"He that dies pays all debts." ....Shakespeare.  (That was before the era of student loans. ....The Irascible Professor.)

Commentary of the Day - June 26, 2013. The Student Loan Interest Rate Controversy.  Guest commentary by Alan Collinge.

[Ed. Note: Unless Congress acts by July 1st, the interest rate on subsidized student loans will double from 3.4% to 6.8%.  The Stafford Loan Program makes subsidized loans available for students who meet certain family income limits.  Currently, undergraduate student who qualify can borrow up to $23,000 in subsidized loans over the course of four years.  The interest rate on unsubsidized direct loans currently is 6.8%.  Currently, Congress is considering bills that would extend the 3.4% rate on subsidized loans past July 1st.]
Make no mistake about the student loan interest rate "crisis" Congress is foisting upon the citizens currently: It is a distraction. A Tempest in a Teapot.  Like so many other debates regarding student loans going back at least 8 years, it does absolutely nothing to affect the structural problems in the student lending system.  In the worst-case scenario, where Congress does nothing and interest rates on undergraduate, subsidized student loans double, the impact on affected students will be something like $9 per month, or about $1000 per borrower over the 10 year repayment period. There really is nothing more to this issue.  [Ed. Note: These figures are averages.  For the neediest students who qualify for the maximum subsidized loans, the interest rate increase could add more than $3,000 to the cost of the loans over the repayment period.]
It's not the interest rate that is getting people out in the streets shaking their fists, it is the shocking increases in sticker price year after year, the resulting debt laid upon the students, and the structurally predatory nature of the lending instrument that is causing the outcry.  For years this has been true, and for years the citizens have seen Congress dramatizing and politicizing the small issues, the resolution of which do nothing to bring prices down, nothing to address the ever increasing amounts the students are forced to borrow, and nothing to fix the structurally predatory lending system that stands behind it all.
The unprecedented, and unjustified removal of bankruptcy and other consumer protections have caused this system to turn structurally predatory, where defaults are a preferable outcome to all of the lending elements, including collection companies (and the lenders who own them), the guarantors (who make the majority of their income through penalties and fees attached to defaults), and even the Department of Education, which gets back $1.22 for every dollar it pays out on default claims.  Even experts allowing for a completely inappropriate "fair value" accounting method that greatly exaggerates the cost acknowledge that the government profits on these loans, and makes more than had the loans never defaulted.

This isn't right.  When a lender wants a loan to default, bad things happen.  Like an unchecked increase in price, like horrible (or worse) loan administration, inadequate oversight of the lending system, and a myriad of other consequences that even the most conservative economist is compelled to acknowledge are unacceptable, indefensible, and intolerable.   The only way to truly fix a lending system stripped of bankruptcy, and other bedrock consumer protections is to return those protections.

Even Sallie Mae acknowledged publicly that the bankruptcy laws for student loans need to be revisited as far back as 2006.  At the same time, however, a leaked Sallie Mae memo revealed that the company's top priorities included keeping bankruptcy protections absent from student loans.

Since 2006, the pattern has been the same: Legislation is introduced that would return bankruptcy to private loans, followed by a flurry of other legislation that aims to fix one part of the lending system or another.  Congress seizes upon the other legislation, and makes a big deal about it. First it was the Sunshine Act, legislation designed to end a slew of conflicts between the col leges and the lenders (this law was eventually circumvented administratively by the Federal Reserve and likely others).  Then is was the Income Based Repayment program (IBR).  Then it was the Gainful Employment Rule, which may as well have never been passed given how quickly it was bureaucratized by the Department of Education into mush.
Now, 7+ years later, it is the current interest rate debate that is sucking all the air out of the room.  The old "student advocates" continue to ignore bankruptcy protection, and even the newly formed Consumer Financial Protection Bureau isn't even living up to its name, leaving the most critical consumer protection problem in the country unaddressed in favor of championing, among other things, a bailout of private lenders in a refinancing scheme which isn't refinancing so much as federalization.
For all the rhetoric about helping students, championing Higher Education, and the like, the people see plainly at this point that Sallie Mae and the federal government have been the big winners, here.  The citizens, of course, have lost badly to this point, and stand to lose much more if, at a minimum, standard bankruptcy protections aren't returned to all student loans.
Republicans could demonstrate that the "invisible hand" actually can work for common citizens by shaking off the cronyism, and championing the return of bankruptcy protections to the lending system.  Democrats, similarly can demonstrate that they haven't abandoned the bread and butter principles that the party was built upon by standing up to the banks, at long last, instead of pretending to.
With bankruptcy protection returned, the Department of Education will be compelled to crack the whip on the schools to lower their prices and improve their quality (and kick a good number of diploma-mill colleges out of the program).  Congress will be compelled to impose lower, rational lending limits.  Prices will come down to rational levels, and the taxpayer will save a bundle of money.

  2013, Alan Collinge.
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Alan Collinge is the founder of http://StudentLoanJustice.org, and the author of The Student Loan Scam.

The Irascible Professor comments: One might be tempted to dismiss Alan's comments as just another rant by someone who has been caught up in the college loan mess.  But the IP thinks that Collinge makes some good points even though he doesn't agree with everything said in the article.  First Alan is completely correct in noting that the overall level of student loan debt is out of control.  The IP would add that it is out of control both on an individual basis and on a collective basis.  Financial aid for individual students has shifted from grants and scholarships to loans, and loan limits are unreasonably high.  Collectively, student loan debt now exceeds $1.1 trillion.  In the long run, this threatens economic stability.  The cost of a college education needs to be reined in.  The easy availability of student loans has allowed college administrators to engage in all sorts of questionable activities that raise the costs to students, and have seduced state governments into reducing their contributions to public higher education.

Second, those people who were forced to take out large private student loans before the bulk of student lending was returned to the federal government need some relief from the onerous repayment conditions that leave many of them in what amounts to involuntary servitude to the lenders and the collection agencies.  These people need to have the protection of bankruptcy returned to their loans, as well as limits on late fees, and the ability to refinance their loans at low interest rates.  Likewise, the student debt of those who die before repayment should be cancelled rather than made a burden for their parents.

But, the IP does not agree with Alan that the recent reforms of the student loan process have been mere sideshows.  Returning the bulk of student lending to the Department of Education has reduced overall costs.  And other reforms such as better forbearance terms, and limits on the maximum monthly payments have helped many people.  Yes, much more needs to be done, but given the current gridlock in Washington the IP thinks that what has been accomplished is a step in the right direction; and, keeping the interest rate for subsidized loans at 3.4% one more small step in the right direction.

 

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