a payment on a Parent Plus loan, according to the Government Accountability Office. That exceeds the default rate on U.S. mortgages at the peak of the housing crisis. More recent Education Department data show another 180,000 of the loans were at least a month delinquent as of May 2016.

“This credit is being extended on terms that specifically, willfully ignore their ability to repay,” says Toby Merrill of Harvard Law School’s Legal Services Center. “You can’t avoid that we’re targeting high-cost, high-dollar-amount loans to people who we know can’t afford to repay them.”

The number of Americans with federal student loans, including through programs for undergraduates, parents and graduate students, grew by 14 million to 42 million in the decade through last year. Overall student debt, most of it issued by the federal government, more than doubled to $1.3 trillion over that period.

The financing fueled a surge in college enrollment. Between 2005 and 2010, enrollment grew 20%, the biggest increase since the 1970s. The Obama administration supported such lending in an effort to widen access to college education.

Nearly four in 10 student loans—the vast majority of them federal ones—went to borrowers with credit scores below the subprime threshold of 620, indicating they were at the highest risk of defaulting, according to a Wall Street Journal analysis of data from credit-rating firm Equifax Inc. That figure excludes borrowers, such as many 18-year-old freshmen, who lacked scores because of shallow credit histories. By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.

Roughly eight million Americans owing $137 billion are at least 360 days delinquent on federal student loans, nearly the number of homeowners who lost their homes because of the housing crisis. More than three million others owing $88 billion have fallen at least a month behind or have been granted temporary reprieves on payments because of financial distress.

Joint Effort

In 2005, president Bush signed the bankruptcy reform act of 2005 making student loans not dischargeable in bankruptcy.

President Obama came along next and encouraged parents who had no idea what they were getting into to sign loans to put their kids through college.

Parents plus their kids are mired in debt that cannot be paid back. Thank you Congress, President Bush, and President Obama.

Surefire Way to Discharge the Loans

There is one way to get rid of these loans. Die.

Stop the Madness

Wherever government meddles, costs rise dramatically.

The solution is to stop the meddling: Stop all the loan programs, stop all the aid programs, stop insisting that everyone needs to go to college, and start accrediting programs and course offerings from places like the Khan Academy.

Not a single student aid program aided any students. Rather, escalating costs went to teachers, administrators, and their pensions as student debt piled sky high.

By Mike “Mish” Shedlock

New Cars Could Limit Mortgage Options

Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move to a different house? Could your growing debt — for autos, student loans and credit cards — make it tougher to come up with all the monthly payments you owe? Absolutely.

And some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.

New debt taken on to finance autos accounted for 81 percent of the increase — a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup truck in April was $33,560, according to Kelley Blue Book researchers.

Student-loan debt is also contributing to strains on owners’ budgets. Balances are up more than 55 percent since 2006.Credit-card debt is another factor, but it has not mushroomed like auto and student loans have. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration and Veterans Affairs home loans. These borrowers — who typically have lower credit scores and make minimal down payments (as little as 3.5 percent for FHA, zero for VA) — now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads — an average $22,414 — but typically have much higher credit scores and have made larger down payments.

Is there reason for concern? Bruce McClary, vice president at the National Foundation for Credit Counseling, thinks there could be if the pattern continues.

Some people have lost sight of the ground rules for responsible credit and are “pushing the boundaries,” he said.

Auto costs — monthly loan payments plus fuel and maintenance — shouldn’t exceed

15 to 20 percent of household income, he said. Yet some people who already have debt-strained budgets are buying new cars with easy-to-obtain dealer financing that knocks them well beyond prudent guidelines.

According to a recent study by credit bureau Equifax, total outstanding balances for auto loans and leases surged by

10.5 percent during the past 12 months. Of all auto loans originated through April, 23.5 percent were made to consumers with subprime credit scores.

Ben Graboske, senior vice president for data and analytics at Black Knight Financial Services, cautions that although rising debt loads might look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30-day delinquencies on mortgages are just 2.3 percent, he said, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low at 4.53 percent.

But Graboske agrees that other consequences of high debt totals could limit homeowners’ financial options: They “are going to have less wiggle room” in refinancing their current mortgages or obtaining a new mortgage to buy another house.

Why?

Because debt-to-income ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student-loan and credit-card debt you have along with other recurring expenses such as alimony and child support, the tougher it will be to refinance or get a new home loan.

If your total monthly debt for mortgage and other obligations exceeds 45 percent of your monthly income, lenders who sell their mortgages to giant investors Fannie Mae and Freddie Mac could reject your application for a refinancing or new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.

Bottom line: Before signing up for a hefty loan on a new car, take a hard, sober look at the effect it will have on your debt-to-income ratio. When it comes to what Graboske calls your mortgage wiggle room, less debt, not more, might be the way to go.

Read more in The Columbus Dispatch where author Kenneth R. Harney covers housing issues on Capitol Hill for the Washington Post Writers Group. kenharney@earthlink.net