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Where's the Bail Out for Borrowers?

April 17, 2008 - 5:39pm

After Tuesday's surprisingly one-sided hearing before the Senate Banking Committee on the credit crunch, it's clear that Congress is prepared to take steps to add liquidity to the student loan marketplace. But as lawmakers move forward with plans to bailout student loan giants like Sallie Mae, they shouldn't forget about the financially-distressed borrowers who have been victimized by the lenders' predatory private loan practices. Surely, they deserve a helping hand too.

Over the last two years, we at Higher Ed Watch have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt, often before they have exhausted their lower-cost federal loan eligibility. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loan options.

Lenders will deny responsibility until they're blue in the face, but they're the ones who have been feverishly marketing $30,000, $40,000, or $50,000 a year direct-to-consumer private loans to undergraduates. In pop-up Internet advertisements, youtube videos, and television and radio commercials, the companies tout the convenience of applying for private loans but seem to brush by the fact private loans are more expensive than federal loans and lack important safeguards.

Lobbyists for colleges and financial aid administrators place the blame squarely on direct-to-consumer marketers. But many private colleges and high-priced public universities are also putting students in harm's way by including private loans in the financial aid packages they offer students. Packaging private loans gives students the misleading impression that they have no choice but to take out these loans. It also leaves them with the impression that these loans have the colleges' imprimatur and therefore must have pretty reasonable terms, which they seldom do. Worse, some lenders have encouraged colleges to brand the loans with their institutions' names -- which only adds to the confusion.

Perhaps the students who have been hurt the worst have been the low-income and working-class students who were pushed to take out subprime private loans, with rates and fees totaling more than 20 percent, to attend poor-performing trade schools owned by giant for-profit higher education chains like Career Education Corporation and Corinthian Colleges. By all accounts, defaults on these loans are growing alarmingly. And serious questions have been raised about whether these companies have duped disadvantaged students into taking on private loan debt without making them aware of their cheaper loan options first.

Now don't get us wrong. Congress is preparing to take steps that will make private loan borrowing somewhat safer for future students. Lawmakers are finalizing legislation to renew the Higher Education Act that would, for example, ban lenders from co-branding private loan products with a college’s name or logo. The legislation also includes provisions that aim to discourage lenders from making subprime private loans and that would make it easier for colleges to counsel students against taking on private loans prior to exhausting their federal student loan eligibility.

These provisions are all good, but they won't provide any relief to borrowers who have already fallen victim to lenders' predatory private student loan practices. The House had a chance to start to make things right for these students in February but punted. Under pressure from the loan industry, the House defeated a measure that would have allowed borrowers in severe financial distress to discharge their private loans in bankruptcy.

But now that Congress is considering bailing out lenders for past risky financing decisions, we believe that lawmakers have an even stronger obligation to revisit the bankruptcy issue. Private student loans should not be treated any differently from other forms of consumer debt when it comes to bankruptcy. Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.

We also believe that policy makers need to consider efforts to help borrowers who took on private loan debt before exhausting their federal student loan eligibility. They can do this by authorizing the Department of Education to offer a debt swap to these borrowers. Under this proposal, which we floated last month, the federal government could make new unsubsidized federal Stafford loans available for all borrowers (out-of-school or in-school) with private loan debt and untapped federal loan eligibility. These newly borrowed funds would have to be used to pay off existing private student loan debt. Presumably, a debt swap policy would ease the financial burden of private loan borrowers and infuse liquidity into the private student loan market.

These proposals -- for revising the bankruptcy law and authorizing a debt swap -- are reasonable steps that Congress can take to help out private loan borrowers in dire straits. Borrowers with unmanageable debt loads may not be able to hire high-priced lobbyists or lavish lawmakers with generous PAC contributions, but that doesn't mean that they should be left out of the discussions. Because really, if we're talking about a bailout, who's more deserving?

This post was prepared by Stephen Burd and Michael Dannenberg.

NAF to the rescue?

Uh, this is a "bailout" for the students.  Congress has realized that the change to the totalitarian Direct Loan program can't happen overnight.  It would be bad news for the majority's party in November if kids and parents can't get their loans.  Makes one wonder how well this party will govern?  I mean, come on man!  This is a real mess they've created!  But you and your adherents go right on saying there isn't a crises--I think this will be good news for another party come November! 

PS. Do I detect some disappointment that no NAF luminaries were called to testify?  Here's a suggestion...maybe a little less truthiness might do this organization some good!     

The lenders can shove it.

If those lenders don't want to invest their capital without taking a loss on every unprofitable loan, then they can take their capital and shove it. We don't want charity from lender's anyway. We will just go to work and save our money before we go to college, however many years that will take. Or we will go to community college. Or we will just beg for money on the streets like the students in Canada. Or join the army. There are lots of ways to avoid taking out a loan for college. But then again, why do we even need college. College will just turn us into bourgeoisie elitists, forcing us to reject our low-income and working class roots. Who needs that? Don't take out loans to go to college!

Student Bailout

Did you happen to glance over the fact that they are going to raise the limits on FFELP loans by $2000. That is HUGE!! But don't worry, government is forgeting about the student. Whatever. Also, you want to allow private loans to be discharged? Fine, but you can bet that interest rates would go up. So we are going to punish all students that need to take out private loans just so a select # of students would be allowed to file bankruptcy?

