…by Meg White
The place Meg puts the stuff she wrote
The Cost of College and the Cost of Student Loan Reform
Categories: Commentary, Economy

by Meg White

If President Obama proposed removing a roadblock to success, one that would encourage kids to do better in grade school and one that promises to increase research opportunities and innovation on the same level as what happened in the 1960s, and at the same time save taxpayer money, who in their right mind would object?

You’d be surprised.

When Obama made it clear in his budget proposal earlier this year that he wanted to reform the student loan system, it seemed like a win-win-win. But then, greed and politics interceded. Here’s my favorite summary of the situation, posted by “Amanda” at the blog Wronging Rights:

Congressional Budget Office: It would be possible for the government to save tens of billions of dollars on student loans, through a process of no longer paying private lenders for doing nothing.

Obama Administration: Cool. We were planning to do that anyway.

Private Lenders: We would prefer to continue to receive billions of dollars for doing nothing, actually.

U.S. Congress: The lenders make a good point. Prepare for a fight, Obama Administration!

The president, in addition to simplifying the notoriously (and unnecessarily) complicated Federal Application for Student Aid, hopes to “restore the buying power of the Pell Grant for America’s neediest students and guarantee an annual increase tied to inflation” as well as “end wasteful subsidies to banks under the Federal Family Education Loan (FFEL) program, and re-direct billions in savings toward student aid.”

According to a commentary at Inside Higher Ed, “The president’s plan will save taxpayers $94 billion over 10 years by ending pointless subsidies to loan companies and using government funds to lend directly to students. Because loan repayment is guaranteed by the federal government, private lenders assume very little risk under the FFELP and yet are rewarded handsomely — a subsidy that makes little economic sense. Much of the savings from the move to direct lending would be used to increase the maximum Pell grant award to $5,550 for the 2010-11 school year, and make the Pell grant a mandatory government program guaranteed an increase — inflation plus 1 percent — every year.”

Over the past 30 years, average tuition costs have risen at more than double the rate of inflation and have far outpaced increases in family income, meaning more and more students have to take out loans, rather than pay as they go. The recession is stressing family income more than we’ve seen in quite some time.

The credit crisis has brought this issue to the fore, but other factors add credence to the idea of attacking the status quo now, rather than later. In addition to the annual crop of high school seniors going off to college and college graduates looking at their repayment options, we’ve also got a larger amount of unemployed or underemployed people who are going back to school rather than spend time looking for a job.

So, what’s holding up student loan reform? Well, there is a complex web of public and private collusion at the expense of students who are told that college is a nonnegotiable endeavor and that student loans are the best form of debt.

To fully understand the intersection of educational finance, industry, and the government, you’d do yourself a favor by reading Alan Michael Collinge’s The Student Loan Scam: The Most Oppressive Debt in U.S. History — and How We Can Fight Back (2009). Collinge artfully combines personal stories he’s collected on his Web site StudentLoanJustice.org from former students broken by debt and unsavory lending practices with the sordid tales of how lawmakers and officials collaborated with the lending and collections industry to make student loans the worst kind of legal debt a consumer can take on in this country.

President Johnson’s Great Society reforms basically created the direct government lending to students with the Higher Education Act of 1965 and how the opportunity transformed the country. When people realized they can afford to go to college, high school graduation rates soared. Technological and economic booms followed.

The act has since been amended many times over. In general, after lawmakers invited student loan companies into the process, private lenders got increasingly more in government subsidies and guarantees while at the same time getting more freedom to squeeze every last drop out of stretched borrowers.

Some of the most egregious amendments were in the collections department. Guarantors were all of the sudden allowed to change 25 percent collection rates. These agents can squeeze money out of Social Security and disability payments. The act was also changed to prohibit student loans from being discharged in bankruptcy, taking away the last resort for students saddled with more debt than they’ll ever be able to pay back.

Other changes related to privatization. Created in 1972, the Student Loan Marketing Association (Sallie Mae) was once overseen by the U.S. Treasury. Sallie Mae went from being sponsored by the government to being a for-profit, private corporation, thanks to congressional action in 1995. Between that time and 2007, the company’s stock increased by more than 1,600 percent.

Amendments also removed consumer protection standards that apply to other types of loans in this country, such as state usury laws and Truth in Lending Act. Collections agencies don’t have to abide by the Fair Debt Collection Practices Act, making life for a defaulted borrower roughly equivalent to Hell on Earth.

People who are in default can now be legally fired from public employment or have their state-issued professional licenses suspended for owing money on their student loans (what kind of sense does it make to take away a person’s livelihood when you’re trying to get them to pay you back?). Furthermore, aggressive collection techniques often follow borrowers to work, putting them at risk of losing their jobs.

How did this industry convince Congress to change the law? Well, they did peddle a few lies and exaggerations, such as the false impression of students declaring bankruptcy as soon as they left college, an image for which there was no evidence. But they also used good old-fashioned bribery.

Here are two of the many examples cited in Collinge’s book:

  • Rep. John Boehner (R-OH), then chair of the House Committee on Education and the Workforce (now House minority leader), got a job with a large student loan corporation for his daughter during a golf game with a company executive. He is also a top earner of campaign funds from the student loan industry; Sallie Mae has been the number one contributor to his leadership PAC since 1989. In exchange, he upheld the single-holder rule and eliminated the Super Two-Step loophole, making it impossible for students to shop around for better reconsolidation rates.
  • Rep. Buck McKeon (R-CA), who replaced Boehner on the Education Committee when he was elected House Majority Leader, raked in big bucks from the student loan industry through his PAC, which he used for his own re-election, as well as to pay his wife’s salary and to give away to other congressional candidates.

