Student Loans

Posted on Thursday, June 30, 2011

NEW YORK (AP) — Wells Fargo is hoping to make its student loans more attractive to families.
The San Francisco-based bank says it is now offering fixed-rate student loans, which is a departure from the industry practice. Unlike federal student loans, the private student loans issued by banks typically come with variable interest rates that are tied to a benchmark rate.
Wells Fargo says its fixed rates will range from 7.75 percent to 14.25 percent, depending on the credit background of the applicant or co-signer, who is often a parent.
Even on the low end, however, Wells Fargo's fixed rates are higher than the 6.8 percent fixed rate on most federal student loans. Federal loans also offer safeguards that do not come with private student loans. For example, students who earn very modest salaries can enroll in programs that cap their monthly federal loan payments to a percentage of their income. Remaining balances are forgiven after 25 years of payments.
Federal loans also give borrowers the option to defer payments for set periods if they run into financial hardships, such as unemployment. With private loans, it's up to the lender to decide whether to grant deferment. And the deferment periods granted are typically shorter than the time permitted under federal student loans.
As a result, private student loans are widely regarded as a last resort after federal aid has been exhausted. Still, private lenders note that their loans can help bridge the gap in covering college costs after other resources have been tapped out.
Wells Fargo also said this week that it will give existing customers who take out new student loans a 1 percent discount on interest rates. If approved, all loan applicants will now be offered the option of either a fixed or variable rate. Variable rates range from 3.5 percent to 9.99 percent.
The announcement from Wells Fargo & Co. comes ahead of the peak season for private student lenders, when families are looking to bridge financing gaps leading into the fall semester.
The private student loan industry has nevertheless been shrinking in the past few years. After peaking at 25 percent of total loan volume between 2006 and 2008, private student loans declined to 8 percent of total loan volume in the 2009-2010 academic year, according to The College Board. Several factors, including higher federal loan limits and tightened liquidity in the private loan market, contributed to the decline.

Senate Hearing Slams For-Profit College For Subprime Mortgage Type Loans
Washington - Students attending for-profit colleges are subject to subprime mortgage-like loans that saddle them with thousands of dollars in debt and waste millions in taxpayer dollars, Democratic lawmakers and education experts said at a Senate hearing Tuesday.
The hearing of the Senate Health, Education, Labor and Pensions Committee came just days after the Education Department issued new rules to deal with the student debt problem at career colleges, rules that those at the hearing said did not go far enough.
"I believe it is going to take more than these rules," committee chairman Tom Harkin, D-Iowa, said, to do something about what he described as the "toxic mix" of companies trying to maximize their profits and vulnerable people taking financial risks to improve themselves.
Republicans on the committee, who say Harkin has unfairly singled out the for-profit college industry in a series of hearings, boycotted the event. Industry representatives, who take strong issue with the hearings' findings, said they had not been invited to testify.
"I think this is really the second coming of the subprime crisis," Harkin said, citing figures that nearly a quarter of students at for-profit schools default on loans within three years and that students at such career schools account for 47 percent of all student loan defaults.
Wade Henderson, head of the Leadership Conference on Civil and Human Rights, also noted similarities to the housing meltdown, saying career schools are offering a panoply of financial support programs to people, often of lower incomes or minorities who are not educated in the consequences of defaulting. "It's the hijacking of the American dream. Offering promises that cannot possibly be met," he said.
Harkin also pointed out that large for-profits receive almost 90 percent of their revenues from federal taxpayer dollars, 23 percent of all federal student aid money. He said that in 2009, for-profit colleges received $18 billion in guaranteed student loans.
Meanwhile, 57 percent of students who enrolled in 2008-2009 departed without a diploma and with a high probability of debt. Students at for-profits make up about 10 percent of all college enrollment but account for almost 50 percent of all loan defaults.
The lawmakers heard from Eric Schmitt, who after obtaining a paralegal bachelor's degree at an Iowa career school found himself $45,000 in debt and without a job despite promises of a 100 percent placement rate in his field.
But Harris Miller, president of the Association of Private Sector Colleges and Universities, an industry group, told The Associated Press that Harkin "has always exaggerated the size and dimension of the problem" and "only invited witnesses who are ideologically opposed to what we do."
He said the default rate at career colleges is no different from that of other institutions serving low income people and minorities and that graduation rates surpassed those of community colleges. He denied that career colleges were making money by pressuring students to take out high-interest loans. "We don't want to be in the lending business," he said. "We don't make money."
Harkin, addressing Education Department undersecretary Martha Kanter, said the new rules issued last week were "better than nothing," but noted that the stock prices of the companies owning the schools soared after the rules were announced.
Under the rules, schools will only be able to receive federal money if at least 35 percent of their former students are repaying their loans. Under the original plan, schools could have lost their federal loan eligibility immediately for not meeting criteria, but the final rule was softened to give schools multiple chances over a four-year period to improve their statistics.

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