Are you all set to enter a college but scared about how will you pay the high fees? You do not have to worry as most banks are willing to offer private student loans. This is a respite for students who are able to borrow money at lower interest rates as compared to personal loans.
But can the easy access to educational loans lead to a situation similar to that of the subprime crisis of 2008? Most people are of the view that it is completely possible as jobs are few and if students fail to secure a job, the pressure to pay the debt is surmounted on the shoulders of the borrowers, who in this case are the students.
You can’t get rid of the terms and conditions
The lending agency puts a clause of having a guarantor who will pay for the loan in case the person availing the loan fails to pay. It provides a leeway by giving six months time after course completion to start repayment. The procedure is simple enough but the catch is if a student fails to get a placement and the co signor (parents in most cases) is not sound to pay for the installments for a period of five to seven years, then it puts a permanent blotch on the person’s credit history.
Uncertainty in job market, more chances of default
With the prevailing global scenario of turmoil, it is hard to imagine if there is any guarantee of students getting the placement after their college. The cost of education is only rising but the alluring rates offered by banks are making students opt for these educational loans at a quicker pace.
A chunk of students applying for colleges nowadays borrow money through banks or some other private institutions. Private student loans have been aggressively marketed to both non-qualifying students and families. Some of these students after having passed out from college find it difficult to pay high-interest rate loans. It is the banks which decide to convert these loans into securities and sell them later on for profit to investors. Since the original lenders weren’t holding on to the loans, they weren’t at risk if students defaulted in the repayment.
The biggest difference between student loans and subprime scenario comes to the fore when the person’s home is foreclosed in subprime mortgage crisis. On the other hand, private student loans don’t allow for default at all.
Every cloud has a silver lining
Most industry people are of the view that lending standards should be made more stringent and banks must coordinate with colleges before doling out money. This would result in keeping the loan amount low enough in order to enable the borrower to meet the requisite needs.
Although, the private student loans are far less in comparison to the subprime crisis of 2008, it is catching up. A small percentage of defaults amongst the private student loan takers can result in a crisis and have a yet another crippling effect on the worldwide economy.
Bottom Line
While it is encouraging that more students are getting access to the much needed credit for education, it is also imperative for the lending agency to put in place stricter norms for lending. Every bubble bursts sooner or later and one can only hope that the number of defaulted private student loan takers do not even reach closer to mortgage liabilities.
James Hopes has always had keen interest in finance and blogging about it. He helps provide information on how you can trade your commodities through his website www.HowToTradeCommodities.co.uk.
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