Top Ramen For Life: The Student Loan Crisis 

With more than two-thirds of students borrowing money for their educations, student loans are now the largest type of consumer debt. Is this another crisis in the making?

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However, Sallie Mae was selected by the government as a servicer and collector for Direct Loans. It also can still make private loans, which, like federal loans, are difficult to discharge in bankruptcy, but lack the same flexible repayment options. In addition, the company's status as both a lender and a collector of government loans has led some critics to contend that Sallie Mae has incentives to make risky loans — especially since defaults are profitable.

A 2002 report by the Government Accountability Office showed that lenders made more money when they forced a student into default than when they let that student linger in delinquency. In 2003, Sallie Mae CEO Albert Lord told shareholders that the company's record profits were attributable to penalties and fees from defaulted loans. Between 2000 and 2005, its loan portfolio increased only 82 percent, but its income from fees increased 228 percent.

Patricia Christel, a spokesperson for Sallie Mae, refutes that notion. She said that the lending company works with students to find repayment options. "Sallie Mae has a strong track record of helping student loan customers avoid default and preserve or rebuild their good credit, which in turn helps Americans access lower-cost credit in the future, taxpayers save dollars on federally guaranteed student loans, and colleges retain their eligibility for federal financial aid for students," she wrote in an e-mail. She pointed out that in the last twelve months, Sallie Mae has helped "two million customers resolve their past-due accounts and avoid default on $38 billion in federal and private student loans," and that 422,000 borrowers had fully repaid their loans in the last year.

Yet there's evidence that deception and collusion spans from colleges to lenders to collection agencies, and even to the agencies that are supposed to oversee them. In 2007, New York Attorney General Andrew Cuomo brought suit against nearly one hundred schools for giving lending agencies "preferred lender" status in return for bribes, and for allowing lending agencies to put their own employees in school financial aid advice centers. That same year, Secretary of Education Margaret Spellings testified before Congress responding to criticism that the Department of Education failed to clamp down on the practice of student loan companies offering bribes to financial aid officers in return for preferred lender status. Spellings was also asked why, despite a report that the Department of Education had overpaid the lender Nelnet $278 million in subsidies, she never attempted to recollect the money. In an article in The New York Times, a spokesman for the US Department of Justice called the Department of Education's "oversight failures" "monumental."

Such oversights aren't so surprising considering that the Department of Education has had, and still has, ties with executives in the student loan industry. A 2003 US News & World Report article detailed how the Bush administration appointed a number of lobbyists and executives from the student lending industry to positions within the Department of Education, among them Theresa Shaw, who worked in the student lending industry for 22 years. Congressman Boehner once told a group of student loan executives, "I hold you in my trusted hands" before working to weaken a Direct Lending program that government agencies had found to be more efficient than FFELP, according to the book The Student Loan Scam by Alan Collinge.

Meanwhile, consumer protections for student loans have slowly been eroded by Congress, and lenders have expanded their collection powers. For example, Congress exempted EdFund, the nation's second largest provider of student loan guarantee services, from the Fair Debt Collection Practices Act and the Truth in Lending Act. Congress also removed the statute of limitations on student loans, exempted them from the Truth in Lending Act, and removed bankruptcy protections from all loans — unless the debtor can prove that repayment would cause "undue hardship."

As a result, the default rate on student loans has grown tremendously. A loan in default is one that hasn't been paid in 270 days, which allows lenders to tack on additional costs. But accurate data for the number of such loans outstanding is hard to come by because the Department of Education, which tracks the figure, only looks at a brief window of time when assessing whether or not a student has defaulted.

For example, for borrowers who began repayment in the 2008 fiscal year, 7 percent had defaulted by the 2010 fiscal year. But that number is likely misleading considering the six-month grace period and the fact that it takes nine months on average for a loan to fall into default. An article this year in the Chronicle of Higher Education used previously unpublished data to show that, of borrowers who began repayment on their loans in 1995, 20 percent defaulted on them by fiscal year 2010. Collinge, who is a debtor himself and founded the web site StudentLoanJustice.Org, believes the lifetime default rate could be even higher.

"I think the number of lifetime defaults could easily be anywhere between one in four and one in three," said the author. "And that's not even counting all the borrowers who are just on the other side of default."

Borrowers have little escape from debt short of changing their identity, fleeing the country, or dying. "The student loan is an inescapable and profitable debt instrument unlike any other," Collinge writes.

Predatory Loans

In 2005, Thomas Keith borrowed $46,000 from a private lender to attend the Culinary Academy of California, a for-profit school based in San Francisco. Keith says that his lender, Stillwater National Bank, promised him a fixed interest rate of 9 percent. Upon graduation, however, he found that he was paying an interest rate of double that, 18 percent. He made his first payment of $1,100, but found that the payment didn't touch his principal. In fact, his balance increased by $300.

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