College Loan Industry

Paying for college is no easy thing today with the average tuition costing anywhere from about $9,000 for public instate universities up to $30,000 for private universities. A year that is. With the recession in 2009, many college graduates found themselves graduating without working and facing down hefty loans with no real income. Since then the economy has recovered and the private banking sector is regaining faith in students to pay off their loans. So will it be easy for just anyone to get their loan and head to college?

Probably not. Although the private sector has started showing signs of faith, it is likely that for now they will be lending to students who have good credit and a prosperous cosigner. A high school graduate with good credit and a cosigner can find a loan with interest ranging from 2-5.5% depending on some of the variables. If you don’t have good credit and a good cosigner you wont be finding yourself as lucky. People who fall into the later category typically find college loans with interest rates higher than 10%, an amount that makes any interest hard to pay off. Not only are they slammed with a high interest rate but they are usually limited to finding federal loans oppose to the loans from private banks.

As one may have guessed the students who are taking out federal loans at higher interest rates are finding themselves defaulting at a much higher rate. When the recession hit in 2009 student defaults spiked from about 4% in 2008 up to 10% in 2009. Facing major loses the private banks had to tighten down restrictions to avoid extreme losses. On the other side, Federal loans only increased from 7% in 2008 to 9% in 2009. The major difference between the private bank loans and Federal loans is in the recovery. Due to stricter underwriting the private sector has been able to avoid loses and drop its default rate all the way down to 3%. The Federal loans, however, kept restrictions broad not trying to limit college ambitions and as a result have seen increases in default rate from 9% during the recession to over 11%.

Don’t get me wrong, the news of improved loans for college students is a good indicator that our economy is on path to full recovery, it just isn’t great news for students across all socio-economic statuses. Some students are going to face some hard times when applying for these loans and then attempting to pay the off post graduation. We can only hope that with the improved economy more students are able to get high paying jobs upon graduation and can pay off these monstrous debts.

6 thoughts on “College Loan Industry

  1. davus@umich.edu'davus

    I agree that financing college has become a burden. Top universities charge top dollars, and even if you are very smart and major in sciences and engineering, if you are borrowing at 10 percent with interest accruing while you are in school, even that may not be worth it. While universities (including this one) pursue diversity and encourage education for all, the persistent raises in tuition, coupled with the difficult of financing said tuition, create a barrier to entry for those that need it the most.

  2. jhchamot

    Good post. When I read this, the first thing I think of tuition. Instead of thinking about the difficulty of paying back loan and paying for college, I would argue that tuition is way too high and that this should be the focus. The US needs to step it up and follow European models of education (and all over the world, really) which makes it accessible to everyone. In a lot of places, you pay based on your means. It is ridiculous how expensive college is here, and most public universities don’t give much financial aid.

  3. haozhao

    The tuition fee of universities in US is way too high compares to other countries. However, i think that the government should encourage college loan industry. We know that a newly graduated student can’t get such a high pay in terms of the tuition fee, it takes a long term for them to pay that money back, not to say that the interest rate is also too high.

  4. Max Huppertz

    I think the student loans issue, and with it the debate about tuition, is one of the most interesting and important debates to be had right now. Really important topic.
    I actually think that it’s okay to ask for tuition payments per se. After all, going to college gives you a better shot at a better job, and generally a higher quality of life (which is probably more important than your potential income gains). Over the course of a lifetime, you’ll probably make enough money to repay your student loans, but you can’t use that as collateral, which is why premiums are outrageous. So I think the much better option would be to have students pay a certain percentage of their income (or a certain amount total based on their income) after graduation in addition to income taxes.
    That said, there’s definitely a good justification for spending tax money on tertiary education as well. As a society, there are huge benefits from having college educated people improving your stock of knowledge. So I wouldn’t say that those post-graduation payments need to be as high as tuition is now.
    Anyway, good post on an important topic!

  5. zsalem

    I believe there are more solutions to this problem then what you hope for in your last sentence. Since students are defaulting on their tuition loans, there are not enough of high-paying jobs in the labor market. What if there were other avenues toward reputable higher education without all the unnecessary university fees? There is so much valuable information online and its all for free! So access the information isn’t the problem. The problem is signaling your human capital to potential employers! In addition to his is the niche of our universities (and our GPAs). There has to be another way for those who don’t want to take on all the debt.

  6. fanglue

    I believe that top universities should also attract more donation from the top alumni so as to release their financial burden. Students with high default rates will be charged higher interest rates. This made it more difficult to collect the payment. Banks and universities should find ways out to this problem.

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