March 17, 2008
When I heard about the subprime mortgage crisis, it sounded eerily similar to the shady credit card lending practices found on most college campuses. I imagined yet another financial bubble floating down from Wall Street, filled with the gelatinous slime of adjustable interest rates; one that would inevitably pop somewhere over Poor People, U.S.A., blanketing the unsuspecting citizens below.
I knew the country’s economic situation was bad, and as usual, the poor would suffer the most. However, I did not foresee the trickle-down effect of the subprime fiasco where even my peers–recent college graduates and first time homeowners–would feel the sting from predatory lenders.
“They go after young adults because they know we have to start building our credit and that we need money,” says 25-year-old Vanessa Valenzuela from Norwalk, California. She and her husband went bankrupt after dealing with predatory lenders.
College Loan Connection
But Vanessa and her husband aren’t alone. Predatory subprime lenders prey on the ignorance of inexperienced homeowners, especially young couples, who know little about the dangers of adjustable interest rates.
Andrew Lockwood and Peter Ratzan are co-owners of College Planning Specialists in Florida, and post debt-related advice on their website, College Planning Advice. They instruct families on how they can send the kids to school without the family going broke, and are also deeply aware of the connection between the subprime crisis and student debt.
“Unfortunately, most parents and college-bound students do not realize that student borrowers are not-so-distant cousins to headline-making borrowers with subprime mortgages,” Lockwood (pictured right) points out. “In fact, many experts believe that the student loan market is poised to experience the devastation currently affecting the subprime mortgage industry.”
This consensus comes after bond-rating agencies noticed an increase in defaults on private educational loans, and the U.S. Department of Education reported that nearly 12 percent of all federal loans due in 2001 are already in default. Experts worry that millions of college grads have borrowed too much in loans, which creates parallels to the subprime crisis when students, like homeowners, inevitably default on overwhelming debt.
“The main culprit behind the subprime crisis are adjustable-rate mortgages (ARM) resetting to high interest rates,” Lockwood writes. Inexperienced borrowers, like Vanessa and other young people, are particularly vulnerable to ARMs because they don’t understand that their interest rate can wildly fluctuate throughout their contract. High interest rates prevent families from making payments on time and result in defaults, foreclosures, and ruined credit.