Like Rock and Roll, The Federal Student Loan Program Will Never Die. But's Let Try to Make It Smaller

Rock and Roll is here to stay.

It will never die.

It was meant to be that way.

Though I don't know why.

                                                                                 Danny & the Juniors

As Danny and the Juniors so eloquently reminded us, some American phenomena are perpetual and will never die. Rock and Roll falls in this category, and so does the Federal Student Loan Program.

 According to Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau, total student-loan indebtedness under the  Federal Student Loan Program grew by 20 percent in just 18 months!   Total indebtedness now tops out at $ 1.01 trillion.   In addition, total student-loan indebtedness to private lenders is $165 billion.  So--total student-loan debt now approaches $1.2 trillion. 
 

By the way, how would you like to have Rohit Chopra's job--Student Loan Ombudsman for the Consumer Financial Protection Bureau?  It must be something like a medic's position in a World War II concentration camp--handing out aspirins to inmates slated for oblivion.

Turn out the lights. The party's over.

I'm a realist. I know the federal student loan program cannot be dismantled.  The American higher education community absolutely depends on it, and most for-profit colleges could not exist without it.  The for-profit colleges have powerful lobbyists, and we will never get the for-profit colleges out of the feeding trough.
 

Nevertheless, let's at least try to impose some level of decency on this train wreck of public policy.

First of all, let's treat the wounded.   Let's stop garnishing the Social Security checks of elderly student-loan debtors who  defaulted on their loans.  Let's give student-loan debtors reasonable access to the bankruptcy courts.  Let's make all student loans subject to state consumer-protection laws so injured students can sue college and universities who entice people to take out student loans through fraud or misrepresentation.
 

Second, let's try to stop the growth rate in student-loan indebtedness by encouraging low-income students to attend community colleges that have low tuition rates instead of borrowing money to attend more prestigious institutions. Because you know what? If you are poor you shouldn't be borrowing money to attend Harvard; and besides you probably wouldn't like it anyway.
 

Third, let's crack down on colleges and universities that raise their tuition every year because they can't control their costs.  It is a scandal that university presidents like Ohio State University's Gordon Gee and New York University's John Sexton make more than $1 million dollars a year (far more actually) while college students across the country are borrowing more and more money every year to attend college.
 

American college students are tapped out.  According to Ombudsman Chopra's remarks, people with student-loan debt are now less likely than other people to have home mortgages or outstanding auto loans.  Why?  Because many people are now so burdened with college-loan debt that they can't participate in the consumer economy--they can't buy homes or purchase cars.
 

For years now, colleges and universities have been singing a variation of Rock and Roll is Here to Stay; they think the student loan program was meant to be this way and will never die. But if we don't reform this program soon, higher education will be singing a different tune, this one by Willie Nelson.

"Turn out the lights. The party's over."

 

 

References

Rohit Chopra. Student debt swells, federal loans now top a trillion. Excerpted remarks from speech given on July 17, 2013.  Accessible at: http://www.consumerfinance.gov/speeches/student-debt-swells-federal-loans-now-top-a-trillion/



The Private Student Loan Scandal: More Worthless Advice From the New York Times (which cares so much about the little guy)

You think the federal student loan program is a mess? You should take a look at the private student loan program.  In contrast to federal student loans, which have fixed interest rates, private loans (the loans students take out from private banks and other financial institutions) often have variable interest rates.  The federal loan program--for all its many faults--at least allows students to obtain economic hardship deferments and offers an income-based repayment program (IBRP).  Private student-loan lenders are not obligated to show an overstressed debtor any mercy--and often they do not. Many students are not even aware of the difference between federal student loans and private loans and are shocked to learn that the terms and conditions of their private loans are more onerous than the federal program.

The New York Times--that tireless champion of the little guy--made this tepid suggestion for reforming the private student-loan program on today's editorial page (October 25, 2012).

The federal government needs to open up refinancing and debt relief opportunities for [private student-loan borrowers], as it did for some mortgage holders. The [Consumer Financial Protection Bureau] should also set national standards for loan servicers to require clear disclosure of conditions . . . and prompt resolution of customer requests for information. And borrowers who might be eligible for federal student loans should be advised to examine that option before plunging headlong into private debt.

Yep. A little more federal regulation will straighten out the private student loan scandal.  That's like saying Mussolini would have been a little nicer if he had only gotten the right medication.

If we want to stop the abuses in the private student-loan industry, we only need to do one thing: allow insolvent private student-loan debtors to discharge their loans in bankruptcy like any other non-secured debt.  They could do that until 2005, when the banking industry persuaded Congress to pass legislation to make it almost impossible to discharge a private student loan in bankruptcy.

If the banks knew their student-loan borrowers could file bankruptcy and discharge their loans, they would have an incentive to work with overstressed borrowers.  In fact, they might get out of the student-loan business altogether.

The Times' latest suggestion for reforming the massive student-loan debacle is typically tepid, not coming close to the heart of the problem. But what do you expect from a newspaper that makes its money selling advertising space to such luxury firms as Versace, Saks Fifth Avenue, and Armani? Do you think the Times really cares about some poor smuck who got in over his head by taking out a private student loan from Wells Fargo?

References

Editorial (2012, October 25). Student Debt Debacles. New York Times, p. A24.
   

Dear New York Times: Your Suggestion for Controlling Abuse in the Private Student-Loan Industry is Pathetic

Some people think all the problems of the world will be solved when people are better informed. That seems to be the view of the New York Times--the nation's nanny.

Today the Times--in other tepid and timid editorial--calls for better disclosure for private student loans.  The Times is responding to the recent report by the Consumer Financial Protection Bureau.   The report found that 40 percent of students who took out private loans were eligible for less costly federal loans.

 The Times supports a pending bill "that would require colleges and lenders to thoroughly explain borrowing options to students." In addition, the Times reports, the proposed law will "prevent unnecessary borrowing by requiring lenders to check with colleges to determine how much money students are eligible to receive."

Blah, blah, blah.

Here are the central facts about private student loans.

1. Like federal student loans, private student loans are almost impossible to discharge in bankruptcy.
2. Ninety percent of private student loans are issued to student borrowers with a co-signor. In other words,  parents are often co-signing their children's student loans and obligate themselves to pay them back if their child defaults.
3. According to the CFPB report (p. 64), 850,000 private student loans--an astonishing number--are in default.

Congress can do one simple thing to protect private student-loan borrowers; it can amend the Bankruptcy Code to make private student loans dischargeable in bankruptcy.  

References

Editorial, "Better Disclosure for Private Loans," New York Times, July 26,2012.