Think student loans are worth the price? Alan Collinge, from Student Loan Justice, tells men how wrong that assumption really is.
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Most people going into college are led to believe that student loans are friendlier than other types of loans. Most happily sign whatever loan papers are put in front of them by their university without reading any fine print. These loans are what they must take to get registered for class, and really, the decision to take the loans was made when they decided to enroll in the first place. Most have the idea that since the loans are usually from the government, they can trust that the loans will be fair, and that they are dealing with a lender that has their best interests at heart, a lender that will act in good faith.
I have some very bad news. This is completely wrong. Good men, and Americans generally, need to know the truth about how horrible the student loan system in this country has become. It is truly a threat to the citizens of this country that we’ve never before seen, and I am not being dramatic. To explain this properly, let me start in the way-back.
When the founding fathers wrote the Declaration of Independence and the Constitution, debt was in the front of their minds. Thomas Jefferson and George Washington, for example, were up to their eyeballs in debt to British banks and merchants. According to Harvard Historian Jill Lepore, the Declaration of Independence was a way to cancel those debts. The American Revolution, she argues, was itself a form of debt relief. Lepore writes, “A creditor was ‘lord of another man’s purse’; hadn’t the British swindled Americans out of their purses, their independence, their manhood?”.
It should come as no surprise, therefore, that when the U.S. Constitution was written and the powers of Congress enumerated, the founders placed the establishment of uniform bankruptcy laws near the top of the list. Creating a uniform bankruptcy code was placed ahead of the power to raise an army, navy, the power to declare war, and even the power to coin currency!
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A funny thing happened, however, some 200 years later. In 1977, Congress – under pressure from Sallie Mae and other lending interests – began placing restrictions on bankruptcy rights uniquely for student loans. The reasoning was that people were going straight to bankruptcy court to erase their student loan debt after graduating, but in retrospect, it turns out that during that time period only about a tenth of one percent of student loans were being discharged through bankruptcy. Nonetheless, the bankruptcy rights that the Founders felt so strongly about were breached, and in the years to come, Congress would continue to claw away this right from student loan borrowers, bit by bit.
By 1998, Congress had not only made bankruptcy impossible for well over 99% of student loan borrowers, they had removed statutes of limitations, refinancing rights, fair debt collection laws, truth-in-lending laws, and even state usury laws from applicability to student loans…and only from student loans. They also created draconian collection powers and a monstrous fee and penalty regime to be inflicted upon delinquent and defaulted borrowers.
By 1998, Congress had made bankruptcy impossible for well over 99% of student loan borrowers. They removed statues of limitations, refinancing rights, fair debt collection, truth-in-lending laws, and even state usury laws… but only from student loans.
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Flash forward to today: student loan debt has skyrocketed to nearly $1.5 Trillion dollars; The price of college has risen faster than the price of healthcare, real estate, and every other product, service, or asset; The average undergraduate student is now leaving college with about $34,000 in debt. Graduate students with much, much more.
What is most shocking however: The lending system- owned and administered by the federal government and its contractors- are now not only making extreme profits off of interest (The Department of Education booked over $50 billion in profits from the system in 2011), they also make significant profit from defaulted student loans!
Think about that for a moment. A credit card company, for example, is thrilled if they get back 10 cents on the dollar for a defaulted account. The student lending system, however, gets back somewhere between $1.15 – $1.23 (perhaps even more) for defaulted loans. In many instances, the Department of Education actually makes more on defaulted loans than loans that remain in good stead! Profiting from defaults, so you know, is a defining characteristic of a predatory lending system, and simply doesn’t happen for any other type of loan…only student loans!
This is bad, folks, and it is hurting alot of good people. A predatory collection industry has sprung up where decent people are being stripped of many multiples of what they borrowed. A $25,000 loan, for instance, can easily explode to over $100,000 with penalties and fees, and for the borrowers, there simply is no recourse. Defaulted loans become a desired outcome for the lenders, and so it is in their best interest to confuse the borrowers, “lose” their payments, or otherwise behave in such a way as to induce the borrowers to throw up their hands.
Sallie Mae, the nation’s largest lender, for example, was found to be defaulting loans by the thousands without even attempting to contact the borrowers. A nationwide network of student loan guaranty agencies has sprung up where despite their mission statements of “helping borrowers,” or “making college affordable,” etc., these companies make the majority of their revenue from penalties and fees on defaulted loans. Unsurprisingly, the default rate for student loans is now much larger than 1-in-4. By my best estimate, the true, lifetime default rate for student loans may be as high as 50%!
