Feature

Beware of Parent PLUS loans

And more of the week's best financial insight

Here are three of the week's top pieces of financial insight, gathered from around the web:

Trapped by a good deal

Homeowners with low-rate mortgages are reluctant to remove their "golden handcuffs," said Nicole Friedman in The Wall Street Journal. "Housing inventory has risen from record lows earlier this year as more homes sit on the market longer." But the number of newly listed homes in the four weeks that ended Sept. 18 fell 20 percent from a year earlier, according to Redfin. Many would-be sellers are staying put because of their current mortgages, said deputy chief economist Odeta Kushi at First American Financial. "What is their incentive to move and lock into a rate that's potentially as much as 3 percentage points higher?" The average 30-year fixed mortgage rate rose above 6 percent last week. As of July, "more than two-thirds of first-lien mortgages had a rate below 4 percent."

Beware of Parent PLUS loans

The federal government is handing out huge loans for college with almost no underwriting standards at all, said Ron Lieber in The New York Times. The Parent PLUS loan has become "a subprime lending program," financial aid experts say, ensnaring low-income families in a 25-year debt trap. When they were first introduced in 1980, "you could only borrow $3,000 per year." That cap was lifted in 1992. Today, practically anybody without a very checkered recent credit history can borrow six figures for tuition, no matter their income. The moral hazard hits a wall when families realize the loans carry an interest rate that's now at 7.54 percent, "plus a whopping 4.23 percent origination fee." And "if you default, the government helps itself to a chunk of your Social Security check."

Autos still command big markups

Paying above sticker price for a new car continues to be the norm, said Jessica Dickler at CNBC. The average transaction price for new cars rose to a record $46,259 in August, a 10 percent increase from a year ago. That's well above the manufacturer's suggested retail price (MSRP) for most models. A new Jeep Wrangler "is currently selling for 24 percent over the MSRP, or roughly $8,433 more than retail," according to iSeeCars. Several luxury SUVs, like the Lexus RX 450h and the Genesis GV70, are also selling at a 20 percent premium. On top of that, financing vehicles is getting pricier, too. The average annual percentage rate on a new car hit 5.7 percent in August, up from about 4 percent in January.

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.

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