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"Federal and state governments are deeply involved in the student loan market, either directly originating student loans or indirectly guaranteeing them." Part of the reason why student loans appear to be so complicated is the nature of Federal loans being guaranteed to every applicant regardless of credit. Of the roughly $1 trillion in outstanding student loans, the overwhelming majority is Federally originated or was backed by the FFELP program before it was eliminated. Most of these loans are Stafford loans. (Parent and Grad plus have a nominal credit review with relaxed approval standards compared to credit based loans) Because all Stafford loans were approved without a credit check, the Gov't is now on the hook for Billions if borrowers do not repay, so the bankruptcy laws that are seemingly unfair to borrowers will not change in the near term. Best way to deal with this would be to stop guaranteeing loans without a credit check. This would be a positive turn in financial responsibility for our Gov't, but many citizens would be unhappy to lose access to guaranteed Gov't loans for college access. It seems impossible to have it both ways while making everyone happy.
Toggle Commented Mar 5, 2012 on Grading Student Loans at Liberty Street Economics
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Mar 5, 2012