A nationwide financial disaster almost as farreaching as the foreclosure crisis is occurring quietly all around us. It has already turned hundreds of thousands if not millions of college-educated people into indentured servants, trapped in debt. The effects on their lives are crippling, and the broader economy suffers as the income of a large segment of the population is squeezed for interest payments and fees on loans taken out to pay for college, or for graduate or professional school.
The scale of the problem is not easy to assess, but there are clues. Some $96 billion a year is loaned to people attending colleges, universities and trade or professional schools, and that doesn't count so called "shadow" borrowing, such as taking money from home equity lines of credit, retirement accounts and credit cards (in 2005, a national survey by Smith College found that 23 percent of students were using credit cards to help pay their tuition).
This year Americans' total outstanding student loan debt from federally funded and private loans was estimated at $833 billion, a sum that exceeds our credit card debt (though the two kinds of debt overlap, since, as the Smith study showed, credit cards are used to help pay tuition). The Chronicle of Higher Education reported in July that the 15-year default rate for federal loans is 20 percent; for loans to community college students, 31 percent; for loans to students at for-profit schools, 40 percent.
What has been reported about this problem so far is only the tip of the iceberg. There has been some press coverage of conflicts of interest between college financial aid administrators and large lenders. A recent wave of reports targets excessive default rates at for-profit universities. Still, the systemic scandal in the student loan industry, which reached from Congress to scores of institutions—not just the half-dozen mentioned in the newspapers—has only been reported in a few places, and the story seems not to have lodged in the public consciousness.
But Alan Collinge, author of The Student Loan Scam and founder of the group (and website) Student Loan Justice, is determined to get that story told as often as it takes to end the abuses in the system.
At the heart of the problem is the fact that, as Collinge explains, the conventional protections for borrowers don't apply to student loans. They can't be discharged in bankruptcy, even after many years. Wages, tax returns, including earned income tax credits, and even Social Security and disability benefits can be garnished to pay them.
Incredibly, professional licenses can be revoked as a penalty for defaulting, making it even less likely that the borrower will ever catch up.
And many classes of student loans are even exempt from truth-in-lending laws. Nonprofit state-operated lending operations were also exempted from the Fair Debt Collection and Practices Act. In many cases, state usury laws don't apply to student loans.
The result, Collinge says, is that borrowers have been set up to fail because defaulted loans are more lucrative for lenders than loans that are paid, especially loans that are paid on time. Collinge's website, www.studentloanjustice.org, carries stories from every state in the country of people whose loans have ballooned to three or four times what they originally borrowed—more than they will be able to pay off in their lives. In a few cases people have left the country, gone underground, even committed suicide.
"Trapped in limbo with a $120,000 tab on my head," one poster writes, "I have been told frankly by my lenders that with all my interest and the 30-year repayment program (because I can't do it any other way right now) I will be paying somewhere in the range of $500,000 and one million dollars. All in the name of a dream wherein I would become a journalist, at a meager $25,000 salary, chasing stories and serving the public.... I had the thought of killing myself many times, but the realization that my loan's responsibility would merely fall onto the shoulders of my co-signer (my mother) is what really keeps me going."
Meanwhile, the lenders have been taking no risk, because the loans are guaranteed by the other victims of the scam: the taxpayers.
Collinge learned about the student loan debacle by hard experience. He borrowed $38,000 to acquire three degrees in aerospace engineering, and owed $50,000 when he finished his schooling in 1998. Given the income he expected to enjoy, his debt load didn't seem insuperable. But things took a turn for the worse in 1999, after a month in which he was unable to come up with the whole amount of his loan payment. His lender, Sallie Mae, hit him with a fee. From then on, though he continued to make his payments regularly, the fee he had originally been told was a one-time charge was repeated. He appealed to the lender to no avail.
In 2001, with the loans eating up more than 20 percent of his income, Collinge resigned his $35,000-a-year job as an associate scientist at a university after receiving a "weak offer" of a lucrative job in the defense industry. The job didn't come through; the events of September 11 chilled his search; and though unemployment should have gotten him a forebearance, Sallie Mae threw his loans into default. His debt soon rose to $60,000; he was constantly hounded by collectors.
