May 5, 2011
For many years, Academia, the lending industry attached to it, and the US Government failed to inform the public that all of the elements comprising the lending system (lenders, collection companies, guarantors) made far more money when students defaulted on their loans. Nevertheless, this is true fact, and is well documented. More disturbing: recent analysis of the President's Budget data reveals that even the US Department of Education, on average, recovers $1.22 for every dollar paid out in default claims. After collection costs, this still leaves a net revenue of more than 15%. This should be highly alarming to interested readers: These perverted financial incentives are defining characteristics of a predatory lending system. The primary reason for this is that unlike all other types of debt, bankruptcy and other standard consumer protections have been removed from student loans.
The consequences of these types of financial motivations, both for the students, and for the lending system itself are too numerous to describe here, but one very significant result is that during the legislative process, when the schools, lenders, and their lobbyists pressure Congress to raise the allowable loan limits, the Department of Education is one of the only entities available to act in the interest of the students. Instead of voicing concern, or even objections to such proposals, the Department of Education instead remains largely silent, despite their knowledge about the true default rates, etc. This, again, is a key failure in oversight that effectively causes Congress to make decisions without the interests of the borrowers being represented (Of course the lenders and schools claim to have the interests of the students at heart, but their obvious financial motivations obviously discount their credibility on this claim). Therefore, Congress continues to rubberstamp these legislative efforts, and the schools quickly raise their tuitions to reach the new lending ceilings.
If the Department of Education were seeing a material, financial loss with loan defaults, they likely would be far more assertive about the reasons NOT to raise the loan limits...and this would provide a critical check on the process. But they have been largely absent from these debates, and their misaligned interest is certainly the reason why.
So it must be agreed that lack of Department oversight contributes directly to repeated votes by Congress to raise the loan limits, and we've already established the link between this poor oversight, and the removal of consumer protections. So undoubtedly, the removal of standard consumer protections has effectively allowed the schools and lenders to have their way with Congress on this issue.
Critics could argue that the established student advocacy groups should have stepped in to fill this role...and this is obviously a true statement...but the advocates can claim that they did not know that defaults were as high as they were (recent evidencesuggests that the true default rate exceeds 1 in 3), therefore any objections from them (assuming they did object) were not strong. Had they known that defaults were as high as they were, one can only assume that they would have objected far more forcefully.
The current debate surrounding college prices is a confusing mix of rhetoric that typically involves in fingers pointing in all directions..."like a scarecrow in the wind" between lenders, schools, the Department of Education, the student advocates, and Congress. But of these five entities, four were behaving as expected (i,e, schools pushing for raising the limits, advocates wringing their hands in the absence of defensible proof that things were going awry, lenders playing their part as the selfish, amoral entities they are understood to be, Congress debating what they are told, and ultimately voting based upon this debate.)
The Department of Education, however, failed to fulfill its role, and did not disclose to the group the true magnitude of the default problem, as one would expect it to. Therefore they are clearly the party whose behavior can ultimately be questioned with strong justification. Of course citizens have every right to be seethingly resentful and angered by all of these actors to point out what was obvious...that the students were being saddled with outrageous increases in student loan debt, but strictly speaking, the Department's failure is the only one with zero defense.
This is a critical, unambiguous link that is never pointed out, but which is key- the key- to explaining the rampant inflation we have seen in academia over the years.
For supporting documentation, See http://studentloanjustice.org/
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