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Alan Michael Collinge: The Way Forward on Student Loans

Alan Michael Collinge responds to the State of the Union and what the President promised to student borrowers. Collinge is the author of The Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back and is the founder of

Book Cover for Student Loan Scam Last night, President Obama's first State of the Union Address clearly showed a man determined to inspire bipartisanship from the Republicans. At the same time, he pulled no punches in repeatedly reminding us that the banking crisis can be blamed largely on the banks, and at times even seemed to take pleasure in unloading on Republicans from his well-stocked quiver of damning facts. On the student lending front, Obama described the Direct Lending program, the billions that will be saved by cutting out the middlemen banks, and repayment programs that will guarantee students an easy time of repaying their loans. This was one of the least controversial of Obama's initiatives over the year, and not surprisingly was met with relatively broad approval from the audience.

Given this, one might think that student advocates like me would be pleased, or at the least, have little to complain about. The reality, however, is that I am not pleased. In fact, I, and anyone fighting for the return of standard consumer protections to student loans couldn't be more disappointed. Obama's plan does nothing to bring back fundamental protections that were taken away during the past administration, and does nothing to address systemic problems such as college costs and government oversight.

Here is the problem with the student loan system: over the past couple of decades lenders have used Congress to remove nearly all consumer protections, such as bankruptcy protections, statutes of limitations, truth in lending laws, and fair debt collection practices. Similarly, collection powers were given to the industry that surpass those of all other lending systems, including the ability to garnish wages and even social security and disability income without a court order, withholding of professional licenses, denial of employment, and other powers over and above the standard collection powers that creditors generally enjoy. The resulting system gives us lenders who make more money when loans default, government agencies that also have a strong financial incentive to promote defaults (these include both state agencies and the Department of Education), and universities who can easily raise their tuitions and have no incentive to help students graduate on time and keep quality high.

On the ground, the results we see from this wrongly incentivized system are spiraling college costs, increasing enrollment times, and higher default rates, in addition to corrupt relationships between educational institutions and lenders. Most importantly, however, are the borrowers whose lives are wrecked by being trapped in a system which demands that they pay back double, triple, or often a far higher multiple of what they originally borrowed.

Obama's plan, while it may be a good thing for a limited number of current and future students, does nothing to bring back the consumer protections needed to prevent these horrible outcomes. As an aside, it also does little to "cut out the middleman" as advertised. Sallie Mae and other industry heavyweights have already won contracts to both service and collect on loans in the new program, and so will still be serving in conflicted roles.

While the plan does streamline the existing system, and redirect a significant amount of the profit to the federal government, this has no real impact on the students. In fact, the system will look and act almost identically to the existing system. Parents will continue to see the same level of tuition increases, and the student loan executives known for building luxury golf courses in their backyards, buying Major League baseball teams, and even entire sports leagues will still be joined to the government at the hip.

We elected our current president to bring back good government. What better place to start than with the Department of Education? Congress, too, must own up to its hand in this, and as a first step, should immediately return standard consumer protections, such as bankruptcy protections, to student loans. Only then will the system work for the benefit of those it is supposed to be serving: the students and their families.