Guest Post

By Deanne Loonin

As most readers of Higher Ed Watch know, current bankruptcy law treats students who face financial distress the same severe way as people who are trying to discharge child support debts, alimony, overdue taxes and criminal fines. It's difficult to separate fact from fiction when trying to understand the logic behind this policy, but one thing is clear -- the restrictions came about without any empirical evidence that students were more likely to "abuse" the bankruptcy system.

Unfortunately, the legislative history of the student loan bankruptcy provision sheds little light.

The bare facts are that in 1976, Congress made student loans generally non-dischargeable except five years after default or if the borrower could prove "undue hardship." Since then, there have been three significant legislative changes. First, in 1990, the five year period was extended to seven years. In 1998, Congress eliminated the seven-year floor primarily as a budget savings gimmick to pay for student loan changes it made when it reauthorized the Higher Education Act that year. Finally, in 2005, lawmakers included private loans in the non-dischargeability category as part of comprehensive bankruptcy amendments (the change primarily affected for-profit lenders because private loans made by nonprofit providers were already exempt). If there were reasons to consider restricting bankruptcy for federal loans, there was absolutely no such basis for extending the policy to high-cost private loans.

[Editor's Note: Last week, Treasury Secretary Henry Paulson said that he planned to expand the $700 billion bailout plan to aid private student loan providers. But what about the alarming number of financially distressed private loan borrowers who have fallen behind on their payments or are in default? Is there any help for them? In this post, consumer advocate Deanne Loonin takes a critical eye to lenders' arguments for why they have been so unwilling to provide relief to these borrowers.]

By Deanne Loonin

Oscar, a 26 year old college graduate living in the Bronx, called our Student Loan Borrower Assistance phone line the other day. The first member of his extended family to pursue a higher education, Oscar took out both federal and private loans to pay for college. Earlier this year, he was laid off from one of two jobs he works to make ends meet. Since then, he has run intro trouble making payments on his private loans. He wants to avoid default, but is afraid he will have no choice, as his loan holder has repeatedly refused to work with him to ease his monthly payments.

"The loans were so easy to get," he says. "So why is it so hard to get some help?"

Oscar is not alone. Defaults and delinquencies on private student loans are growing at alarming rates. This is hardly surprising given the predatory terms of many of these loans and the current state of the economy. So why are student loan providers so unwilling to offer financially distressed borrowers like Oscar the help they need to dig themselves out of trouble and avoid defaulting?

By Deanne Loonin

We don't know yet whether private student loans will be among the "troubled assets" purchased by the federal government as part of the massive bailout plan that Congress approved this month. Regardless of what happens at the Treasury Department and regardless of who ends up holding these assets, there are countless private student loan borrowers who need help.

The problem is that private student loan providers are not offering long-term relief in the form of loan modifications, work-outs, flexible repayments or hardship deferments to financially distressed private loan borrowers. If the government is willing to come to the aid of private student loan providers, it should, at the very least, require these companies to provide relief to borrowers who won't be able to repay these high-cost loans without assistance.

The costs of student loan defaults, while not as visible as boarded up houses, are real. Here's why -- education is the main ticket out of poverty in this country. We know it's not always the case, but on average increased education brings higher incomes and helps individuals build assets. Oppressive student loan debt can stop this upward mobility in its tracks.

[Editor's Note: The Project on Student Debt is releasing today its third annual report on the debt of recent college graduates. The report and accompanying website provide average student debt level data for every state and for most four year colleges in the country. In this guest post, Matthew Reed, the report's main author, discusses the limits of this data and suggests steps policymakers can take to make more accurate and timely information available.]

By Matthew Reed

Student debt is up again, according to the data that we at the Project on Student Debt released today. One of the lessons we have learned from putting together these reports for the past three years is just how difficult it is to get timely and accurate information about students' loans. Congress and the next leadership of the U.S. Department of Education could take some simple steps to improve that situation.

For our purposes, the most useful data comes from annual surveys of colleges by college guide publishers such as Peterson's. The utility of this data, however, is limited because so much of the information is missing or unreliable. Colleges self-report and many fail to respond to the survey on an annual basis, resulting in missing or repeated data.

In addition, colleges use different methodologies to calculate these figures, depending on the capabilities of their data systems and the expertise and interest of the staff members responsible for filling the surveys out. While student debt figures for some schools stay the same for years as no one bothers to update them, at other schools, they fluctuate wildly from year to year as staff turn over or new software is used make the latest calculations.

The Department of Education maintains a database tracking students loans -- the National Student Loan Data System (NSLDS). Unfortunately, the Department doesn't make sufficient use of it. At the Project on Student Debt, we believe that expanding the information entered into this system and the reports generated from this system would go a long way toward providing more useful information for policymakers, student borrowers, and the public.

[Editor's note: At a time when loan industry advocates and the news media are raising alarms about private student loan providers tightening their lending standards, we at Higher Ed Watch believe it's important to remind readers about the dangers these high interest loans pose for financially-needy students. In this post, consumer advocate Deanne Loonin warns that these loans are particularly damaging because of the way they have been financed. In the weeks ahead, we will take a closer look at the tactics that some loan companies have used to erode key consumer protections for private loan borrowers.]

By Deanne Loonin

In my experience representing borrowers through the Student Loan Borrower Assistance Project, I have found that a great many borrowers who are in financial distress could get back into repayment if only lenders would work with them to modify loan terms or offer flexible repayment options. At the same time, I have also found private student loan providers to be universally inflexible in granting long-term repayment relief for borrowers. Even in the most severe cases, the creditors I have contacted have offered no more than short-term interest-only repayment plans or forbearances, during which interest on the loans continues to accrue. This experience holds true for both for-profit and non-profit lenders.

