Monday, April 30, 2012

"Predatory lending" in a target-rich environment

This Bloomberg article has been making the rounds lately, and given my history of writing about student loans, I feel as though I have to weigh in.
Susan Romano read her son Zach’s financial-aid letter from Drexel University, and her eyes jumped to the line highlighted in yellow: “$13,442 expected payment” for the first year at the $63,000-a-year school (my note: what in the hell? How does Drexel cost that much?? I digress...)
“At first, I thought it was great,” said Romano, 48, an insurance claims representative from Huntington, Pennsylvania. “The more I read it over and over, the worse it got.” 
It turned out the college’s “offered financial aid” included $42,000 in loans to be taken out by the family, including a “suggested” $36,178 in parental borrowing or private loans. 
“A loan to me is not financial aid,” Romano said. “It is money I have to pay.” 
As many high school seniors face a May 1 deadline to decide where to go to college, families are struggling to understand financial-aid letters, which can be murky and confusing. While the federal government requires banks and mortgage companies to disclose interest rates and total payments on loans, financial- aid letters for college -- which can cost as much as $240,000 for four years -- are unclear about how much families will have to pay. 
“You have to be savvy enough to know the fine print exists, and then you have to be eagled-eye enough to find it hidden in the letters and on websites,” said Debbie Greenberg, a counselor with College Bound St. Louis, which coaches low- income students about admissions and financial aid. “You also have to have access to a computer.”
Sigh... I can already see where this is headed.

At the peak of the housing bubble, all sorts of banks and other mortgage underwriters engaged in similar behavior in an attempt to generate more business. They didn't particularly care whether or not the borrowers could afford the house over the long run, the goal was to generate as much business in the near-term as possible. When the whole thing blew sky-high, none of the now-underwater borrowers wanted to take any personal blame for the mess they found themselves in. People simply wanted to cast blame toward the "predatory lenders" for the fraud--but as we all know, there are (at least) two parties to any contract.

Now, with student lending creating our economy's newest bubble (and if you think it's not a bubble--and one that's about ready to pop--please read here, here, here, here, and here), I'm already seeing the blame game developing in advance of the inevitable crash. It's not the students who are to blame for taking on debt that they "didn't realize" was debt, or that they didn't realize was non-dischargeable in bankruptcy proceedings. No, it has to be those evil schools who tricked them into doing it... right?

I'm honestly tired of this line of reasoning coming from duped borrowers. If you don't fully know what's in the contract you're signing, DON'T SIGN IT. If you're buying a house with an FHA loan that's only requiring a 3.5% down payment, it's your responsibility to understand what that means (hint: it means that if your home value decreases by just 3.5%, your entire equity stake is wiped out and your mortgage goes upside-down). If you didn't realize that, then it's nobody's problem but yours when you find out that you can't ever move because you have no money left to cover your losses.

For generations in this country now, it has been taken on faith that a college degree is "always a good investment", and that we should all pursue a college education no matter what we have to do to finance it. People therefore rarely blink when asked to sign up for student loans, just like they rarely blinked when signing on the dotted line for a mortgage--remember, buying a house was "always a good investment", too, right up until the time that it wasn't.

More of us need to do what Susan Romano did here--she stepped up and realized that something wasn't quite right, and she took personal responsibility for the contract she signed (or didn't sign). The simple fact is, predatory lenders can't exist in a world in which there's no viable prey--but if we allow ourselves to become vulnerable, then we're just about guaranteed to find ourselves hunted down by some very capable predators.

It's as true in college as it is in the animal kingdom--predators thrive where prey is most abundant. We need to stop letting ourselves become prey, not blaming the predators for being what they are. Period.


1 comment:

  1. As they said Home financing and other that's been around with this kind of business is a complicated world of tough language and difficult-to-understand practices. It’s easy to fall prey to predatory lending/shark.