Thursday, January 22, 2009

NINJA Student Loans

by Andrew Gillen

In a piece in Forbes titled The Great College Hoax, Kathy Kristof highlights the practice of “nontraditional” lending. This, in the words of Albert Lord, chief executive of Sallie Mae is “basically kids and parents with poor credit who are at the wrong schools."

Let me get this straight. Sallie Mae saw a group of people with poor credit wanting to attend overly pricey schools with poor job prospects and said, I think we should lend them lots of money which they probably won’t be able to pay back. What could possibly go wrong?

How is this different from the many fraudulent no income no job no assets (NINJA) mortgages that got the country in so much trouble? At least those mortgages can be laid to rest with bankruptcy, unlike most student loans, which stick with you “to the grave.”

And it’s not like they were being altruistic in making these loans to people who otherwise couldn’t get them – they were charging 18% interest! That’s the rate I’d expect at “Bob’s Pawn Shop and Student Loan Center” not Sallie Mae.*

Krisof says more and more students are
victims of an unfolding education hoax on the middle class that's just as insidious, and nearly as sweeping, as the housing debacle. The ingredients are strikingly similar, too: Misguided easy-money policies that are encouraging the masses to go into debt; a self-serving establishment trading in half-truths that exaggerate the value of its product; plus a Wall Street money machine dabbling in outright fraud as it foists unaffordable debt on the most vulnerable marks.

But just as banks that made stupid loans are in serious trouble, lenders who made these loans are being forced to write down their value.

This leads Megan McArdle to ask, Who benefited from this?
Not [the students], obviously, but not the "greedy" loan company, either [who were forced to write down much of the value of these loans]. No, the beneficiaries are the schools that take peoples' money in exchange for worthless degrees.

*If anyone from Sallie Mae is reading this, I take it all back. Please don’t jack up the rate on my loans and crush me under an even bigger mountain of debt like you did to the poor people in this story.


collegeloanconsultant said...

If colleges and universities think these degrees will enable their graduates to make student loan payments, then they should be the ones lending (and collecting) the money.

A student loan program is self-sustaining- apart from the initial start-up capital, the money is recycled as loans are paid off. And the interest rate can depend on the default rate. If these degrees are so valuable- well the interest rate will be able to be set fairly low.

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capeman said...

Hey, didn't the student in this story go to one of those for-profit schools that this website is always talking up?

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Education is a must for everyone, only then a person will communicate and face problems easily in all aspects. Plenty of jobs openings are there but it is meant only for the right candidate.its the right time to develop new skills to become one of the right person what the organization expects.

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