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The Student Loan Scam: Students Still Need Basic Lending Protections

Alan Michael Collinge is the author of The Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back. He is the founder of StudentLoanJustice.Org.

4229As I was finishing the manuscript for my book, The Student Loan Scam, in early 2008, Americans collectively owed roughly $650 billion in student loan debt—an incredibly large number at the time. Today, however, that amount has grown to surpass $1 trillion and continues to increase at a rate faster than historical debt growth prior to the financial crisis. Defaults, too, have skyrocketed, and nearly all of the failures in the lending system I call attention to in the book have continued unabated. This issue has grown, I would say, from a significant problem to a major crisis. This has greatly strengthened the book’s core argument: the need for a return of standard consumer protections (like bankruptcy) to all student loans. 

Since the book’s publication, student loan debt surpassed credit card debt as the largest category of consumer debt (excluding real estate). While the banking crisis compelled banks to tighten lending and reduced borrowing across all other lending categories, student loan borrowing actually accelerated significantly. Colleges and universities, to their discredit, have not exactly adjusted their prices in deference to the hard economic times, but have instead increased tuitions and fees at an even faster rate.

Defaults, unsurprisingly, have surged. The cohort default rate (the percentage of loans defaulting within the first two fiscal years of repayment) has grown from less than 5% to over 9%. In 2010, however, this metric was found to be vastly lower than the actual, lifetime default rate (supporting a controversial claim I made in the book). Specifically, government data showed that for 1995 graduates the default rate was about 20%. So while it is impossible to say what the true default rate is currently, we can say confidently that for years it was comparable to the subprime home mortgage default rate of 25%.

Another controversial claim made in the book was that the government may actually be making, not losing money on defaults. Initially, the Department of Education and Beltway analysts disputed this claim vigorously. Since then, however, a leading financial aid expert has publicly confirmed the claim.

Importantly, the public is speaking out about this problem, most notably through the Occupy movement that started last year. Student demonstrations, too, are occurring with some frequency in the U.S. These citizen actions have, however, been largely ineffective for various reasons. The Occupy protests, of course, were shut down rather abruptly and haven’t yet re-emerged. The student demonstrations have usually consisted of simple, reactionary protests against tuition hikes. Such strategies have been stymied or co-opted by the universities, who have become quite good at shifting the blame to state or federal cuts. This has left most student groups conflicted in purpose or changing their protests to calls for more funding. Going forward, it is key that the students become more knowledgeable on the issue so that they can pursue more informed and effective courses of action.

It is also important to note that real, investigative journalism on this issue evaporated in the wake of the financial crisis. From roughly 2009-2011 media coverage of student loans focused almost exclusively on for-profit colleges and the private student loan industry, and ignored other issues, such as those mentioned above, the cost of college, and the lack of disclosure to students and their families about the absence of consumer protections. That has begun to change somewhat as the shear magnitude of outstanding student loan debt and related public protest have become impossible to ignore, but to this day it remains extremely difficult to convince reporters, producers, and others to ask the tough questions outside of this non-starting, “non-profit vs. for-profit” narrative.

Much has happened over the past three years that cannot be conveyed in this piece. For example, I’ve left out much about our experiences in Washington, D.C., the interesting middle-ground that this issue sits on (drawing from both liberal and conservative principles), and the resulting mixed bag of support and attention we have received. The impact of President Obama’s overhaul of the lending system and the post-crisis response of the student lending industry, colleges, advocates, and other key players are also important but not covered here. Finally, the increasing harm that is being done to real people as a result of living under the weight of this debt is critically important, but goes unaddressed here.

I believe that, with increased pressure from those affected by the high costs of college (this includes both borrowers and those who pay out-of-pocket), Congress can move forward on this issue, and StudentLoanJustice.Org is devoting its grassroots efforts towards that end. The most important element in this fight is the level of action by citizens. Students, who will likely prove to be the most important group in this fight, need to see why returning consumer protections to student loans is key to getting prices and default rates down, making student loan debt manageable, and fixing a plethora of systemic problems that have arisen in their absence. Their actions today will not only affect their future financial well-being—but also the economic health of the entire country.