FAP789: PLUS Loan Moral Hazards, Free Stuff Friday

05.02.08 | FAP789: PLUS Loan Moral Hazards, Free Stuff Friday

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Student Financial Aid News
+ NASFAA: HR 5715 approved - going through final phases now
+ Increase Annual and Aggregate Stafford Loan Limits
+ The bill would increase the following loan amounts for loans first disbursed on or after July 1, 2008:
+ Increases the additional unsubsidized Stafford annual limits by $2,000 for independent undergraduate students, and for dependent undergraduate students whose parents cannot borrow PLUS, but appears to reduce the additional unsubsidized limit for teacher certification to $6,000 for “undergraduate” students
+ Increases unsubsidized Stafford limits for dependent students by introducing additional unsubsidized amounts of $2,000
+ Increases aggregate unsubsidized loan amounts for undergraduate dependent students from $23,000 to $31,000 (minus subsidized borrowing) but does not appear to extend additional unsubsidized funds for preparatory coursework or teacher certification for these students.
+ Increases aggregate unsubsidized loan amounts for undergraduate independent students from $46,000 to $57,500 (minus subsidized borrowing)
+ Beginning July 1, 2008, the bill would allow parents to choose to defer payments on a PLUS loan until six months after the date the student ceases to be enrolled at least half time. Accruing interest could either be paid by the parent borrower monthly or quarterly, or be capitalized quarterly.
+ Special Provision for Parents Delinquent on Mortgage Payments
+ The bill would allow lenders to consider parents eligible for PLUS loans even if, during the period January 1, 2007, through December 31, 2009, the parents are or were:
+ No more than 180 days delinquent on a mortgage payment on their primary residence
+ No more than 180 days delinquent on any medical bill payments
+ No more than 89 days delinquency on the repayment of “any other debt”
+ The bill temporarily authorizes the Department to purchase FFEL loans originated on or after October 1, 2003, provided those purchases do not result in any cost to the federal government. The Department’s authority to purchase loans under this provision expires on July 1, 2009.
+ The bill would stipulate that if the Department acts as a secondary market lender, it must ensure that any proceeds paid to a lender are used in a “manner consistent with ensuring continued participation of such lender in the Federal student loan programs.” In other words, it would prohibit lenders from using those proceeds in any other way than ensuring they continue participating in FFELP.
+ Some massive changes, and I guarantee, some massive opportunities for loopholes as well, as these provisions contain opportunities for less than ethical behavior, like dumping delinquent borrowers on the Department and leaving them there
+ I still take issue with the whole rewarding bad behavior by allowing delinquent borrowers of mortgages to take out more debt in the form of PLUS loans - this is moral hazard, or encouraging people to behave irresponsibly
+ Here’s an abuse scenario just waiting to happen: Parents whose credit would otherwise deny them a PLUS loan take one out under the expanded, more lax lending standards
+ As part of due diligence, they fail the standard PLUS loan credit test
+ A lender marks them essentially as a high risk borrower
+ The lender holds the loan until the last quarter before the Department’s authority to purchase loans at present value ends - Spring of 2009 - then sells off the loans to the Department at present value, which is the loan plus accrued interest for those nine months
+ If you use a standard amortization table at 8.5%, 9 months of interest accrued on $30,000 is $1,890. If a lender can afford to hold onto high risk borrowers for 9 months, they can earn nearly $2K per high risk borrower at absolutely no risk because the loan will be flipped to the Department before the clock runs out
+ Does anyone besides me think this could be a problem for the taxpayer down the road?
+ I suppose www.ParentPLUSLoan.com is about to become one of our most popular web sites…

Scholarship Update
+ The Collegiate Inventors Competition is a national competition that recognizes and rewards innovations, discoveries, and research by college and university students and their faculty advisors. The Competition encourages students who actively pursue invention. Students frequently come from science, engineering, mathematics, and technology studies but creative invention can emerge from any course of study. The Competition also recognizes the working relationship between a student and his or her advisor. The program was introduced in May, 1990 and is operated by the National Inventors Hall of Fame Foundation.
+ Up to 15 finalists will win an all-expenses paid trip in Fall 2008 to present their work to a panel of expert judges. Each finalist or finalist team will also receive $2000. One Undergraduate and one Graduate winner or team will each receive $15,000. One Grand Prize winner or team will receive $25,000. Academic advisors of each winning team also receive a cash award.
+ Deadline May 16, 2008
+ Details at our free college scholarship search site

Free Stuff Friday
+ Realtime traffic data in Google Earth for major roads
+ Insanely cool! Google Maps has street view turns!
+ Juicy Juice sippee cups for parents of young children
+ Your local Starbucks has free music cards
+ If you’re a fellow podcaster, IODA Promonet is a great source of music for your show
+ Lifehacker has a hack for free Wi-Fi - warning, there might be consequences
+ Men’s Health has four free video workouts for your iPod or computer
+ Great presentation by Clay Shirky at Web 2.0
+ If you ever find yourself making presentations for school or work, watch this video by Garr Reynolds

Free Song of the Week
+ Ronn McFarlane
“Indigo Road” (mp3)
from “Indigo Road - Original Lute Music”
(Dorian Recordings)

Buy at iTunes Music Store
Buy at Amazon
More On This Album

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