In March, Congress enacted desperately needed reforms through the student loan provisions tucked in the healthcare reconciliation package.
Gone are subsidies to lenders; instead, all federal loans will be issued directly by the Department of Education, saving taxpayers about $6 billion a year. Thanks to improvements in the income-based repayment program, recent graduates’ payments won’t be an undue burden as they get started with their professional lives. Finally, underprivileged students currently on Pell Grants won’t get hit with previously scheduled reductions in disbursements in an era of rocketing tuition.
Even though the minority wailed about the changes, this is a great deal for Americans living outside the Beltway.
But there is one aspect of student lending in an even more dire need of attention: private student lenders (PSLs). A decade ago, the low prevalence of these loans meant action was not necessary, but today it is necessary for true student loan reform.
Due to negligence by both Democratic and Republican administrations, PSLs such as Sallie Mae became very powerful. They intensely lobbied public and private college financial aid offices to direct enrollees towards private lenders rather than encouraging federal options first. In exchange, the colleges received commissions and other various perks for those referrals.
It is no wonder, then, that PSLs’ student loan portfolios doubled in yearly volume from $7.2 billion in 2003 to $15 billion in 2008, and the number is expected to grow.
Furthermore, the statistics on borrowers is startling at best and alarming at worst. According to the Project on Student Debt, 64 percent of private borrowers did not fully pursue federal options, and 26 percent did not take out any form of federal aid. Given today’s tuition environment, the problem will only get worse.
The interest rates of PSLs are also the most predatory, an educational analogue of the subprime mortgages that ravaged the retirement accounts of millions of Americans. Based on short-term lending rates and a margin, the variable rates sound like an affordable alternative to government-based loans. But any misfortune during payment, such as if the mail doesn’t arrive on time, can change that attractive rate to hellish default rates near 18 percent, a cost of borrowing that many cannot pay.
So they can get rid of them through bankruptcy, right? Actually, no.
The most sinister aspect of PSLs is their bankruptcy protections. When bankruptcy laws were restructured in 2005, the loans became nearly impossible to discharge in bankruptcy, a privilege previously given only to federal and state obligations. In comparison, a reckless, card-swiping spendthrift can discharge or reduce their debts in bankruptcy court.
Yet even the most desperate PSL clients cannot get rid of their debt, banishing them to financial oblivion. Thomas Jefferson’s warning about all-powerful banks has come true, with politicians creating a financial weapon of mass destruction. Defenders of private student lenders say that this is capitalism, but capitalism requires a free flow of information and clear understanding of lending terms, both of which are absent with these loans.
This is not capitalism; this is full-blown anarchy.
There are two immediate options available to legislators, and I suggest both be undertaken. First, Congress must end the bankruptcy privileges. While discharge of government-issued promissory notes should be prohibited in order to protect the taxpayer from losses, let’s make one thing clear: Sallie Mae is not sovereign, is not the equivalent of the United States government, and should not be treated as such. Fortunately, courageous members of Congress such as Steve Cohen, D-Tenn., have introduced legislation to address this issue, but current obstruction by both sides is certain to kill it.
Second, Congress can enact legislation to offer refinancing options to borrowers who have been charged usurious rates. In fairness to those who took out federal student loans, the rates would probably be around 8 percent, but is much better than the alternative.
In addition to the interest rate advantage, a refinancing bill would allow applicants to use recent reforms such as income-based repayment that limits monthly payments to 10 percent of disposable income. This is much better than the $900 a month charges that some graduates have to pay.
Would this reduce the loan portfolios of private student lenders? Yes, but the refinancing options would give hope and relief to graduates who fell prey to these snake oil salesmen, giving them the ability to enjoy a better future and prevent them from being indentured servants for a substantial part of their lives.
These reforms will provide a square deal for college students striving to fulfill their dreams and save graduates from crushing educational debt they don’t understand.
It’s time to demand that Congress join people like Rep. Cohen and pursue effective reforms for private student loans, bringing order to the Wild West of lending. It’s high time to send these legalized loan sharks packing, but our timing will determine if we the students do so from a position of solvency, or a position of impecuniosity. I’ll take the former.
Gregory Poole is a graduate student in metallurgical engineering.
