[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.
______________________________________________________
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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Irascible Professor
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