Where's the Bail Out for Borrowers?
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.