The federal student loan system has become predatory. The root cause of this is the unprecedented removal of all meaningful consumer protections, and the establishment of draconian collection powers, which caused the lenders, guarantors, collectors, and even the Department of Education to make more income when students default on their loans. The wrongly directed financial motivations caused, over time, the system to be inclined towards acting in ways that would promote, rather than discourage defaults. In this environment, damaging consequences resulted including an incredibly high default rate, heinously bad or nonexistent oversight, uncontrolled inflation, indefensible corrupt activities (systemwide) and other systemic failures too numerous to list. These results are in addition to the personal damage and destruction that has been visited upon citizens who were trapped in this predatory system, and their families.
Please see our argument.
Congress can and MUST swiftly correct this system defect by returning the critical consumer protections that they should never have removed. At a bare minimum, this includes bankruptcy protections.
1. Student loans are the only loans in history to be exempted from bankruptcy protections, statutes of limitations, truth in lending laws, fair debt collection practices, refinancing rights, state usury laws, and others.
2. The special collection powers exceed those for every other type of unsecured loan in the nation, and include wage/tax social security/disability income garnishment without a court order, suspension of state professional licenses, termination from public employment, denial of security clearances, and others.
3. The “recovery rate” for federal student loans (FFELP) is 123% Comparatively, the rate for credit cards is about 25%. Thus, the federal government and its agents are actually making, not losing money when students default on their loans.
4. Student loans barely existed 30 years ago. By 2008, however, one fourth of all consumer debt (excluding real estate) was student loans...and today, student loan debt comprised one-third of all consumer debt, and even exceeds the nation's credit card debt! Amount: $1 Trillion
5. Despite public perception caused by misleading advertising from schools, lenders, and even the Department of Education, the default rate for student loans is not low. It is extremely high, and has been for years. In fact, it is likely more than 25%...surpassing the subprime home mortgage default rate.
6. There was never a rational basis for removing bankruptcy protections from student loans. Three decades ago people found to be discharging their loans shortly after graduation, while highlighted by media and pointed to as a rationalization for bankruptcy removal, turned out to be exceedingly rare. In fact, far less than 1% of all federal loans were actually discharged in bankruptcy.
7. Restoring Bankruptcy protections is the only way to reorient the fiscal motivations of the lending system to be aligned with the interests of the students, instead of against them. This is an essential, indispensable requirement to ensure that the system will act to promote student success by demanding quality from the schools and also lower prices throughout the higher education system.