For years Collinge worked 90 hours a week and more to pay off a debt that was swelling from the original $38,000 to $103,000. His lenders refused to negotiate. "I became obsessed," he writes, "literally unable to put my student loans out of my mind for more than a couple of hours at a time. ... Consumed, I began doing research. I found that Sallie Mae and other lenders made far more money from defaulted loans than they did from those that remained in good standing. ... I found that well-connected student loan executives and shareholders had carefully orchestrated a lobbying campaign to strip away even the most basic consumer protections from student loans."
He also found that his case was not unique—that "millions of other citizens were trapped just as I was."
How did it all start? There's always a layer of paternalism in society's view of students, who in fact are targets of much underreported exploitation—by credit card companies, slumlords, textbook scammers, employers who pay students less than nonstudents in the same age group and count on their transience to make them unlikely to report workplace abuses. Take paternalism, add a little corruption and a lot of profit motive and you get, among other things, the student loan scam.
Paternalism was at the root of the idea, dating from the 1970s, that student loans were defaulted on more than other types of loans—a belief amped up by anecdotes about a few doctors and lawyers who finished their training and promptly staged phony bankruptcies to shed their student loans.
Yet a GAO report done in the late 1970s, when student loans could be discharged in bankruptcy after five years, showed that the default rate on student loans was only 1 percent (for purposes of comparison, the rate of delinquency on home mortgages at that time hovered around 4.6 percent, while the rate of foreclosure was .4). Nevertheless, the regulations about student loan dischargeability were tightened so in the 1990s and again in 2005 that now even many private student loans, as well as federally backed loans, can never be discharged in bankruptcy.
In other ways as well, students have been treated like children who don't deserve the same protections as "adult" borrowers. Particularly in the 1990s, after the largest student lender, Sallie Mae, had turned from a government entity with Treasury Department oversight to a private lender, protections were stripped away. Not only was discharge in bankruptcy eliminated; student loans were even exempted from state usury and truth-in-lending laws.
Borrowers whose loans were in default could have wages garnished, tax refunds seized, Social Security and disability payments garnished. Their credit ratings suffered. Public employment could be terminated, professional licenses revoked. Collinge's book includes the story of a man who borrowed $70,000 to become a chiropractor, then fell behind with his payments, lost his license and saw his loans balloon to $400,000.
"Revoking the professional licenses—it makes no sense," Collinge told the Advocate in a telephone interview. "Who designs that kind of a system? It's a trap unlike any I ever thought I would come up against in this country."
In 1998, the government approved collection charges of 25 percent on defaulted loans. That meant that 25 cents of every dollar borrowers attempted to pay back went to the collection companies, which were in some cases owned by the lenders themselves. The fees left people already struggling to pay back their principal and interest so far behind they couldn't catch up.
With respect to the ballooning effect of fees, the pitfalls for the student loan borrower are the same as the pitfalls of paying off credit card debt. An important difference is that in the worst-case scenario, bankruptcy, credit card debt can be discharged.
Another difference is that credit card users are not prohibited from consolidating their debt with another lender who offers better terms. But among the advantages student lenders fought for and won from Congress was the right to prohibit borrowers from consolidating most loans with firms other than the original lender. A loophole called the Two-Step, which allowed borrowers willing to go through a complicated process to seek lenders offering more favorable terms, was outlawed in 2005.
In 2006 the so-called "single holder" law was repealed due to outcry by smaller lenders, but borrowers of federal loans must still stick with whoever becomes their lender the first time they consolidate. The result of all this has been to keep many students trapped in relationships with their original lenders.
The lives of people whose loans go into default, even for the most pardonable of reasons, are severely damaged. "The student loans of Robert, an Air Force captain, defaulted in the mid-1990s while he was serving in the military," Collinge writes. "His original $35,000 in loans grew to $155,000 despite his efforts to negotiate with the lender, the Illinois Student Assistance Commission. ...Like most StudentLoanJustice.org members, Robert absolutely agrees that he should pay what he owes, but he simply cannot deal with a debt of this magnitude."