Lenders who refuse to offer help often say that they are acting in the best interests of borrowers, who will be harmed, they claim, if they make payments so low that they do not reduce principal. This is a good principle in theory, but not particularly practical for borrowers in severe financial distress, especially those facing long-term problems such as disabilities. Unfortunately, these borrowers have reached a point where they will not be able to repay their loan balances without substantial help and flexibility from their lenders.

Isn't it in the loan providers' interest to provide a helping hand? Don't they benefit if they can ease borrowers, who otherwise will default on their loans, back into repayment?

By Rupert Wilkinson

The Bush administration has repeatedly called for simplifying the federal student aid system by eliminating two of the main "campus-based" aid programs, which provide colleges with federal funds for needy students that they allocate themselves. Under the administration's plan, funds from the Supplemental Educational Opportunity Grant and Perkins Loan programs would be transferred into expanded Pell grants, the government's main source of grant aid for low-income students.

A better solution would be to restructure the campus-based aid programs so that they do a better job of leveraging college support for students who are promising but disadvantaged.

In America's decentralized higher education system, the ultimate responsibility for meeting (or not meeting) student financial need lies with the college itself. Outside an elite band of well-endowed institutions, most four-year colleges do not meet all need -- because they are either unable or unwilling to use their own grant aid to fill the gap between the cost of attendance and the family resources and financial aid (including federal loans and a reasonable amount of College Work-Study employment) that students are able to cobble together. Estimating that gap is tricky, but it is the widest for poor students -- probably well over 20% of what they need.

By Jon Oberg

Congress deserves ample credit for approving a significant expansion in the GI Bill education benefits that veterans can use to pay for college. But as a veteran myself, I fear that the benefits are being oversold. Take a recent statement about the GI Bill made by a representative of the Iraq and Afghanistan Veterans of America: "It made going to school your full-time job. You worry about getting into school and you worry about getting as many degrees as you can but the government will worry about paying for it."

Fellow veterans: don't count on it. Although billions more will be spent annually in your name, you may not get as much help as you think. A lot of the money will disappear before you see it.

I used data from the most recent student aid databases (the 2004 National Postsecondary Student Aid Study) to see how veterans fared at four-year public and private colleges, as compared to other undergraduates. The results confirmed my suspicions that despite the government's help, most veterans have been stuck with large amounts of student loan debt and received little in the way of institutional financial aid (the country's largest source of grants) from the colleges themselves.

In short, many colleges have treated veterans as an afterthought. Some institutions have clearly used veterans' GI benefits to replace institutional aid dollar-for-dollar, and shifted the money they saved into merit aid for the kind of high-achieving students that improve their rankings. In such situations there has been no remedy for veterans, as the federal government has largely looked the other way. Many veterans have gotten the message and lowered their educational ambitions.

By Robert Mackey

In 1944, Franklin Roosevelt signed into law the “Servicemen’s Readjustment Act,” what would be commonly called the “GI Bill.” It was a model of success, educating future presidents, Nobel Prize winners, writers, poets, musicians, and teachers, as well as a generation of mechanics, farmers, and technicians. By the time it expired in 1956, it had changed the face of American higher education and boosted a generation into the middle class.

On June 30, President Bush signed into law the newest version of the GI Bill, legislation that promised to reward the service of the men and women who have worn the uniform since September 11, 2001. This measure, which would significantly expand higher education benefits for veterans, has won bipartisan acclaim, with only a slight ripple from those concerned that the recipients of said governmental largesse will flee from the military in droves, cash in hand, ready to actually go to college.

These critics need not worry because, despite the hype, this bill is not really a new version of the World War II bill at all, but in many ways a repackaged enlistment benefit meant to tie the individual servicemember to the military for decades before full privileges are earned.

The original GI Bill was simply a reward for service. It was intended to ensure that troops coming back from World War II were able to get an education, move into the middle class, and contribute to the system, in stark contrast to how veterans had been treated since the American Revolution (a small "separation" pay if you were lucky, your likely ragged uniform and out the door). Most importantly, the original bill was not tied to future service—you didn’t enlist to gain the benefits; your past service was the only deciding factor. And the actual amount of money involved could be substantial: full tuition, books, room and board were covered until 1952, when an amendment to the act changed it to a simple stipend ($110 a month, the equivalent of about $900 in 2007).

By Art Hauptman

The sub-prime lending crisis has brought student loans back into the policy limelight as government officials and advocates of different stripes have sought to ensure adequate loan availability for the coming academic year. But resolving the current set of concerns should not obscure the continuing need for broader reforms to ensure the long-term availability of student loans at a reasonable cost to both borrowers and taxpayers.

As recent events perfectly illustrate, policymaking on student loans has often been driven by real or perceived crises regarding banks’ continued willingness to lend. Lawmakers and Congressional staff spend countless hours trying to determine what the exact right subsidy for lenders should be, rather than ensuring that the programs are continuing to fulfill their broader federal goals of promoting students’ access and success in college. Instead of taking a patchwork approach, fundamental reform is needed.

Here are some key challenges the loan programs face:

By Art Hauptman

Since the passage of the National Defense Education Act of 1958, the federal government has had a policy of helping students from a broad range of circumstances pay for college. One of the principal lessons we should draw from this half century of experience is that when it comes to students most at-risk, the traditional approach of providing aid through grants, loans, and work-study is not nearly enough to make for a successful policy.

The evidence for this conclusion is clear from several angles. For one, while the federal investment of hundreds of billions of dollars in student aid over time has certainly helped raise participation and attainment rates to record levels across the board, the gaps in access and success between students from the lowest and the highest family income brackets are virtually the same as when the student aid programs were created.