Why Wall Street Loves Student Loans

Why Wall Street Loves Student Loans

Only five years after Wall Street brought about economic collages through irresponsible handling of mortgage debt, the industry is coming under increasing scrutiny for its questionable involvement in the field of student loan debt. With students across the country finding it increasingly difficult to pay for college, many feel that Wall Street’s involvement in student loans is unethical, to say the least.

Why the Concern?

As increasing numbers of students started borrowing for college, Wall Street took notice and started getting involved more heavily in the lending, buying, packaging, collection, and servicing of student loans. With around a trillion dollars of outstanding student loans, many of the same issues that were involved in the subprime mortgage market are showing up in the world of student loan debt. This includes predatory lending, poor customer service, and very aggressive debt collection practices. The similarities between the subprime mortgage market and student debt is especially similar in the field of private student loans, which account for about $150 billion in debt.

The Effects of Wall the Street Involvement

A Consumer Financial Protection Bureau and Department of Education report in July of this year shows that private student loans have mushroomed over the last ten years, mainly due to the never ending desire by Wall Street to make more and more money. Investor pressure for securities backed by student loans caused major lenders like Citi, Sallie Mae, Wells Fargo, and others to lower standards for lending and to market student loans directly and aggressively.

Dangerous Changes

The majority of student loans used to be made in conjunction with college financial aid departments, ensuring that students didn’t borrow more than they could afford and weren’t taken advantage of. Since 2005, however, the amount of student loans made without school influence or involvement grew to over 70%. At the same time, the amount of student loans quadrupled.

In a further move to make money, some of the largest banks in the country now own debt collection agencies that are on contract to collect default student loans for the Department of Education. NCO Group and Allied Interstate, owned by JP Morgan Chase and Citi respectively, have received the largest number of complaints through the Better Business Bureau for collection practices in the last three years.

Help for Students

Not everyone is out to prey on college students. The Consumer Financial Protection Bureau is now providing federal oversight of the largest debt collection agencies in the country. In addition, the Department of Education intends to reward good collection practices and penalize those who use unsavory practices. Even though there are now agencies watching out for those who owe student loans, it is a good idea to stick with federal loans when possible and to only borrow the absolute minimum needed to pay for education. That means less money in Wall Street and more in your pocket.

 

 

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