Watch CBSN Live

Column: How The Financial Crisis Impacts Students

This story was written by M. Austin Margolis,

There are some things in life that I simply do not understand. For instance, I do not and probably will never understand how disco actually succeeded as a musical genre.

At the top of my list, however, is undoubtedly the economy, and I know I am not the only one to place it there.

Sure, I can understand the basic laws of supply and demand, and there may even have been one point during economics in senior year in high school when I actually understood how the stock market worked. But still, taken as a whole, the economy puzzles me like nothing else.

Thus, while my colleagues writing for this economy page took their 800 words to write about an aspect of the economy, I have decided to use my 800 words to figure out and explain to those suffering the same confusion what exactly is going on in the economy today.

Related Daily Bruin columnsRising fees, prices make education less affordableDont let monetary woes deter your travel plansGoing green is friendly to both the Earth and the economy

Based on the news, it seemed best to focus on the housing crisis, the recession and, for students, the student loan crisis.

The housing crisis has affected millions of Americans. That said, until researching for this column I did not exactly understand what the housing crisis entailed, and I am sure that there are many students at UCLA who do not either.

Around 2001, as increased demand for housing raised home prices, banks began offering low-interest loans in order to help people satisfy their demands.

However, lost in the details of some of these loans were stipulations that said banks could raise interest rates two or threefold over the next years. These are called adjustable rate mortgages. As interest obligations rose, people were unable to pay back their loans. This led to a high number of foreclosures within the last year and resulted in a collapse of demand for housing and a fall in home prices.

Several banks have had to shut down their mortgage units as housing prices drop and more and more people are unable to pay back their loans.

In essence, banks were losing more money over mortgage payments than they were gaining.

Furthermore, since investment banks had bought these now-defunct mortgages to hold as assets, the housing crisis has spilled over to other areas of the economy. Some say it is behind what seems to be the current recession.

A recession is when the gross domestic product of a country declines for two or more economic quarters straight.

While government officials have yet to officially declare that America is in a recession, big names from the financial arena, such as billionaire investor Warren Buffet, have come out and said that we are.

I would say, by any commonsense definition, we are in a recession, Buffet said on CNBC last week.

And how does this present recession relate to the housing crisis?

Well, many economic analysts say that the housing crisis is behind the recession.

As people default on loans, GDP growth slows down.

Finally, there is the student loan crisis. The student loan crisis the fact that students are finding it harder and harder to find loans, and the loans they do find have high prices and rates is a result of the mortgage crisis.

With less money available to lend, small lending firms have increased interest rates on student loans and have also made the criteria for getting a loan harder.

To make the problem worse, the legislation passed by Congress has made some lending firms completely opt out of participating in the federal student loan program.

What has this really meant for students, though?

Well, students that can still qualify for subsidized student loans from the federal government will only have to pay an interest rate of about 6 percent. However, students who go to private firms for loans because they no longer qualify for the federal program may be looking at interest rates of up to 13 percent.

The economy is a tough thing to understand. But as university students, poised to go out into the job market or even to law school, it would be in our best interest to figure out exactly what is going on.

At the very least, some acronym-dropping of GDP or IRA might help you impress and amaze at a pre-finals kickback.