One of many Valley residents struggling to pay their loans for college and graduate school told the Advocate by email that she pays $1,100 a month on a schedule that is supposed to get her loans paid off in 10 years.
"My starting salary after taxes totals $2, 800 a month, making my approximate loan payments total nearly 40 percent of my salary," she wrote. "I decided to apply for extended repayment, which allows me to decrease my monthly payments and pay for 25 years. I promptly called to check on the status of my application, which the employee at the loan company stated would be processed in 10 to 14 days. One day later, I received an e-mail stating that my application for 'graduated repayment' had been denied on the basis that I was still in school. Interestingly, I neither applied for graduated repayment, nor am I still in school. ... I will have to spend an inordinate amount of time on hold or arguing with the loan company, all in order to assure that I will be able to make my loan payments on time. "
Though she has no dependents, this young woman is so concerned about her co-signers that she has added to her living expenses by taking out a life insurance policy to protect them in case she dies.
The growth of the student loan business was not just a result of the rise in college costs but at least partly a cause of it, Collinge argues. He's not alone in that hypothesis; Secretary of Education William Bennett said in 1987 that the increased availability of loans had changed the way colleges did their budgeting. The result, says Collinge, has been a bubble that has created fortunes for student loan company executives at the expense of students. Between 1999 and 2004, for example, Sallie Mae CEO Albert Lord received $225 million in total compensation.
The largest lenders, like Sallie Mae and Nebraska-based NelNet, have been indefatigable in their efforts to make money from every sector of the student loan business. After years of working to take market share away from the Direct Loan program, they later courted and got contracts worth hundreds of billions of dollars to service loans made through that program. Ever more favorable laws allowed them to own collection companies, creating a profit stream through late fees and interest on defaulted loans.
Sallie Mae and other lenders deny that borrowers are set up to fail. "Nobody wins when a student loan customer defaults," Sallie Mae spokeswoman Patricia Nash Christel told the Advocate by email. "The only way any lender earns money on a loan is if it goes into repayment and stays in repayment. Simply put, we lose money if a borrower defaults. Even if we collect on a defaulted loan, we make only about one-third of what we would have made on that loan if it had stayed in repayment. ... In academic year 2009-2010, Sallie Mae's company-wide default prevention efforts helped 2 million customers resolve their past-due accounts and avoid default on $38 billion in federal and private student loans."
But it's not only borrowers who have suspected they were set up to fail. In 1998 a Florida firm, Cybernetics and Systems, paid the government $30 million in penalties for claiming falsely that it had contacted borrowers before throwing their loans into default and requesting payment from the government for the "defaulted" loans. In 2001 Sallie Mae paid a much smaller sum, $3.4 million, to settle a case involving a similar practice.
In the heyday of big lending, before an investigation by the office of the Attorney General of the State of New York led to a crackdown, financial aid administrators at one institution after another were gifted, bribed and otherwise blandished by the major loan companies to establish so-called "preferred lender" programs that channeled their students toward those companies. In 2007, financial aid officials David Charlow of Columbia University and Ellen Frishberg of Johns Hopkins both left their posts under clouds because the New York AG's investigation had exposed their ties to the lender Student Loan Xpress; Frishberg in particular became the lightning rod for publicity about the scandal.
But the focus on two big-name schools actually obscured the fact that financial aid administrators in colleges across the country were found to have improper relationships with lenders, accepting their payments, owning their stocks. Sometimes lenders' employees, rather than college financial aid staffers, actually served as loan counselors for students. Lenders' logos appeared on athletic gear; lenders set up relationships with alumni associations to help business flow their way.
The New York Attorney General's office came on the scene very late in 2006, when then-AG Eliot Spitzer, just before assuming the governorship of New York State, identified the student lending business as ripe for investigation. A player of lesser standing than Sallie Mae, Education Finance Partners, had admitted to the AG's office that it had given a college a piece of its business in return for being given "preferred lender" status and having student borrowers steered its way.
Early in 2007, when Andrew Cuomo replaced Spitzer as AG, he immediately moved to investigate how wide the practice was and soon publicly identified several lenders and their complicit colleges. In a bold move, Cuomo also included colleges from outside New York State in his accusations that lenders and institutions were engaging in conflict of interest at student borrowers' expense. Early on he came out swinging against Education Finance Partners and its "kickback" agreements with Baylor, Boston University, Clemson, Drexel, Duquesne, Fordham, Long Island, Pepperdine, St. John's University, Texas Christian University, Washington University (St. Louis), the University of Mississippi and 48 other schools not named in public releases.
Before the end of 2007, Cuomo had instituted disciplinary measures against Citibank, Sallie Mae, JP Morgan Chase, Bank of America, Wells Fargo, Wachovia and College Loan Corporation—the country's largest student lenders—as well as Education Finance Partners and other smaller players. His investigation brought to light one abuse after another: one private lender who advertised interest rates "as low as" 7.15 percent was actually charging 16 percent on 40 percent of the loans it offered students. Cuomo's office forced the termination of "preferred lender" agreements, gifts from lenders to college financial aid administrators, and arrangements allowing lender employees to serve as loan "counselors" in colleges all over the country.
This year, President Obama terminated the role of the large banks and private lending companies in the student loan business, a measure the Congressional Budget Office estimates will save the government $61 billion in subsidies over the next 10 years. The new rules also put a lower cap on monthly payments as a percentage of income, and on the number of years borrowers must go on paying.
But fundamentally, Collinge says, borrowers are still up against the same odds as before, because the new rules do nothing to restore the protections borrowers of other types of loans enjoy.
"I support [Obama's] program," he says, "but it does nothing for students. It saves the government a ton of money, and more than that, the government also is getting the interest, where the lenders were getting the interest. But in terms of the predatory nature of the business, the system is the same. The bad guys are still going to be doing the same things they did before. Sallie Mae and NelNet will still be the people that decide whether a student defaults or not. Their collection companies will still be collecting debt. ... The most damaging aspects of the system persist."
"I've got one primary wish," Collinge adds. "Number one, bankruptcy protections have got to be re-established. The reason bankruptcy protections are so important is to prevent a predatory lending scheme from evolving. That will cause the federal government once more to have a stake in the success of the student rather than in the failure of the student.
"They get 25 cents on the dollar—on average they get $123,000 back from the borrower on a student loan for $100,000. There's no statute of limitations. ... Sallie Mae often brags that they can predict very accurately who is going to default. They treat the people they predict will default much worse. They don't grant them forbearances. At the root of it is [lack of] bankruptcy protections, which enables the whole system to start cycling up in this predatory fashion."
In 2007, with the financial crash looming, even a Sallie Mae executive was quoted in Time saying that it might be necessary to return to the older law allowing student loans to be discharged in bankruptcy after seven years, Collinge points out.
Wish number two, Collinge says, is that the system would stop garnishing people's Social Security. "I've gotten submissions [for the Student Loan Justice website] from senior citizens who couldn't buy medications as a result of a percent of their income going for their loans," he says.
Wish number three is that the government would put a stop to the revocation of borrowers' professional licenses—an irrational penalty, it would seem, since it not only cripples the borrower but even goes against the interest of the lender.
What can borrowers struggling with a mountain of debt do in the meantime? They can tell their stories, says Collinge. They can follow the issue, join Student Loan Justice or kindred organizations at websites like forgivestudentloandebt.com, bankruptyourstudentloans.com, or projectonstudentdebt.org. They can support reform measures in Congress and in their states and transparency in financial aid practices at their local educational institutions.
They should let their Congresspeople know about their situations. Sometimes—though rarely—a Congressperson has actually managed to get a constituent a measure of relief. "More important," Collinge writes, "borrowers should contact their local officials because these representatives need to understand the depth, breadth, and seriousness of the student loan problem. ... Student loan borrowers, particularly those whose debt has exploded to unmanageable proportions, need to realize that suffering in silence serves only to perpetuate a predatory lending system that is in critical need of reform."