By Charlotte Allen
Alan Michael Collinge is back in his gadfly role agitating against the student loan industry. Collinge is the author of last year's The Student Loan Scam: The Most Oppressive Debt in U.S. History---and How We Can Fight Back (Beacon Press) and founder of the website studentloanjustice.org, dedicated to, among other things restoring the bankruptcy protection for student loans that Congress removed for all but the most hardship-hit borrowers in 2005. Writing for the New York Times blog "The Choice," which deals with college admissions and financial aid, Collinge calls the federally guaranteed student-loan system "a predatory lending scheme" and argues that Congress should curb the Education Department's power (also granted in a 2005 law) to "extort not just the original principal and interest from borrowers, but also a massive amount in penalties fees and collection costs."
Collinge wrote his book from his own 20-odd years of disastrous experiences with student loans. He graduated from the University of Southern California in 1988 with three degrees in engineering and $38,000 in loan debt, an amount that ballooned to $100,000---still mostly unpaid two decades later---when he fell behind on monthly repayments after consolidating his loans with Sallie Mae (the nation's leading buyer of student debt) and penalties, back interest, and collection fees began to accrue with lightening speed. Loan consolidation often (although not always) means that graduates can lock in lower interest rates than they might otherwise pay, but it can also entail stretching out the life of the loan to as long as 30 years (the tradeoff is lower monthly payments). Collinge's New York Times blog dovetails with the Obama administration's goal of eliminating private lenders (banks, credit unions, and Sallie Mae) from the federal student-loan system and requiring all student borrowing to come directly from the government itself.
It's difficult to say whether Collinge, who, with his engineering degrees could expect decently paying employment, actually got a bad deal from the federally guaranteed system. For one thing, he took out his loans long before the 2005 law went into effect, although as early as 1976 Congress had placed some limits on using bankruptcy to get rid of student debt. One might also ask whether it was prudent for Collinge, if he was strapped for college money, to choose to attend an expensive private university such as USC rather than a cheaper state school where he would not incur so much debt. Furthermore, students who borrow from private financial institutions under the federally guaranteed system enjoy below-market interest rates (the Department of Education sets annual caps), a nine-month grace period after graduaton during which no payments are due, and an array of forgiveness and deferment arrangements if economic hardship forces borrowers to fall behind. For example, the going interest rate (according to Sallie Mae) on Stafford loans, products of one of the most widely used federal loan programs, is 6.8 percent, and the going rate for PLUS loans (products of another popular program) is 9 percent (the rates are even lower for students whose income qualifies them for a federal interest subsidy). Compare that to the 17.28 percent annual rate on credit-card debt, and the interest rate that Collinge agreed to pay on his consolidated loans (it's currently capped at 8.25 percent) could hardly be considered "predatory." It should be remembered, too, that student loans are unsecured loans (no mortgaged house, no car or other collateral) to unemployed or partially employed people who can be as young as 18. In other words, the loans are ipso facto risky, which is why government guarantees are an integral part of private student lending. A government guarantee means that taxpayers pick up the tab when a loan goes into default---so it is perhaps not surprising that Congress has made it difficult to cancel the loans in bankruptcy court.
Still, as Robert VerBruggen, an associate editor of National Review wrote in his review of Collinge's book last year, genuine abuses exist in the public-private partnership that is the federally guaranteed system. For one thing, many lenders have entered into all-too-cozy arrangements with the colleges they service. In many cases the schools themselves make the loans, then flip the debt to financial institutions for a premium---essentially a cut of the profits on the loan. Perks for college financial officers such as parties and trips have helped sweeten the relationships.
Furthermore Sallie Mae, which began life during the 1970s as a government-sponsored enterprise along the lines of Fannie Mae and Freddie Mac in the mortgage market but has since privatized, has used its clout on Capitol Hill, as have other big lenders, not only to all-but-eliminate bankruptcy protection where student loans are concerned, but to forbid graduates to consolidate their loans more than once, so they're barred from moving to another lender that offers a lower interest rate. Private lenders can own the collection agencies that deal with borrowers in default (in return for a cut of the proceeds), and that gives lenders "the perverse incentive to to let loans go into default rather than trying to collect them" in timely fashion, VerBruggen noted. "It's also worth noting that in the student-loan industry, whre bankruptcy is not a threat and collection powers include wage garnishment, defaulted loans are actually profitable on balance," he wrote.
Collinge, besides advocating a relaxation of the current draconian bankruptcy restrictions, urges an end to government involvement with private lenders in favor of direct federal aid to schools and students. This is essentially the position of the Obama administration, which hopes to use savings from cutting out lender middlemen to boost federal Pell grants to low-income students. VerBruggen, concerned with the perverse effects of handing free money to young people---namely the temptation on the part of colleges to raise tuition so as to cash in on the handouts---proffers an alternative proposal: Requiring students to give up a percentage of their income after graduation rather than make loan payments. This would keep private lenders in the system but give them an incentive "to pick the students who would stick with college and benefit from it."
That would be a good start. In his New York Times blogpost, Collinge cites a 2003 study by the Education Department's inspector general estimating that that the true lifetime defaults on education loans (in contrast to the two- and three-year default rates that the department has been issuing) were 25 percent for nonprofit four-year institutions, 35 percent for nonprofit two-year institutions, and 45 percent for for-profit institutions. That's about one out of every three student borrowers (and two-thirds of college students these days graduate with debt). Those high default rates are a near-certain indication that large numbers of those who enroll in college these days have gotten nothing worthwhile out of college in terms of improving their earning prospects. It's likely that most of them should never have enrolled in college in the first place.
Among the 137 comments on Collinge's New York Times blog-post, this one stands out:
I am a 35 year old mother of six that works 80+ hours a week, at two jobs, to pay for my return to school. I do qualify for some grant money but that doesn't completely cover the expenses. I won't borrow because I did that my first trip to college. I borrowed around $12,000 and it now has turned into close to $60,000 I think. I quit checking the statements because it causes me to get very depressed.
Even though I'm in school full time, I can't get the interest stopped because my loans are consolidated. You know, the paper you can sign that is going to save you so much money. Well it cost me thousands! I am now responsible for my ex-husbands loans because my name is on the loan first. They haven't even once went (sic) after him. He told me it's my problem but yet (sic) when I need a forebearance or deferment, I have to get his approval. How fair is that?
It's hard to know where to start in assessing this sad story, but its sub-college-level command of English grammar is as good a place as any.
Who told this woman that she was college material, much less encouraged her to borrow to finance a degree that she stands no hope of obtaining for many years, if ever? Other parts of her comment indicate that she is currently employed as a paramedic. The median annual salary for that occupation is $39,000, not great for someone trying to support six children but not too far below the national median household income of $46,000 a year (and she likely earns a few thousand dollars more from her second job). The worst thing that happened to this woman (putting aside her choice of a ne'er-do-well for a husband) was that the government made it easy for her to borrow a substantial sum of money to enroll in an institution of higher learning for which she was not qualified. The second worst thing was that the government gave---and continues to give---money to her that enables her to continue pursuing that hopeless goal. Wouldn't she be better off focusing on working her two jobs and devoting her spare energies to raising her children to succeed in college or elsewhere?
Collinge's proposal that bankruptcy laws be modified so as to make it easier to discharge student-loan debt under genuine hardship conditions sounds humane. His proposals, seconded by VerBruggen, to make lenders in the federally aided system more accountable to borrowers and taxpayers sounds only just, given that lenders benefit from federal largesse. But the best way to benefit taxpayers---and young people contemplating college themselves in the long run---might be to stanch the free flow of federal tuition-assistance funds in the first place.