This is not to debate the political wisdom or not, of rolling Student Loans into a Government-only control (as has just happened under the new Health Care bill). This is just a quick, little blog to discuss something that I’ve not heard mentioned on this issue, to date. And those who are contemplating such loans would be prudent to keep this in consideration:
Formerly, any neighborhood bank would issue the loans, backed by the Federal Government. Although the argument might be that these will decrease loan borrowing costs by eliminating the middleman, understand that these new Government-only loans will be administered by the IRS.
What’s the big deal? It’s the nature of IRS debt: it never discharges. If one falls into hard financial times, although it’s never the ideal solution, the effects of default or bankruptcy will reside on the credit for a few-to-seven years. IRS debt—of any type—never goes away. It remains on the credit until it discharges, and the IRS retains the right to chase it (and attach wages, if it so chooses) forever.
Anyone who undertakes such a loan should realize that there is no relief—ever (or at least for 25 years, which is tantamount to the same thing)—for such debt. –A decision that could come back to haunt you, many unexpected years in the future.
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What’s also interesting is the SBA loan program. Formerly, this program was designed to where banks and other financial institutions could make loans to borrowers who did not qualify under those companies’ credit criteria. The SBA credit criteria not “sub-prime” in nature, but it did give businesses an opportunity to get lower than market rates for their credit profile as well as longer-term financing, especially for equipment. Now, however, the gov’t is telling lenders that if they would not qualify an applicant under their own credit guidelines, they should not submit these applicants for SBA financing, EVEN if they meet the SBA’s stated criteria for lending. While this appears prudent in one respect, in that the government is in essence using these companies’ credit criteria and expertise to lend it’s own money, it’s also tightening up who gets financed via an SBA loan. Heard much about banks being unwilling to lend? How about the government? As well, banks while in large part pretty consisent in lending practices, do have differing criteria of what it takes to get a loan. So why go to a bank to try to get an SBA loan? Finally, more compelling to me is that this was a major source of start-up financing for small businesses. Again, there are criteria in place with the SBA that are prudent: liquidity requirements, solid business plan and management background, etc. However, with banks essentially not doing ANY start-up financing, this has put a crimp in the ability of many to start businesses. A man I respect greatly has said recently that India is beginning to overtake the U.S. in some regards because they produce 8 engineers for every 1 lawyer, while we produce 8 lawyers for each engineer. Very simply and roughly put, engineers see long-term consequences of choices; lawyers seem to be more concerned with the immediacy of their cause. Laws do bring consequences.
The Great Depression was triggered by the “banking elite” tightening and tightening credit, until the market cracked. Some argue that it was intentional. I pray that such a thing doesn’t happen in this time.