College Loan Debt is a Big Problem for Borrowers, Lenders and Government


MSN Money and The Wall Street Journal have combined to produce an article detailing some of the problems that exist for those with college loans debt. Among the situations cited is a 41-year old MD with $550,000 outstanding college debt. The debt was much less (about $250,000) when this individual graduated from medical school in 2003, but has ballooned to the present amount through mismanagement.

Another case mentioned is a laid-off factory worker with $120 a week garnished from her $300 a week unemployment check to apply against her son’s college loan debt. The son is also unemployed, having lost his $29,000 a year job 8 months ago.

A third case describes a college loan debt that has grown from $28,000 to more than $90,000, with monthly payments that were originally $230 now $816.

How do such cases happen? Here is an excerpt from the article:

There is an estimated $730 billion in outstanding federal and private student-loan debt, says Mark Kantrowitz of FinAid, a Web site that tracks financial-aid issues — and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means payments and interest are halted, or in forbearance, which means payments are stopped while interest accrues.

College loans are difficult to restructure, as well. One individual was able to renegotiate home mortgage terms but has not been able to do the same with outstanding college loan debt.

While some of the defaulted debt, or that in forbearance, results from financial hardship, it appears that some is also the result of mismanagement by the debtors. One gets the impression that some who borrow for college make no effort to understand the financial details of the loans they assume. This seems to be a familiar story of how individuals simply do not understand basics of personal finance.

Is it any wonder that the value of a college education is now being questioned more than it used to be? Perhaps a basic education in personal finance would help more people make informed decisions about college and how to handle the financing of that endeavor.

Student loans are largely held by SLM Corp (SLM), familiarly called Sallie Mae and Student Loan Corp (STU), a subsidiary of Citigroup (C), with smaller amounts of such loans placed by individual banks. SLM currently trades at $12, down nearly 80% from its high in early 2006. STU is at $25.10, down nearly 90% from its high in April, 2006.

Sallie Mae was originated as a GSE (government sponsored enterprise) in 1972 but completed privatization (as a publicly traded company) in 2004. Student Loan Corporation was founded as a non-government enterprise and remains that today. Approximately 78% of the outstanding loans issued by STU (approximately $17 billion) were government insured against default as of 2007. Sallie Mae holds a much larger amount of government guaranteed debt, $145 billion according to Mark DeCambre in the New York Post.

Both companies lost the opportunity to issue more government backed loans in the future as of March this year when a bill was passed into law and signed by the president that re-established direct lending to students by the government. The changing nature of the business opportunity has renewed speculation about the sale of both SLM and STU, or of their break-up into spin-offs. Such rumors helped sparked a 11% rally in SLM this past week after announcements of increased loan loss provisions had dropped the stock by the same amount the previous week. STU, without any specific news, has rallied even more, up 19% from July 21 and 12% in the past week.

STU is certain to be a possible sale by Citigroup, who owns more than 80% of the company, as the giant bank tries to raise capital to deal with its solvency issues.
At the current market price, C’s stake in STU is worth more than $400 million.

More stories about college debt problems can be read in a 2008 New York Times article by Jonathan D. Glater.

This article was originally published August 1 at Seeking Alpha.

About these ads

4 Responses to “College Loan Debt is a Big Problem for Borrowers, Lenders and Government”

  1. money loans company,loan company Says:

    money loans company,loan company…

    [...]College Loan Debt is a Big Problem for Borrowers, Lenders and Government « Piedmonthudson’s Weblog[...]…

  2. Terrance Says:

    Sweet blog! I found it while surfing around on Yahoo News.
    Do you have any tips on how to get listed in Yahoo News? I’ve been trying for a while but
    I never seem to get there! Many thanks

  3. First Time Home Buyer Says:

    Hi there! Would you mind if I share your blog with my twitter group?
    There’s a lot of folks that I think would really enjoy your content.
    Please let me know. Thank you

  4. serviced apartments phnom penh cambodia Says:

    Thousands of travellers visit London every year to enjoy this amazing city.
    However, these apartments can be rented for minimum 7 days.
    Apart from the above described benefits, short stay apartments in Sydney provide several other
    facilities to every guest. In addition to the best accommodation Melbourne has a diverse range of things to do and activities
    that can be enjoyed by people of all ages.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Follow

Get every new post delivered to your Inbox.

%d bloggers like this: