Question

For the Week 2 required discussion, students will prepare a short essay pertaining to an aspect of the Federal Reserve. From your readings this week, you recognize the role of the Federal Reserve and its impact on monetary policy and interest rates, influence on the stability of the U.S. financial system, and its role in establishing monetary policy and fiscal policy for the U.S. economy. In addition, actions and decisions made by the Fed and the Board of Governors impact the overall global economy, especially with respect to market interest rates, inflation, and economic activity. For your essay, explore one of these characteristics in depth. Provide a brief analysis essay (400 words) on your topic, and cross reference using the textbook and one additional primary reference source. Briefly introduce the characteristic and focus the bulk of your essay on describing the topic impact on one or more key stakeholders. Stakeholders include individual investors, investment firms, global businesses and trade, and U.S. corporations. Use qualitative and/or quantitative data to provide support for your essay. Identify your reference sources.

The topic is Student Loan.

Answer 1

One of a recent key issues is rising student loan. Currently, in American household total debt, student loan has a major share. Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the costs of tuition and borrowing continue to rise, the result is a widening default crisis that even Fed Chairman Jerome Powell labelled as a cause for concern.

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Student loans have seen almost 157 percent in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52 percent while mortgage and credit-card debt actually fell by about 1 percent, according to a Bloomberg Global Data analysis of federal and private loans. All told, there’s a whopping $1.5 trillion in student loans out there (through the second quarter of 2018), marking the second-largest consumer debt segment in the country after mortgages, according to the Federal Reserve. And the number keeps growing.

The cost of borrowing has also risen over the last two years. Undergraduates saw interest on direct subsidized and unsubsidized loans jump to 5 percent this year—the highest rate since 2009—while students seeking graduate and professional degrees now face a 6.6 percent interest rate, according to the U.S. Department of Education The federal government pays off interest on direct subsidized loans while borrowers remain students, or if they defer loans upon graduation, but it doesn’t cover interest payments on unsubsidized loans).

Impact of rising student loan

Sallie Mae or SLM Corp., a former state-owned enterprise, is the main private lender for student loans. Sallie Mae makes loans that aren’t backed by the government and packages the loans into securities, which are sold in tranches (or segments) to investors. Since the recession and the subsequent realization that asset-backed securities were primary catalysts for the crash, Sallie Mae has tightened its lending constraints. Nevertheless, it still services more than three million borrowers.

In recent years, Wall Street banks have stopped securitizing loans because federal subsidies were eliminated. Another reason is that interest rates are so low now that student loans are not as profitable. The Federal Family Education Loan Program (FFELP), which ended in 2010, was a government-sponsored platform that subsidized and reinsured the loans, essentially guaranteeing that these loans would be paid back. Thus, the expiration of the Federal Family Education Loan Program led to less enthusiasm from lenders and investors.

With many of the benefits listed above no longer in place, banks have rapidly been replaced by peer-to-peer lenders like SoFi, LendingClub and CommonBond. As a result, private lending has been inching upwards to 7.5% of the total student loan market. These companies allow borrowers to take out credit without the need of an official banking institution to do the financing. This method also takes on more time, effort and risk, but is a big boon to people who can't get credit elsewhere. Typically, these lenders will advance credit to those with lower credit scores, but that usually comes at a price. Loans can come with extremely high interest rates, which can put pressure on the borrower when it comes time to repay.  

In SoFi's case, though, it does take credit and income into account when approving a loan. People with a stronger credit score and history are usually those who get approved, which means that the default rate is lower. SoFi's default rate as of 2017 was listed at only 3%. That's pretty good when you compare that figure to the latest national statistics overall — a default rate of 10.7% on payments that are 90 days delinquent or more, as per the Federal Reserve's data in the first quarter of 2018

Source:

Bloomberg

Business Insider

Federal Reserve data bank