Worse Than the Subprime Mortgage Crisis

Steve McDonald
by Steve McDonald

Editor’s Note: A version of this piece originally ran in our sister publication, Wealthy Retirement. You can go here to subscribe if you haven't already. It's free.

The “Slap in the Face” Award this week goes out to the folks who are running a federal student loan program called “Parent Plus” at the Department of Education.

This, the most recent money disaster from Washington, D.C., allows unlimited borrowing for college so students can go to the college of their choice. Unlimited!

Really?!

Unlimited anything is crazy enough, but it gets worse...

Borrowers aren’t asked about their income, how much debt they carry or their ability to repay these new loans. Their credit ratings aren’t even checked before being handed thousands of dollars - in some cases, hundreds of thousands.

Sound familiar? It should. We saw the exact same thing with the subprime mortgage crisis 10 years ago.

Forty percent of these “unlimited” loans are going to people with subprime credit ratings. And 11% are already almost one year in delinquency. So far, 8 million people are 360 days delinquent on $137 billion.

This program is so completely out of control, a spokesman from Harvard Law School described it as willfully ignoring the ability of borrowers to repay the loans.

It’s being run as a giveaway, not a loan program.

And the real killer is that the people who signed for the loans - parents and grandparents - are having their Social Security payments reduced to make good on these debts.

In some cases, the withholdings to repay the loans are driving people below the poverty level.

Loans have been made to people who are living solely on small disability pensions or Social Security - people who couldn’t cover the smallest monthly loan payment.

And none of these loans can be erased by bankruptcy. If the current regulations stand, they’re stuck until the signer passes.

Don’t get me wrong, I know how important school loans are. I couldn’t have attended college without them. And my four sisters borrowed money for school as well. But we were limited to $1,500 per year, and we all had to work to make up the difference.

Oh, and none of us attended the college of our choice. We went where we could afford to go.

Loaning unlimited amounts of money to people who have no ability to repay is beyond even D.C.’s record of moronic financial mismanagement. Driving some below the poverty level to force repayment is draconian.

And the debt and delinquency numbers from the Parent Plus program do not include student loans made directly to 18-year-olds who obviously don’t have any credit history.

This is a bigger mess than the subprime mortgage crisis. Another one compliments of our D.C. financial geniuses.

Good investing,

Steve

Thoughts on this article? Leave a comment below.

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