Now that subprime is shaking itself out, I'm curious as to whether another credit problem is showing up: student loans. I see these TV spots for easy student credit and can't help but wonder if that's the next big bite and how much these private lenders are regulated. I worry that lenders are using the fears of rising costs of a college education to draw in desperate borrowers.
Government-back loans like Salle Mae are currently capped at 6.8% but private lenders are free to structure their loans however the market will bear. And from what I can tell, unlike with a mortgage these student loans are uncollateralized, leaving a borrower - and co-signer - potentially on the hook indefinitely.
One of the lenders' web pages mentioned this little tidbit:
Annual Percentage Rate (APR) is a measure of what a loan will cost. It takes into account the rate, fees, length of the loan, and the timing of all payments. The APR will increase if the LIBOR Index increases.
The LIBOR index is typically used in many ARM calculations, leading me to believe the student loan rates are adjustable, too. Factors outside the student's control could cause their debt load to balloon to a point where they feel the earning potential of their degree is negated by the cost of getting it.
I'd like to see the rates on these loans capped or at least un-pegged from an adjustable index. It makes no sense to lock college students onto the same hamster wheel that some homeowners have been on and hurt by. At its very heart, the value of a college degree will likely not keep pace with the amount of debt incurred to achieve it. Let's not put undue burdens on young people trying to better themselves.