Student loans and the presidential race

The student loan problem has its genesis in the 1970’s, when the quasi-governmental agency Sallie Mae was formed to purchase student loans from private banks.  Sallie Mae worked hard to convince Congress to remove bedrock consumer protections, such as bankruptcy rights, and statutes of limitations, from federally guaranteed loans.  By 1998 federal loans had become completely free of bankruptcy protections, for all intents and purposes, and in 2005, Sallie Mae (by then a completely for-profit entity) and friends even convinced Congress to removed bankruptcy from private student loans.

Disturbingly, years of White House budget data show clearly that the federal government has been making, not losing money on defaults, recouping about $1.23 for every dollar paid out on default claims.  Under the new, direct lending system it is certainly making even more on defaults, having subsumed the guarantor function and all of the default income that comes with it. Make no mistake:  This is a defining characteristic of a predatory lending system, and to date, Congress has done absolutely nothing to correct it.

{mosads}And now we are seeing the results:  Skyrocketing inflation in the cost of college and indebtedness, a captured Department of Education that works against the interests of the students rather than for them, exploding default rates (the true default rate is likely approaching 50 perrcent as we speak), and tens of millions of borrowers who are being saddled with massive levels of predatory debt. This is financially devastating tens of millions of decent people and their families-

If one reads position papers of the Center for American Progress, which appears to be guiding the policy of at least one of the presidential candidates (and likely others) on the Democratic side, one is lead to believe that CAP gets this, and proposes returning bankruptcy protections to student loans.  Careful reading, however, reveals that the reverse is true. Under the leadership of David Bergeron, longtime director of the lending program for the Department of Education, CAP proposes a shady qualifier that would keep bankruptcy away from all federal loans, and likely most private loans. Instead of bankruptcy protections CAP and other liberal policy shops push for repayment programs designed like credit card teasers, where the majority of people who try for the benefit will be kicked out before anything is forgiven, and who will be far, far worse for having tried.

One “gem” of Bergeron and CAP is a refinancing plan, currently being championed by Sen, Elizabeth Warren (D-Mass.).  This plan would essentially federalize private loans at lower interest rates, which sounds great, but this program is more of a bailout for private lenders – who would like nothing better than to be paid book value for non-performing loans on their books – than anything else.  In any event, it only would affect a small number of borrowers, and may or may not actually help them, considering that statutes of limitations would be lost for these borrowers – one of the few remaining consumer protections available to private student loan holders.

The Republicans are, frankly, worse.  Generally, they make no mention of returning bankruptcy protections to student loans, and wrongheadedly decry the cost of the repayment programs and the lending system generally to the taxpayer, while offering no real solutions.   Some, following the lead of groups like the Consumer Bankers Association, would revert to the older system where private banks stood between the students and the federal government and sucked every penny possible out of the system in both interest and penalties.  This, most everyone agrees, was a horrible system better left in the public policy graveyard.

Why the Republicans would so callously disregard the importance of a free-market, Constitutionally mandated mechanism like bankruptcy, and instead embrace shameless worn-out banker’s rhetoric that created this problem is puzzling.  Why the Democrats would allow themselves to be guided by long-time cronies from the Department of Education in a way guaranteed to perpetuate rather than solve this simple problem is equally baffling.

One thing is certain, however:  If the presidential candidates on both sides of the aisle wish to demonstrate integrity on this issue to the voters and prevent what looks like a national financial catastrophe on the horizon, they will abandon the old rhetoric, stop taking advice from the beltway “experts” who caused this problem, and fight for, rather than against the people, who are either writing checks for their kid’s college, or being drowned in student loans. For both of these demographics, the stakes are enormous.

Collinge is founder of StudentLoanJustice.Org and author of The Student Loan Scam (Beacon Press).