October 19, 2015

Student Loan Fix: Unintended Consequences


The government may be attempting to help students with loans and debt, but critics are concerned about the consequences of new regulations.

Student borrowers in the US are increasingly unable to pay their loans off in full and in time, which can have a detrimental effect on a number of levels. According to a Government Accountability Office (GAO) report, federal student loan debt is now over $1 trillion, with $103 billion of that amount in default.

With such dire situations within the student loan realm, the government has taken measures to step in and propose new regulations in an effort to counter this problem.

Leaving Low-Income Borrowers Out in the Cold

Students depend on college degrees, associates degrees, or training certificates to obtain well-paying, stable, long-term employment opportunities. Yet many of these student prospects also depend on access to student loans in order to cover the typically high tuition costs needed to be enrolled in such educational avenues.

Considering the fact that educational achievement among lower-income and minority students typically trails far behind the average rate, providing educational access for this demographic is especially important.

With the new regulations that the Obama Administration and the US Department of Education may be implementing, these students could find themselves unable to obtain the necessary educational funding.

Under such regulations, many career-focused schools will be reeling from the effects.

The "Gainful Employment Regulation" (GER) is currently under consideration and is focused on targeting these non-traditional educational institutions in what the government believes is an effort to protect students from oppressive student loan payments.

With the staggering numbers of students across the country currently drowning in student debt, their long-term financial health will undoubtedly suffer. Knowing this, certain schools are taking advantage of students who depend on student loans to pay for their education, and don't take into consideration the detrimental effect that uneconomical degree choices combined with high loan amounts inevitably have on the lives of these students.

This new regulation was implemented to address this issue by weighing the student loan debt that is accumulated compared to the salaries made after graduation. When this criterion is reached, financial aid to those programs is restricted.

While the intent of the new regulation is a good one, the unintended consequences can have harmful effects, both on students who depend on these loans, as well as the career-oriented schools that actually follow protocol and keep students' best interests in mind. Even schools doing things the way they should may be punished.


Low-income students, ethical schools, bond investors and banks will all feel the brunt of the new government regulations on student loan debt.

Rather than reducing the debt problem, the new regulation may simply discourage schools from offering loans to those who need it most - the low-income, working-class student demographic.

Bonds Backed by Student Debt Are Winding Up in Default

Federal programs have been designed to help struggling borrowers shave their payments to a certain degree, making student loans much easier to pay off. But such a stream of funding has had a ripple effect on the bonds that back up these student loans.

Investors are increasingly finding themselves with bonds that are backed by these student loans ending up in default. As such, they are becoming increasingly concerned that they won't receive their rightful cash flows on time, and are stalling when it comes to purchasing additional bonds that are offered by financial institutions.

Not only are these investors affected, but so are the banks. With a drop in revenue coming from the sales of student loans into bonds, banks have less capital to access to convert into new loans.

Investors are therefore seeking better prices in a market where financial institutions boost capital by either repackaging or selling their loans.

With the turbulent situation of what is normally a stable securitization market, banks are feeling the brunt of the student debt problem.

Garnet Capital - Helping Banks Navigate the Murky Waters of New Government Regulations Concerning Student Loans and Debt

With such regulations on the horizon that could realistically have a significant impact on schools, students, and banks, it's more important than ever to collaborate with professionals who understand the ins and outs of the student loan business, and how it can affect financial institutions.

The loan market can be a complex one to navigate, especially when the government steps in and imposes new regulations that banks now have to tread through. At Garnet Capital, we can help your financial institution make sense of these regulations, determine how exactly they will affect your bank, and take measures to ensure that your institution come out of it unscathed.

To find out more about how our advisors can help, browse our white papers today.