A $25,000 loan, for instance, can easily explode to over $100,000 with penalties and fees, and for the borrowers, there is no recourse. Defaulted loans thus become a desired outcome for the lenders..
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How predatory has this lending system become? There is a collection company in Indianapolis, Indiana that literally has a 4,000 gallon shark tank installed in its corporate headquarters.
Millions have seen their lives and livelihoods crushed under the weight of this predatory debt instrument, and many millions more are poised to join them. Families have been ruined. Innocent cosigners are being forced to sell their assets to cover loans for their children, grandchildren, nieces, and nephews. Senior citizens are being stripped of their social security income, people are fleeing the country, and even committing suicide because of their student loans.
Millions of men are unable to start or maintain families under the weight of this crushing debt.
The Department of Education, clearly, has turned against the students. In fact the Department of Education works actively against the borrowers to protect this predatory cash cow. The Department claims, for example, that its repayment and forgiveness programs make student loans friendly, but in fact, the Department is kicking out as many people as possible from these programs for the lamest of reasons, and it is my best guess that fewer than 15% of the people who sign up for these programs will actually get the loan forgiveness they are hoping for. It is very telling, also, that Education Department officials fight tooth-and-nail behind the scenes to keep bankruptcy inapplicable to student loans.
Whatever your political stripes, this big-government monstrosity would make our Founding Fathers turn in their graves. This is not what the 1965 Congress had in mind when creating the student loan system, and is certainly not what the 44 million people with student loans signed up for, 27 million of whom are currently not able to make payments on their loans, if the class of 2005 is any indicator.
This is big, but the problem is fast growing even worse. When President Obama took office, we owed roughly $600 billion in student loan debt. Today, we owe far more than double that. Prices continue to rise, and the number of defaulted and defaulted-then-rehabilitated borrowers, which currently sits at about 9.3 million people, continues to grow quickly. And make no mistake: untold tens of millions of future borrowers will be hurt much worse if something is not done now.
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The solution to this problem, clearly, begins with the return of bankruptcy protections to all student loans. This is easily accomplished by repealing the piece of federal law that strips the protection uniquely from student loans. There are currently three bills in Congress that would achieve this: HR 449, HR 3451, and HR 1352.
Passing any of these bills would ensure that student loans are treated the same as all other loans in bankruptcy court. It would force the Department of Education to start working for the students rather than against them, to start cracking whip on the schools to lower their prices, and to kick the worst schools out of the program. It will also compel the Department of Education to impose meaningful lending limits on loans, and to generally be more judicious about what sorts of loans it makes for higher education. Such change is long overdue, and it is clear at this point that all other fixes, short of simply forgiving all student debt, will not work. The Founding Fathers demanded bankruptcy rights for the citizenry for very good reason, and the student lending system is living proof of this.
Interestingly, it turns out that warning the banks and the Department of Education that bankruptcy would open up floodgates, and lead to a massive wave of filing, is baseless fear mongering. As I mentioned earlier, when student loans were treated the same as all other loans in bankruptcy court, less than a tenth of a percent of all loans were discharged this way. Moreover, Robert Lawless, a respected professor and expert on bankruptcy, estimates that repealing the special exemption to bankruptcy would result in only about $2.4 billion in discharged debt per year. I actually think the true cost would be about double this, but that is still a negligible amount compared to the outstanding balance of nearly $1.5 trillion in outstanding loans.
I hope that the good men reading this will understand the magnitude, and importance of this problem, and do what they can to help solve it. Now is the time. This is our country, and on this issue we need to fight to ensure it stays that way!
Collinge is founder of StudentLoanJustice.Org and author of The Student Loan Scam (Beacon Press).
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Photo: Flickr/Simon Cunningham
tough shit pay your bills bitch or you owe me reparations for my loan that I had to pay all off
Once again, Allan Collinge has written another revealing and outstanding piece about the real student loan system in America today. Everyone who has student loans, knows someone who does or may in the future needs to know the predatory hell that awaits them. This is the crime of the century. It is tax money paid by parents that are backing education loans for their children and the US Department of Education is making an obscene profit. How is one dollar of profit earned by our government lending us our own money. I have lost all respect for the United States… Read more »
Alan has written another outstanding piece on the what has be come unethical,outdated in need of a total overhaul student loan system that was reported by Market Watch to be growing at a rate of $3055 a second. No that is not a typo $3055 A SECOND! There are solutions to the student loan crisis, but first our children’s education has to become more important than the unethical profits!