Predatory Lending Biting Back

With calls from student loan providers for a bailout growing louder every day, it's worth remembering that the lenders have brought a good part of these problems onto themselves. Investors are wary of purchasing student loan asset back securities, and, and least when it comes to those made up of private loans, they have good reason. Lenders have dumped lots of bad loans made to subprime borrowers going to dubious schools onto the marketplace, knowing full well that much of this debt was likely to go into default.

Case in point: as we noted last week, there has been in recent years a proliferation of unlicensed, unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. The growth of these schools of dubious quality has been fueled by student loan companies that have willingly and irresponsibly "partnered" with these institutions to provide high-cost private loans to often at-risk students that these schools tend to attract. The lenders have then turned around and, like subprime mortgage lenders, securitized the loans, shifting the risk of the loans onto unsuspecting investors.

Low-income and working class students who enroll in these schools have paid a high price for these policies.

Take Silver State Helicopters for instance. On Super Bowl Sunday, the Nevada-based company, which owned unaccredited flight academies across the country, shut its doors without warning and filed for bankruptcy liquidation. As recounted by The San Diego Union-Tribune, the 2,500 students enrolled in the flight academies were "left in the lurch." Because the schools did not have the proper accreditation to qualify to participate in the federal student aid programs, the company directed students to take out expensive private loans to cover the $70,000 tuition that they were required to pay up front. Unfortunately, Silver State students are now stuck repaying these loans for training they did not ultimately receive.

But Silver States' entire existence depended on the willingness of loan companies -- in this case, the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA) through its national brand American Education Services -- to make and service private loans to students lured into unlicensed, unaccredited, and ultimately "fly-by-night" schools (forgive the pun). In fact, the company appears to have gone immediately belly up the minute the lenders revealed that they would no longer provide private loans to its students because the lenders would not be able to securitize them as a result of the credit crunch.

The student loan industry is desperately seeking a bailout and offering neither borrowers nor taxpayers anything in return. Don't Silver States' students deserve a bailout too? Don't taxpayers deserve protection against another student loan - proprietary school debacle, as we had in the late 1980s and early 1990s? We at Higher Ed Watch think both student borrowers and taxpayers deserve better.