How To Fix The Student Loan System

Alan Collinge is founder of StudentLoanJustice.Org and author of The Student Loan Scam: The Most Oppressive Debt in U.S. History – and How We Can Fight Back (Beacon Press, 2009). He has given me several guest posts on the student loan crisis and here he is back with another.

How to Fix the Student Loan System

The federal student lending system is in critical need of structural reform. Unfortunately, listening to the presidential campaigns debate the issue reminds me of a sort-of “Good Cop, Bad Cop” skit, where for all the drama, nothing that either candidate (or their running mates) have proposed has any chance of solving the crisis we now face. Total debt now exceeds $1 Trillion and is accelerating. College prices continue to increase steeply. And importantly: the student loan default rate far exceeds that for sub-prime home mortgages, and is now at a point where the legitimacy of the lending system itself is threatened in a real way. Fortunately, the problem is surprisingly easy to identify, and its solution is similarly simple, albeit somewhat painful for the colleges, the banks, and a small number of bureaucrats in Washington.

The Problem:

Over the years, nearly all standard consumer protections have been removed from student loans. Concurrently, draconian (as well as lucrative) collection powers were given to the lending side of the system. Today, we are faced with a structurally predatory lending system where most of the players- including the federal government- have been making more money from defaults than loans which remain in good stead. Any western economist will agree that this is a defining characteristic of a predatory lending system. This has caused numerous related problems to cascade throughout the system. First, it has led to an environment where the Department of Education, institutionally, has lost the will to provide meaningful oversight of the lenders or the schools, and has also, clearly, abandoned its reporting duties to the public, and also to Congress.

In this environment, the schools have been given the green light by Congress, which sets the federal loan limits, to raise their prices at double, or even triple the rate of inflation year after year. The schools and lenders both have grossly misled the students about the value of the institutions, and also the real risk that the loans posed. Clearly, this would never have happened had the government, at least, had significant “skin in the game” on the side of the borrowers, rather than against them. This is what happens when bankruptcy and other protections are removed, and defaults become a preferred outcome for a lending system. And in the case of federal student loans (since the federal government guarantees (and now makes the loans), it is the worst sort of “big-government” one might imagine.

The Solution:

First, full bankruptcy protections must be restored to all student loans, at a minimum. This will guarantee that the Department of Education, institutionally, will no longer be wrongly motivated to serve the interests of the lenders/schools, and will instead have its fiscal interests in alignment with the students. It is also important, here, to hold as many individuals at the Department as possible to account for the many instances of public interest failures that have occurred there (and are occurring as we speak). Unless this sort of housecleaning occurs, the corporate culture that has overtaken the Department will dog any and all efforts at meaningful reform of the bureaucracy and is best dealt with first and foremost.

Once the reorientation of the Department of Education has been achieved, and Congress has the full story about the schools, their default rates, etc., Congress and ED should dramatically revise the lending limits to more accurately reflect the value of the education being received. This is a power that the Department of]Educationshould have used long ago, but chose not to. They should also kick out the worst of the bad schools (I suspect that at least 25% of the for-profits would be shuttered, and probably more than a few of the non-profits as well). There are surely other actions the Department will decide to take to ensure the schools are delivering a high-quality education at a low cost, but these are the two most obvious.

The result will be significantly lower costs, significantly decreased government spending, and hopefully better educated, less financially burdened citizens who will appreciate the federal student loan system, and the government that stands behind it. This is the minimum that must be done at the earliest possible opportunity to stabilize the current lending system, and avoid broad, public rejection of the lending system entirely.

Many citizens have been working diligently to compel Congress to acknowledge this problem honestly and legislate accordingly-in a manner that affirms their respective beliefs . At some point, however, our elected officials must act. Hopefully both President Obama, and Mr. Romney will rethink this issue, recognize the opportunity it presents each to affirm the value of their beliefs, and campaign accordingly. There is much to gain by addressing this issue head-on, and conversely, much to lose by sticking to the same old, tired scripts.

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