Tuesday, July 15, 2014


For over a hundred years, banks had a procedure for individuals securing a home loan.  It included lots of paperwork, but mostly it included an investigation in the potential borrower's ability to repay the loan.  Near the end of the last century, banks started seeing an increase in default on mortgages.  Part, but not all, of the reason was people had bought homes in areas there neighborhoods were on the decline, which caused the value of the home to fall.  When property owners were unable to sell their homes, they simply walked away and defaulted on the mortgage.

Banks, who happen to be in business to make money for their shareholders, set up parameters for mortgages, and they 'redlined' these failing neighborhoods and ceased lending, or at least, gave mortgages at a higher interest rate because of the risk to the bank.

Enter Congress in general and Barney Frank and Christopher Dodd in particular.  While banks were basing their lending practices on geography, Dodd-Frank claimed it was discrimination based on demographics.  In part this was the case, as poor neighborhoods have historically been more ethnic.  But the law was the law and the sub-prime mortgage was created.  Suddenly banks were required to lend money to applicants whose credentials showed they were not a good risk, and likely couldn't repay the loan.

The 'housing crash' was the end result of these less secure loans, and soon,  because of the stagnant economy, many of those who HAD loans were defaulting and no one could get a new mortgage.  The housing market died and it's still trying to recover.

Enter college loans.  For years, college students applied for assistance (loans or grants) through the student aid office of their college.  There were background checks on the student and family, verifying ability to repay the loan.  Upon graduation, a repayment plan was in place...... and the system seemed to be working well enough.

Then suddenly the cost of higher education went rapidly higher.  Enter the federal government and the takeover of the student loan program.

Fast forward to Johnston County Community College.... this was in today's paper... JCCC is having to completely opt out of the federal college loan program because of the high default rate for student loans.

Like the sub-prime mortgages, the government got involved in the student loan program and changed the rules for 'qualifying' student loan eligibility.  As with home mortgages, the government reduced the school's ability to verify who was getting how much, and could they pay it back.  Then the government set the parameters for student loan defaults, AND THEN PUNISHED THE SCHOOL WHEN THE STUDENTS DEFAULTED.  Sort of a catch 22..... and this is just one little community college.... and JCCC is being forced to opt out of the student loan program.

Why opt out? 
At JCCC, the student default rate on federal loans has climbed rapidly in recent years. In 2008, the rate was just 2.9 percent. It jumped to 7.8 percent the next year before nearly doubling to 15.2 percent in 2010. The 23-percent estimated rate for 2011 is the latest available figure.
Until five years ago, [the president of JCCC said] “community colleges could run credit checks on students seeking federal loans.  But in 2010, the federal government banned that practice, citing the potential for discrimination in lending. Now, colleges have to give loans to everyone who applies or opt out of the program entirely; there is no middle ground…”
After the federal government banned credit checks, more students started applying for loans, said Pam Harrell, vice president of student services at JCCC. In 2009, she noted, 9 percent of students took out a federal loan. In 2012, 22 percent did so…. Last year, JCC students borrowed about $7.5 million from the federal government. But loans are not the only federal help students receive.  About 60 percent of students receive Pell Grants, which top out at $5,700 a year.  Last year, JCCC students received about $9.2 million in Pell Grants and work-study dollars.
If JCCC’s default rate exceeds 30 percent for three years in a row, or 40 percent in one year, that $9.2 million in other aid disappears. [Said Harrell]

Read the full article here.


1 comment:

  1. The government screws up every thing it gets involved with