This is a draft of a piece that is being published on the blogsite of a book publisher, Beacon Press out of Boston. I thought I would throw it up, and collect the comments to see what kind of interest there is out there in KOS land for the issue of predatory student loans, the corrupted individuals and organizatioms that created it, and the bailout that is soon to fund it.
Ideally, I would be thrilled if someone elevated this diary to "recommended", but I'm not sure if I know the secret handshake :) Hopefully the diary's inherent message will inspire this, regardless of the author!
The Economic Downturn and Student Loans: Some Practical Advice for Borrowers
Student loan companies will soon be lined up at the Federal Treasury, seeking loans against bundles of high interest, private loans that they made to students- often with their parents as co signors. Meanwhile, hundreds of thousands of students and their families see their livelihoods racked by student loans in ways worse, even, than defaulting home mortgage borrowers. As we progress through this economic downturn, there is a strong potential for increased predatory activities by the student lending industry, and borrowers need to be prepared to take extra steps to protect themselves.
A bit of history: Federally guaranteed student loans have been largely impossible to discharge in bankruptcy for the past decade. The federal guarantee on these loans was used as the reason for removing this basic protection. It was a very weak argument- no other loans, federally guaranteed or not have special exemptions from bankruptcy protections. In practice, this unique lack of bankruptcy protection has given the greenlight to lenders to attach penalties and fees onto debt without fear of the borrower. The largest lender in the country, Sallie Mae, saw its fee income increase by 228% between 2000-2005 (its loan portfolio grew by only 87% during this time), and their CEO bragged to shareholders in their 2003 annual report that their record earnings that year were attributable to collections on defaulted loans. So no bankruptcy protections for the borrower means free money for the lenders, and lots of it!
Removing bankruptcy and other protections from federal loans wasn't enough for the student loan industry, however: In 2005, student loan giants Sallie Mae, Citibank, and others lobbied Congress successfully to have bankruptcy protections for private student loans as well- part of the 2005 Bankruptcy Bill.
No one seems to be able to find out who inserted this language into the bill- no congressman can be found who is willing to claim credit. Nonetheless, it happened. That the student loan companies were able to get this passed was shocking to unbiased experts and analysts of this industry.
The industry claimed at the time that by removing this protection, the industry would be able to make loans to people with lower credit scores. After passage, of the bill, however, it was shown conclusively that the industry did not follow through on their promise. Students with low or marginal credit scores received loans at roughly the same rate as before the legislation was passed.
What the industry did do, however, was pile on as much of this private loan debt on the students as possible, often with credit card-like interest rates, and at hugely unfavorable terms (Bethany McLean at Fortune Magazine, for example, found a student who had been stuck with a 28% annual percentage rate).
Unlike home mortgage borrowers who at least have standard bankruptcy protections on their side as a worst, last option, student loan debtors are stuck with the principal, interest, and massive penalties and fees. Students across the country are discovering, typically after the fact, that they've been paralyzed by an insurmountable debt, often with interest that exceeds their monthly earnings. Cosigning parents and other relatives forced to step in often were forced to liquidate the equity in their homes in order to pay.
The Student Loan lobbying machine has been very successful at putting down attempts to reverse this ridiculous legislation by members of Congress including Sen. Dick Durbin (D-IL), and Rep. Danny Davis (D-Il).
In a leaked, 2006 Sallie Mae strategy memo, the 2nd priority listed was to "protect private credit economics (including bankruptcy)". Even with a new Congress in 2007, the industry was somehow able to convince the Blue Dog Democrats to kill the Davis legislation.
Academia has been largely unwilling to speak out for the borrowers on the bankruptcy issue, as their financial interests lie with the lenders. Student loans are again being called upon to make up for budget shortfalls- this time, its endowment losses. Tuition at our nation's colleges continues to increase dramatically, even as the economy slows.
The Feds bailout action potentially lays the groundwork for the promulgation of bad lending onto a new generation of borrowers unless Congress acts swiftly to protect them. Come January 20, President Obama should work with the new Congress to immediately reinstate bankruptcy protections for private student student loans. The bailout loans will be given "haircuts" that will serve to mitigate taxpayer losses on these assets, and the lending industry will have to make due with this basic consumer protection. Of equal importance is the need for the next Congress and presidential administration to work towards the reinstatement of a much broader set of consumer protections for federally guaranteed loans.
In the meantime, students, former students, and their co signors will have to fend for themselves in the absence of meaningul legislative action. I urge those now in repayment on their loans to be very vigilant. The name of the game in the student loan industry is in attaching every penalty and fee possible onto delinquent and defaulted debt, and we can expect this trend to only intensify during times of economic uncertainty. For federal loans, the industry actually has a perverse incentive to default loans in many instances, and borrowers should guard against this at all costs. For example, don't assume that deferment and forebearance requests will be acknowledged by the lenders without contacting them personally to verify receipt. Also, make sure that your payments are posted in a timely fashion by your lender, and that you aren't hit with late fees that can persist for months after a later payment (another clever ploy by the industry).