There's that Patrick Bott AGAIN

Trolling and trying to protect his job!

Why do some students borrow private over federal?

Based on the 2003-04 NPSAS study, 22.7% of undergraduate students who borrow private student loans do not borrow from the federal Stafford loan, and 91.1% do not borrow from the PLUS loan. Unfortunately there is very little data on why some borrowers seem to prefer private loans over federal. Perhaps some of it is due to aggressive lending, as Higher Ed Watch suggests. Perhaps not. With the preference for the private loans over the PLUS loans, two key reasons seem to be the ability to defer payments while the student (as opposed to the parent borrower) is in school and the fact that the student is not obligated on the PLUS loan. (While PLUS loan borrowers could use an administrative forebearance to defer payments during the in-school period, most lenders do not offer this option.) For other reasons see http://www.finaid.org/loans/loantradeoffs.phtml Of the private loan borrowers who do not borrow Stafford, part of the reason seems to be that the borrowers are ineligible for the federal loans. 5.6% are international students and 10% have a GPA below 2.0. Also, some may have parents who are unwilling to file the FAFSA -- 16% are getting no help from their parents and 12% have parents who are divorced or separated. This clearly isn't the only reason, since these percentages fall short of 100%. The bottom line is that there is a lack of credible evidence one way or the other to explain why some students prefer private loans over the less expensive federal loans. The US Department of Education and others need to conduct research into this question.

Editor's Note: Mark Kantrowitz is the Publisher of Finaid.org, a financial aid information website sponsored by Monster, Inc. and Citibank Student Loan Corporation.

For the People By the People

Hey! Forget about the Lenders. Let the American government forgive all the student debtors who are the American Citizens; the real government. Allow our tax dollars to be spent on free education and free health care instead of war and lining the pockets of rich politicians. Uncle Sam wants you to be in debt so you can be used to create a police state and support the corporate, fascist war machine for World Domination! Education is a joke when there are no real jobs and you need to speak Cantonese to be hired. The end of democracy is here.

Private Loan Consolidation Impossible.

With the credit crisis in full effect, It is impossible to consolidate private loans. At the moment I will start payments at Wells Fargo costing $700 a month. This is on a 15 year term and the borrowed amount was $40,000. Over two years $15,000 of interest has accrued. My parents co-signed on this loan, and I was told it would be easy to consolidate. Not at the moment. My parents were turned down for the consolidation and my credit score of 670 isn't good enough even with my parents cosigning. I want to pay Wells Fargo but can only afford $500 a month. Wells Fargo won't take anything less than $700. I mean extend the amoritzation to 25 years and I will be paying more interest. Doesn't make sense and in this time I'm sure I'm not the only person stuck in this pickle.

Why I ended up with Private loans

I wasn't eligible for anything given out by the government - Apparently my single (senior citizen) mothers' salary of $35,000 per year was too much for me to qualify. Not to mention that she didn't even co-sign for my loans - my grandmother (who lives in a housing project on Social Security) did. They also put the $13,000 that I made the previous year at Wal-Mart with my moms' income for a combined total of: $48,000.

This is the thing that many people just don't seem to understand: The government loans aren't available to everyone - It's up to you & your parent(s)/guardian(s) to put something away or you will be stuck paying $85,000 on a $22,000 loan with 17% interest that compounds DAILY. (My mom didn't save for my education & now she admits to making a mistake). I was also unlucky enough to land a job (CAD/Graphic Art) about a month after my graduation that has paid me less than $30,000 a year. (I've worked there for 2+ years, but the crappy economy has me hesitant to move somewhere else) I pay my loan on time each month, but it is killing me financially. I can't even afford to move out on my own. I'm so upset about this whole situation. How can this be right?

No need for college

You guys haven't realized yet that college is a waste of time and money? Too many people have spent 4-6 years in college; that has cost them 50-100k in debt, only to get out and find they have no chance of getting a decent job. Why spend all that money just to make 25k a year? Does this make sense?

Shouldn't they worry about the students

At this time of the recession, students are not getting jobs. As a student I took Key Bank loan. Then they sold it to AES and then I started my 2nd degree, and I was supposed to be hearing from AES sometime last year. They never called, so I ended up calling and they keep telling me "your loans are paid off." Well I am afraid and scared that they may have put me in default.... So I called again and asked them myself that if the loans are defaulted who should I call, they said call your original lender.... So I ended up calling Key Bank again and left messages 2-3 times. No one is getting back to me....I am keeping a record of all these calls.

Now with this bailout..... why a bailout to the lenders... why not to the students who went to school with these loans and thanks to our government (both parties), we are in deep recession and there are no jobs..... America is the worst country to get a higher education. At least in other countries the government helps for the major part of their education. My cousins in UK got all their schooling done free (even law schools) just by getting high grades and being good students.... why don't we have those programs.......

AES Screwing Students Like all the other Student Loan Companies

Well, blame it on BUSH, who else? he screwed us on everything else. AES, are pirates just like them all. This should be illegal, in the meantime they should be bailing out students, not the companies, unless they plan discharging all delinquent loans and the bailout money is used specifically for this.