The period from 2004 to 2006 saw property prices rising and bankers correspondingly increasing their mortgage exposure to consumers (sub-prime) who had very little capacity to repay their loans. Bankers started lending at higher rates, mostly adopting variable rates of interest. By 2007 the property prices hit a new low and this effectively prevented many from refinancing their mortgages. It became difficult for borrowers to sustain the higher repayments and they started defaulting on payments leading to record foreclosures.
Many market observers believe that a similar crisis is brewing in the student loans sector, though quantitatively nowhere near the home loan sub-prime crisis but still large enough to impact millions of families in the coming years.
In the case of home loans to the weaker sections the home equity lenders doled out many concessions:
- Lowest interest rates (disguising the fact that rates were variable).
- Fewer documentary formalities for getting the loan.
- Extending 100% finance without stipulating margins.
- Lower income applicants were eligible for the loans.
- Loan consolidation options extended to all.
The Consumer Financial Protection Bureau (CFPB) firmly believes that the strategies adopted by mortgage financiers at the peak of the sub-prime lending in the early 2000s are being repeated in private education loans today with the emphasis being to target lower income families who actually can’t afford big ticket college education loans. As a result, new graduates are facing an uphill task repaying the loans within their lifetime.
Those who availed private education loans are facing the music unlike their federal education loan counterparts who have a relatively easier transition from college to jobs with longer grace periods for loan repayment, and loan forgiveness options when they become financially strained, and repayments that are realistically linked to income levels.
What the Consumer Financial Protection Bureau (CFPB) have recommended:
- That private lenders should be compelled to coordinate with colleges to determine whether or not the lending is need based and takes into consideration every concession or scholarship or aid that the college can extend.
- Make bankruptcy laws more lenient to education loans, especially taking into consideration the poor financial status and indigent circumstances that lead families to seek bankruptcy protection.
- Regulate the marketing and advertising of private education loans, to weed out unwarranted aggression and competitiveness in extending education loans on unfavorable terms.
- Colleges ought to coordinate with the government to educate the students and offer them federal loans as the first option, and move on to private loans only if the student has understood the broader ramifications of availing private loans.
- Educating the students about their debt servicing obligations and encouraging them to avail only loans that they realistically feel they can repay from their starting salaries.
There are many ways to avoid taking on more loans than you can handle:
- Start early and save safely, investing your money in mutual funds and faster growing stocks so that when the time comes you can reduce dependence on private loans.
- Apply only in matching schools where the student can figure in the top rankings so as to become eligible for scholarships and financial aid that will reduce the need for loans.
- Try gaining entry to community schools and consider them to be stepping stones to the bigger universities after two years.
A vehicle title loan can help you stabilize investments early on in life
A loan for vehicle title taken early on in life can be used to initiate a sizable investment in stocks, bonds or mutual funds that can grow substantially by the time your son enters college. The auto collateral loan will be based on the collateral of the car pink slip papers, and you will be in a position to avail almost 60% of your car’s resale value. The car equity loan unlocks the equity in your vehicle at the reasonable interest rate of 25% APR which compares favorably when you look at usurious payday loans that levy rates exceeding 500% APR. The pawn car title loans can be repaid quite conveniently as the monthly installments are linked to your capacity to repay the loan and not your credit rating.