The Coming Student Loan Bailout

Alan Collinge

October 11, 2008

We can fully expect that student loan companies like Sallie Mae will have
their hands out to Treasury Secretary Paulson, seeking to be paid book value
for private student loans that have gone bad over the past few years. It is
important for citizens to understand the history behind this. This is far
more troubling for student loan borrowers than for home mortgage borrowers.
Here's why:

Student loan companies including Sallie Mae, Citibank, and others lobbied
Congress to have bankruptcy protections for private student loans removed as
a part of the 2005 Bankruptcy Bill- successfully. No one seems to be able
to find out who inserted this language into the bill- no congressman seems
to be willing to claim credit. Nonetheless, it happened. That the student
loan companies were able to get this passed was seen as amazing and
unprecedented by nearly all experts and analysts of this industry. That
this most basic, standard consumer protection could be removed for a
private, non federally guaranteed loan instrument is astonishing. The
industry claimed at the time that by removing this protection, the industry
would be able to make loans to people with lower credit scores. After
passage, of the bill, however, it was shown conclusively that the industry
did not follow through on their promise. Students with low or marginal
credit scores received loans at roughly the same rate as before the
legislation was passed.

What the industry did do, however, was pile on as much of this private loan
debt on the students as possible, often with credit card-like interest
rates, and at hugely unfavorable terms. Students across the country found,
after the fact, that they had been saddled with an insurmountable debt, with
interest that often exceeded their monthly earnings after graduation.
Unlike home mortgage borrowers who at least have standard bankruptcy
protections in place, student loan debtors are stuck with the principal,
interest, and massive penalties and fees. Sallie Mae has been very
successful at putting down attempts to reverse this legislation by members
of congress including Sen. Dick Durbin (D-IL), and Danny Davis (D-Il). In a
leaked strategy memo, Sallie Mae listed the preservation of current
bankruptcy laws as its #2 priority, and proceeded to spend millions lobbying
congress to that end.

Academia, of course, has been silent as a lamb throughout this whole ordeal.
The private loan market has grown at a whopping 24% annual rate, and tuition
at our nation's colleges continues to soar, usually rising at double the
consumer price index (CPI) year after year. The universities have, indeed
been sitting in the catbird's seat throughout this process.

Now, the industry wants the federal government to repay them for these loans
that proved to be wildly unfair to the borrowers, and caused so much
suffering in the citizenry. Even stalwart democrats, most notably Senator
Charles Schumer (D-NY), have taken the lead in representing the banks on
this issue, writing a letter to Secretary Paulson this week to make sure the
student loan companies get their bailout, with no mention of any action for
the students who now face a bleak future with massive, high interest debt,
and a disturbingly weak economy.

One can only hope that Congress will wake up to the fact that they are hired
to represent the interests of the citizens. Not the banks. The return of
basic consumer protections to student loans such as standard bankruptcy
protections should be at the top of the priority list for the next congress.
We should also hope, perhaps demand, that colleges and universities will
immediately lower their prices, and apply this discount fully towards the
debt burdens of the students.