Seems like Sallie Mae and Freddie Mac have been responsible for a lot of the headlines in recent days. Not only that, but there’s been some confusion over what’ is speculation and what is indeed fact, especially in its mortgage arms.
A new report released less than a week ago revealed Fannie Mae was churning out massive profits – to the tune of more than $17 billion in 2012 alone. It was soon discovered that it beat out banking giants Wells Fargo, JPMorgan Chase (which was incredibly surprising) and AIG. Calls for cutting some of the excess off have seemingly gone answered as it now appears the government insurer is moving forward with new announcements.
The biggest announcement is that Sallie Mae is now unveiling a new loan repayment policy designed to ease the burden of college loan recipients. But the efforts are already flawed and it doesn’t take an economist to now that.
The Changes and the Numbers
Before we explore the changes, it’s important to understand a few very crucial numbers. First, more than 43% of student loans are deferred, meaning the borrowers aren’t required to begin repayment right away. Not only that, but we’ve also seen an increase in the dollar amount associated with student loans; in fact, the balances have grown by an astonishing 75% over the past five years. For some reason, there were a lot of surprised folks.
TransUnion says that while everyone expected an uptick in college admissions during the recession and tough recovery, even those most seasoned were “taken by surprise” and that once they observed it for themselves, it became “truly eye opening”. Those are important numbers, but there are a few more than are likely behind the Fannie Mae decision to reformat its loan repayment options.
Graduated Repayment Period
Known as the new “Graduated Repayment Period” program, this option will allow borrowers in good standing to extend their timeframe with their student loans; in fact, they can request up to a year after their six month grace period has expired to begin repaying their loans. But there are a couple of problems with this aspect of the program.
The key is in that one phrase: “borrowers in good standing” is where the problems begin. At the end of 2012, nearly 17 percent of borrowers were more than 90 days late on payments. Once you take the consumers with deferred payments or who are still in college out of the equation, it becomes painfully clear that a whopping one third of all borrowers are delinquent in their payments and therefore will not qualify for the Graduated Repayment Period. Plus, the number of people who are under the age of thirty and in student loan default is growing incredibly fast.
That said, there are more than a few fine reasons for opting to enter this program, provided you qualify. The most obvious, of course, is that time can be bought – provided the student is able to cover the interest payments. Another benefit is that it’s already available, which could mean a huge burden being lifted off of some shoulders.
Sallie Mae insists that its repayment adjustment program is the right solution and that it’s an innovative way of keeping student loan repayments as low as possible. It then goes on to explain that new borrower (first year college student) who applies for a deferment on a $10,000 loan would pay $144 per month on a 10-year repayment plan. With the new program, Sallie Mae says those loan terms are cut to $89 the first year of the repayment schedule, then $152 the second year, until the loan is completely repaid.
It’s clear it’s going to be the right solution for some; it looks as though a high number of students won’t be eligible at all. It’s basically a price break when the students need it most: right out of school, complete with a degree but no job prospects. Beginning in 2004, the debt associated with student loans has grown to surpass the $1 trillion mark and still overshadows credit card debt, auto loans, and home equity lines of credit. It comes in behind mortgage debt. One economist with the New York Fed, Donghoon Lee, explains,
Student loan debt is the only kind of household debt that continued to rise during the Great Recession and has now the second-largest balance after mortgage debt.
It’s a tough time for all involved. Fannie Mae is consistently on the defensive with new claims of poor management and unethical practices that seem to appear out of nowhere at least once a week. Many of the allegations seem to be legitimate, but some are not. The Streamlined Modification program, for instance, goes into effect on July 1, even as many remain confused over its purpose. It only lasts two years and doesn’t require nearly as much documentation as we grew accustomed to in recent years. Many are saying this lack of interest in things like income and other documentation is the very reason for the mortgage collapse than began in 2008 and led to a devastating recession. Perhaps the most frustrating aspect of the two government entities is the lack of clear guidelines – regardless of whether its the Streamlined Modification program or the Graduated Repayment Period program. There’s not a lot of public trust anyway, considering the fact it’s turning a massive profit, though accepted taxpayer bailouts over the past few years.
If it works, it’s going to work brilliantly. If it doesn’t, it just might be that final nail in the coffin many lawmakers have been looking for. Time will tell, though – but frankly, Americans are running out of options and patience.
What do you think? Do you believe one or both of these programs will serve a purpose in consumers’ lives? Are you consider seeking out the possibilities the Graduated Repayment Period program can offer? If so, share your story with us and let us know about your experiences.