A recent article on Forbes.com lashes out against the state of student lending and student debt in the United States. The author makes several salient points regarding the problems surrounding student debt, which cripples many graduates largely because it is very difficult to discharge in bankruptcy.
But what makes a loan “predatory?” The nation conspicuously lacks a legal or official definition for “predatory lending,” but the Forbes article cites many attributes of student loans that suggest they might fall into this category. These include:
- Student loans do not come with “free-market consumer protections.” Student loans cannot easily be discharged in bankruptcy (compared to other unsecured loans); borrowers do not have the option to restructure their student loans; and these loans come with no real statute of limitations in most cases. Lacking these protections, borrowers are more or less bound for life to repay any money they borrow for their education.
- The organizations that are meant to oversee student lenders (called “guarantors”) make roughly 60 percent of their revenue from fees and penalties associated with loans that have gone into default. In other words, the groups intended to protect borrowers from lender abuse actually have a financial interest in borrowers not being able to repay their loans as outlined in their loan terms.
- Student lenders have broader debt collection rights than other types of lenders. This means that they have a better chance of collecting some or all of the money owed to them (including money owed as part of penalties and fees).
Comparing Other Types of Predatory Loans to Student Loans
To refresh your memory about problematic predatory lending that has made headlines in recent months and years in the U.S., here’s a quick outline of how two different types of predatory loans were outed and then blasted by pretty much every consumer advocate in the country.
- Subprime mortgages: These fueled the housing bubble (and bust), and essentially amounted to lending money to people who had no real chance of repaying it. One of the hallmarks of many subprime mortgages issued was that those in the lending, loan servicing, and investment fields had financial incentives for the loans to fail. In other words, these people stood to make money when borrowers defaulted on their loans, because of late fees and other penalties (sound familiar?).
- Payday loans: The target of several pieces of legislation in recent years, payday loans are profitable to the lenders exactly because borrowers are not expected to be able to repay them as originally agreed. Payday loans become most lucrative when borrowers must pay late fees and penalties—meaning, of course, that they were designed to extend money to those who did not have a good chance of repaying it.
Congress has made some noise about reforming the student loan industry, but as of now, no real, meaningful changes have been implemented.
Written by guest-writer on Friday, January 6th, 2012 at 11:51 am and is filed under Predatory Lending. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
I think not all problem when it comes to student loaning can be solved through a bankruptcy option only. However, I am not that sure if there are other available alternatives in solving student loan crisis.
Liz,
Your article would be better if you would show how at least one student loan type meet the specific criteria of predatory lending.
Predatory lending criteria:
Lender deception: knowingly presenting loan terms untruthfully or incompletely to borrowers;
Unfair and/or abusive loan terms: charging more than is reasonable or charging for products/services that are unnecessary;
Exploitation: taking advantage of a borrower’s incomplete understanding of a contract, violating terms of agreement knowing that a borrower does not know his rights, breaking laws the borrower may not be aware of, etc.; or
Violation of consumer protection laws.
The real reason behind all the clamor is exactly related to the predatory nature of the loans, and the fact that students who are unemployed, underemployed, or work at a job that is underpaying them, (which is common in todays job market, as many good paying jobs were exported or outsourced for cheaper labor the past 25 years) Please refer to Exporting America article at CNN for the list). AlterNet has articles on how the big lenders are profitting off of student loans. This is another disaster that is destroying the purchasing power of many families and young people. Unfortunately, if you check out the financial backers that donate large amounts of money to your political representatives you will see many, like Virginia Foxx, who deplores helping students, financial coffers are fed by the educational bureaucracy, and the banks that finance these predatory loans. As Dylan Ratigan on MSNBC has noted, until we change the nature of the corrupt processes in the system, and reform education/tax/trade and banking legislation, by reinstituting Consumer Protections (which is beginning to happen), we will perpetuate the decline of the economy. If you gouge students with fees and capitalized interest and there is no end in site.. as is the case for most loan holders.., especially in todays economy, they will be hostages to life-long debt, and this is what they are trying to correct. H.R. 4170, legislation and bankruptcy legislation, is out there. Americans need to realize this is an emergency situation. It is a financial gridlock. The economy is not growing for many reasons, and this is one of them. People whose loans keep growing and growing because they don’t have the money to pay the entire principle at once, just lose more and more ability to purchase and stimluate the economy. This must stop and if it doesn’t, we will have economic stagnation for a very, very long time.
To start there must be more financial education for students before they borrow money, including guarantors such as parents. Secondly, more regulation is needed for the for profit schools. Maybe, the for profit institution should be required to repay loans that were granted to students who dropped out of class. Thirdly, when student loans go into default and a condition of extended repayment the student should be required to take a finacial education course more than once. Forth, stop paying bonus to sales people who enroll students.