Student Loans: New Subprime Crisis in The Making

For those students having trouble paying for college, government-backed student loans are a much more popular option than private student loans. This is because the interest rates are lower and there are more flexible repayment options. In contrast, private student loans require repayment as soon as the borrower graduates and repayment terms are rigid.

According to a recent report from Consumer Financial Protection Bureau concerning the private student loan market, beginning in the middle of 2000, there had been a growing number of students relying on private loans before they had exhausted all possible federal loans presented to them.

The growth in terms of the private student loan market, which increased from $5 billion in the year 2001 to $20 billion in the year 2008, is almost similar to the growth of subprime mortgage loans during the same time.

Banks discovered that they could package student loans into securities and trade them for a profit to investors. By means of securitization, $100 in student loans could be converted into $105. Because the initial lenders were not hanging on to the loans, they were not in danger if students failed to pay the loan.

Some time ago, a filter operation had been provided by universities, notifying students to the accessibility of private loans when the rest of the alternatives were exhausted.

However, the increase in private student loans is also indicated by an increase in direct-to-consumer lending. Most of the time, these students were not aware that the private loans are less preferred compared with those offered by the government.

The conditions were most extreme at for-profit colleges, a lot of whom had financial connections with private lenders. Based on a report from the CFPB, in the year 2008, a private loan was taken on by 42 percent of undergraduates at for-profit colleges. However, only 14 percent of all undergraduates used a private student loan.

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