In exchange, the student loan industry got the changes it wanted to the Higher Education Act, as well as a committment from Congress to do everything in their power to kill off the competition: the federal Direct Loan Program.

“The lobbying paid off. Throughout the 1990′s and the beginning of the 21st century, the Republican Congress made repeated attempts to starve the Direct Loan Program by putting its funding into an account held at the discretion of Congress — making the program easier to kill,” Collinge writes.

It’s not just favors and donations that are souring lawmakers on Obama’s reform idea. The Pell Grant reforms Obama is proposing would remove from the budget and appropriations committees the power to determine the money spent on the grants. Politico notes that lobbyists are blaming the loss of “horse-trading” powers for the failure of the reform package to catch on.

The student loan industry has been critical of retooling FFELP, but has couched its concern in exceedingly cloying praise of Obama and generalized reform. This attitude seems indicative of the industry’s understanding of their souring public image.

Republicans are bound to use the same tactics to deny students the right to a level borrowing field as they will with healthcare: the illusion of lost choices. But the fact of the matter is that the way student loans are dispersed and serviced today is less competitive than virtually every other form of borrowing in this country.

Collinge writes that Republicans themselves suffocated any competition between the government and industry. He notes that even though three separate studies concluded that Direct Loans were cheaper for taxpayers than subsidizing a private program, fiscally conservative “voices were drowned out by Republican colleagues who apparently had other motives for their championing of the FFEL Program over the Direct Loan Program.” According to The Washington Post, the Bush Administration started stamping out student loan reform secretly as one of their very first agenda items back in 2001.

The fa├žade of a panoply of lending agencies covers up the Sallie Mae monopoly by utilizing different names, but the money all goes into one pot. Sallie Mae ate up nonprofit lenders, guarantors, and collection agencies. By 2006, it was not only the biggest company in all three areas of the student loan business; but also it was four times larger than its closest competitor.

But in order for this sweetheart deal to work, loan companies had to get in good with the student supply system. For years, colleges have signed preferred lending agreements with specific companies. Financial aid directors across the country have been investigated for trading preferred lending contracts for kickbacks. Also, the U.S. Department of Education has been so fully stocked with former student loan industry executives that competition was never even on the table.

Because lenders make more money from defaulted loans, the needs of borrowers are routinely disregarded. Lenders have been found to have made false claims about the process through which loans go into default, such as pretending they got a hold of a borrower and demanded payment. Sometimes the borrower didn’t even realize payments were due yet. In fact, Sallie Mae agreed to pay $3.4 million to settle a case where they’d been accused of defaulting loans after making absolutely no efforts to collect the debt. Sallie Mae was even found to have sent notices to the incorrect address and given borrowers inaccurate information to force default (For more on Sallie Mae’s legal troubles, click here).

But the problem with collectors is often the opposite. These companies (which are often run by the same lending companies that allowed the loans to go into default in the first place) are known for harassing neighbors, threatening co-workers and family members of borrowers and using abusive and profane language in order to get money that often isn’t there.

In Obama’s proposed system, Sallie Mae et al. would have to compete for the priviledge of servicing government loans. The administration recently suggested lenders that engage in deceptive practices would be shut out.

This is another case of Republicans aligning themselves with a reprehensible industry (see Big Oil, Agriprocessors, Wall Street gamblers, etc.). Student loan providers are no different. Premiere Credit of North America is a salient example. The company maintains a shark tank in their lobby to inspire employees. According to its Web site:

Sharks are constantly moving forward, resistant to infections and cancers, and have the ability to heal quickly from severe injuries — qualities that Premiere Credit of North America nurtures as part of its corporate culture.

When you consider the moral bankruptcy of the student loan industry, the shark imagery is certainly appropriate.

Is this the type of industry the GOP wants to align itself with? Really? To be fair, conservatives also say the reforms will result in lost jobs. Indications are that the job loss will be gradual as the program is phased out. Also, the government will no doubt need to hire more people to manage the expanded federal loan system.

On a larger level though, do we want employees who have been trained to operate in a corrupt, parasitic system such as the student loan industry (some of whom have violated the law, according to Collinge and others) to keep their jobs?

The most basic question that should be posed here should be an easy one. Who do we care more about: lenders or students? Maybe this last thought will help conservatives make up their collective mind (from Inside Higher Ed):

If Sallie Mae is so concerned about the job security of its employees, perhaps it should do some soul searching: Despite announcing losses of $213 million in 2008, the company paid its CEO more than $4.6 million and its vice chairman more than $13.2 million — plus use of the corporate jet.

Hmm… sounds familiar, doesn’t it?


There is much more to this story than can fit here. Read Alan Michael Collinge’s book and check out his Web site, where you can learn more about student loans as well as read the heartbreaking stories of people who have had their lives irrevocably turned upside down due to student loan debt.

While Obama’s reforms and other changes sought by Congress are a good start, there is so much more that needs to be done to fix the system and make it possible for usury victims to become productive members of society once more. If you or anyone you know is contemplating taking out student loans, consolidating or facing default — please, educate yourself.

Originally published at BuzzFlash.com.

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