The Private Student Loan Racket


At around 2000, college tuition was skyrocketing–a trend that has only accelerated–and federal grants and loans weren’t keeping pace. To fill the gap, financial aid officers started cutting deals with lenders to bring in private loan money. In the case of proprietary colleges, most of the large publicly traded chains forged arrangements with Sallie Mae, the nation’s largest student loan company. (Once a quasi-government agency like Fannie Mae, it became entirely private in 2004.) In exchange for pots of private student loan funds that they could dole out at will–meaning without regard for students’ ability to repay the debt-the schools gave Sallie Mae the right to be the exclusive provider of federal student loans on their campuses. Lenders vie fiercely for this privilege because federal loans are guaranteed by the government, meaning the Treasury pays back nearly all the money if the borrower defaults. Thus lenders get to pocket generous fees and interest and bear almost no risk.

Sallie Mae clearly understood that these private loans were going mostly to subprime borrowers who might not be able to pay them back; in 2007, Senate investigators uncovered internal company documents showing that executives expected a staggering 70 percent of its private student loans at one for-profit school to end in default. Investigators concluded that Sallie Mae viewed these loans as a “marketing expense”-a token sum to be paid in exchange for the chance to gorge on federal funds.

The frenzy only intensified after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. This made it almost impossible for those who took out private student loans to discharge them in bankruptcy and, not surprisingly, turned the private student loan market into a much more appealing target for lenders.

As a result of these changes, private loan borrowing has skyrocketed. In the last decade alone, it has grown an astounding 674 percent at colleges overall, when adjusted for inflation. The growth has been most dramatic at for-profit colleges, where the percentage of students taking out private loans jumped from 16 percent to 43 percent between 2004 and 2008, according to Department of Education data.

The spike in private loan borrowing is dismal news for students. Unlike traditional student loans, which have low, fixed interest rates, private educational loans generally have uncapped variable rates that can climb as high as 20 percent–on par with the most predatory credit cards. Private loans also come with much less flexible repayment options. Borrowers can’t defer payments if they suffer economic hardship, for instance, and the size of their payment is not tied to income, as it sometimes is in the federal program. Private loans also lack basic consumer protections available to federal loan borrowers. With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. Also, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping.


What’s Happening With the Proposed Student Loan Bill

My thoughts:

The accepted wisdom in the U.S. is that in order to get a ‘decent’ job, one must obtain a college degree. The problem is that tuition is prohibitively high and scholarships are scarce (even if you’re a exceptional athlete). So people take out student loans, with the implied promise that their post-commencement salary will enable them to pay off the debt.

When my brother graduated with his BA in the mid-80s, college grads were ecstatic to get $20,000 year jobs. When I and my brethren graduated college in the early 90s, we were still struggling for those $20,000 year jobs. Have early 21st century college grads fared better, overall, especially light of higher gas, food and otherwise general cost of living prices?

What do many college grads do when they realize there are no jobs? They go back to graduate school. And most likely, even if Mommy and Daddy ponied up the cash for undergrad, they’re not doing the same for their mid-to-late 20-something (at least), where does the money come from?

That’s right – MORE student loans.

Now you’re looking at MASSIVE debt, a worthless academic career placement department, and a job market that is only accessible by ‘who you know’. Each month that goes by means accrued interest on the loans, and yet folks are expected to move out of their parents’ homes, afford health insurance, and embark on a somewhat ‘expected’ (by U.S. standards) way of life.

Yet we’re in a recession, health insurance premiums are through the roof, a huge percentage of personal bankruptcies are filed by people because of medical bills but WITH health insurance, the cost of food, clothing and shelter has risen far beyond rate of median wages – in fact, if you look at the census info and an earlier blog post, you’ll find that median wages in the U.S. have been basically flat since the mid-1980s. That’s right; the cost of EVERYTHING has increased exponentially, but wages for the lower 95% of this country’s population have stagnated.

It used to be that married people could consolidate their student loans together. The divorce rate and subsequent arguing in court over who should be responsible for the debt caused this policy to change (good), which means a spouse cannot be held accountable their partner’s student loans. Which is obviously a problem if the partner with the loans is making much less than the partner without and the couple keeps separate finances (which happens).

Did I mention a 2005 law made it damned near IMPOSSIBLE to discharge student loans through bankruptcy? That’s right, student loans have NO consumer protections. None. And it doesn’t matter if you took out the loans where there WERE consumer protections, those were stripped away in 2005 and from that point on, you are screwed. Your wages can be garnished, your tax return withheld, your SOCIAL SECURITY BENEFITS taken away…

It is easy to ‘blame the victim’ (aka the person who took out the student loans) but no one can predict recessions, layoffs, medical crises, fire, flood, famine, business failures, lawsuits, stock market crashes, or simply a life that doesn’t go according to plans. No one should have to pay for their college education when they’re in their 60s yet many of Generation X are looking at that very real possibility. Changes must be made.