Rampant Subprime Lending in Student Loan Industry
By Levi Pine
Subprime lending may have brought the world financial market to the brink of ruin, but several higher education advocacy organizations argue student lenders are continuing the same practices.
In a report released Dec. 1, “Subpriming Our Students: Why We Need a Strong Consumer Financial Protection Agency,” the organizations outline the need for borrower protection in the student loan industry. The report was produced by U.S. PIRG, the United States Student Association (USSA), and Demos, groups that advocate for students and consumer protection.
The study showed that 67 percent of last year’s bachelor’s graduates had student debt, at an average of $23,200.
The study also showed that the number of students taking out loans is rapidly increasing. In 2008, 3 million American students took out private loans while in 2007 only 1 million took out loans.
The groups blame the increase on aggressive marketing by unregulated lenders, especially by for-profit schools. Those institutions offer loans to help increase their enrollment levels. Many students take out high-interest loans offered by those schools first, before they have reached their limit on low-interest government loans.
Rich Williams, U.S. PIRG’s Higher Education Associate, likened taking out private student loans to incurring credit card debt.
“Students using private student loans to pay for college may as well be putting their degree on a credit card,” said Williams in a press release Tuesday. “Like credit card debt, these student loans carry high penalties and fees.”
Several for-profit institutions have been convicted of loan fraud. Right now, the U.S. Department of Education is working on new regulations for for-profit schools.
On Dec. 1, one former student’s bankruptcy was back in the news when the Supreme Court began hearing a case between Francisco Espinosa and United Aids Student Funds, Inc. Espinosa declared bankruptcy when he realized he couldn’t pay back his student loans on time, and the bankruptcy court excused him from paying $4,000 in interest under the repayment plan. United now claims the bankruptcy court’s ruling was illegal, and that Espinosa still owes the money.
Groups Call for Consumer Protection
The groups behind the report are calling for a Consumer Financial Protection Agency that would regulate companies like United. While a version of that agency is already proposed in a bill before the U.S. House of Representatives, “Subpriming our Students” sees a problem in the legislation. A legal loophole in the bill would allow for-profit colleges to escape from the CFPA’s regulations on private loans.
“It is essential we have a consumer watchdog to ensure that students don’t plunge headlong into financial risk to pay for a college degree, and it is critical that private student loans are covered by the agency,” said Williams.
Critics of the program say that the CFPA would suppress innovation in business. But Williams and his colleagues see this kind of consumer protection as necessary for the overall health of the economy.
“If we let profit-seeking companies target our students with ‘easy credit’ that they’ll be struggling to pay off for years, our economy will suffer in the long-run.”