10 giugno 2009

Book Review of "The Student Loan Scam"

Lenders of First Resort
More and more, student lending is becoming a rigged game.

By Robert VerBruggen

Modern American college students are some of the most fortunate people ever to inhabit the earth. Why should we feel sorry for them?

Because they’re saddled with “the most oppressive debt in U.S. history,” argues Alan Michael Collinge in his new book, The Student Loan Scam. This is, of course, quite false: The most oppressive debts in U.S. history probably occurred when this country had debtors’ prisons.

Unfortunately, Collinge is filled with such unjustified indignation. He makes a big deal about high interest rates on private (non-federally guaranteed) loans, as if students aren’t given that information when they sign up. He seems offended by the mathematical fact that when you don’t pay your debts, interest and fees accumulate, and you can end up owing several times what you borrowed.

But there is a very important story in this book: Collinge, who is himself buried in defaulted debt, explores the alliances that student-loan companies have established with universities and the government. By sharing profits with schools in exchange for preferential treatment, the industry’s biggest players have shielded themselves from free-market competition; and through intense government lobbying, the industry has secured exemptions from laws that apply to other forms of lending. No matter how wrongheaded his analysis, Collinge’s facts should evoke cringes from Americans of all political stripes.

Schools’ relationships with the major lenders will come as a shock to many — especially those who’ve taken advice from purportedly neutral university employees. Through “school as lender” programs, lenders can essentially give schools a cut of the profits in return for financial-aid officials’ steering borrowers their way. (Technically, the school makes the loan, and then the lender buys the debt at a premium.) Lenders often sweeten the deal by offering officials lavish parties and trips. Sometimes, lenders have even run financial-aid call centers on universities’ behalf, with lenders’ employees claiming to represent the schools.

Lender-state ties are no more innocent. The problems began in the 1970s, when the federal government created Sallie Mae as a “government-sponsored enterprise” that would buy student loans (much like Fannie Mae and Freddie Mac did for mortgages). Sallie grew through the 1980s, took a hit when the federal government began issuing loans directly in 1993, and began privatizing in 1997.

Today it’s a fully private entity, but Sallie and other big lenders have used their size and sway on Capitol Hill to their great benefit. For example, while there have long been limits on bankruptcy protection for student loans (some worry that it’s tempting to file for bankruptcy right after graduating), the student-loan industry managed to eliminate bankruptcy protection in 2005. No matter how long it’s been since you took out the loan, and no matter the size to which the debt has ballooned, you typically cannot discharge a student loan in bankruptcy. One can argue that bankruptcy laws in general should be stronger than they are, but it’s hard to make the case that student loans should be treated so differently from every other form of debt.

Also, Sallie has been able to work around laws that prevent it from outright buying guarantors — the companies that are supposed to oversee it, and that are required to purchase loans that go into default. Basically, lenders can own the collection agencies with which the guarantors contract, a situation that gives lenders the perverse incentive to let loans go into default rather than trying to collect them. When a borrower defaults, the lender can get repayment from the federal government, and stands to make more money on the collection agency’s work for the guarantor. Once, Sallie was found to have pushed loans into default without even attempting to collect them first, and had to pay $3.4 million. It’s also worth noting that in the student-loan industry, where bankruptcy is not a threat and collection powers include wage garnishment, defaulted loans are actually profitable on balance.

Many other foolish ideas have been adopted. According to federal law, a borrower can only consolidate his student loans once; then he’s stuck with that lender, even if a different lender is willing to pay off the loan and accept a lower interest rate. Also, to punish those who don’t pay their debts fast enough, collectors can have borrowers’ professional licenses taken away. Obviously, without being able to practice in the field for which they borrowed money to train, there’s little hope of these folks’ digging their way out of debt.

Collinge provides some good suggestions for dealing with these problems. He says kickbacks to schools should end, and he would like to see bankruptcy protection restored to student-loan debt.

His most ambitious solution, however, would probably be counterproductive. Collinge says the government should stop subsidizing loans, and instead dramatically increase direct aid to schools and students. In doing so, he says, the government would not only reduce the burdens on students but also stop college costs from rising. He does manage to cite an academic study to this effect, but he doesn’t consider that many economists think such a policy would have the exact opposite result.

Their theory (which John Hood has explained in NR) goes like this: College aid increases the demand for college, and it makes students less price-sensitive. Therefore, when the government increases aid, colleges can simply take that aid by raising tuition, putting students pretty much back where they started.

There are plenty of better ideas for rejiggering the way we pay for college. One is for students to give up a percentage of their income after graduation, instead of making traditional tuition and loan payments. Not only would this go easy on folks who have money troubles (no income, no payments due), it would take the burden off parents and the government. It would also provide schools with a very explicit way to compete on price: With loans, grants, and parental dollars out of the way, a student would have to ask himself if it was really worth X percent of his income to go with college A instead of college B.

Better yet, this could be done through private lenders, who’d have an incentive to pick the students who would stick with college and benefit from it. Such lenders would pass over the many students who shouldn’t be going to college and often drop out.

The Student Loan Scam is an eye-opening work of investigative journalism, despite its frequent hyperbole. Students are indeed fortunate people, even when they have to borrow money, and there’s every reason to support lenders’ right to collect the debt they’re owed. But Collinge demonstrates convincingly that lenders have gotten in bed with universities and the government, with predictably bad results.

— Robert VerBruggen, an NR associate editor, edits the Phi Beta Cons blog.

Source: National Review

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