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On worker's compensation from a neck injury, Keith put his loans into forbearance twice before Sallie Mae — which had purchased his loans midway through college — denied him any more forbearances. By then his loan had swollen to $60,000. Now, three years later, it's $120,000. And because Keith's loans are all held by Sallie Mae, he can't get them refinanced by another bank.
"They all refused," said Keith, whose story will be featured in the soon-to-be-released film Default: The Student Loan Documentary. "They said it would be illegal. They said Sallie Mae owns me."
For-profit colleges have been some of the most heavily criticized participants in the student loan machine. Their funding comes nearly entirely from federally backed student loans, but their graduates have the most difficulty repaying. According to the Chronicle of Higher Education, students at for-profit colleges defaulted at a rate of almost 40 percent in a fifteen-year period, twice the national average. In Arizona, 70 percent of defaulted loans are held by students who attended the University of Phoenix, one of the largest for-profit schools in the nation.
Private loans are now the fastest growing segment of the student lending industry at 15 percent of the market. Deanne Loonin, an attorney with the National Consumer Law Center who has testified before Congress on the importance of restoring protections to student borrowers, believes that private student loans, like sub-prime home loans, are predatory. "They have all the characteristics of a predatory loan," she said. "Variable rates, teaser rates, high hidden fees. These are loans that were so expensive and so explosive that borrowers were destined to fail."
That said, the element of personal responsibility should not be downplayed. Just as with any other business decision, a student loan is a choice that should be made only after a student fully understands his or her obligation, and can expect to meet that obligation. That sentiment is often echoed in the comments sections that trail student loan debt stories.
"Welcome to the real world and being an adult!" writes "Mark" in the comments section of a New York Times op-ed story about student loan debt. "What seems to be missing here is ownership by the borrower. Assessing what you pay in tuition and living costs while attending school is just like planning a vacation. You have to figure out what it will cost and if you can afford to do it!"
While such advice seems like a no-brainer, it's also not that simple. For one, many student loans are complex, and often not well-explained to the borrower. Private loans with variable rates also make it difficult for a student to know exactly what he or she will eventually owe. And, as with the case of Kyle McCarthy, unexpected life events can intervene.
"They purposely make it so it's so complicated, so you have no idea what's going on," he said, leafing through bills, envelopes, and no-nonsense warnings. "It's like a spider web, and you're just trapped."
Paying For Life
Well into her third decade of repayment on her student loans, Cynthia Warner gave up. She was living at home with her mom and barely making minimum wage doing various jobs for friends. When her car broke down in 2006, she lost the ability to get to gigs as a background actor, one of the sources of income that had helped her stay afloat. Collections agencies were demanding $900 a month. At 51, the Alameda County native once even contemplated suicide.
Warner's road to debt began when she graduated from UC Berkeley in 1982 with a degree in sociology and $6,000 in debt. She then enrolled in a private, Catholic, evening law school in San Francisco called Kendra Hall, for which she borrowed $8,000 from two private banks through FFELP. According to Warner, she never finished the program because she was "bullied" out of school by a malicious classmate. Two decades, several more loans, and another unsuccessful go at law school later, interest, penalties, and collections fees had swollen Warner's $43,089 principal to $124,651.68.
In 2006, after being harassed by creditors for most of her adult life, Warner filed for Chapter Seven bankruptcy. All of her debts were written off. But her education debt remained.
"They said I couldn't discharge my loans in bankruptcy," Warner recalled. "All my other debts, fine. But not my student loans."
The student loan industry contends that, unlike other borrowers who can hand over their car or house in bankruptcy, student borrowers have no collateral beyond their education — and so therefore to allow bankruptcy discharges would be to invite ruin on themselves. Loan company executives contend that prohibiting bankruptcy discharges allows them to keep their rates low. However, the rates of private student loans climb higher and higher.
While borrowers should not be exempt from their financial obligations, many believe that there are reasons why student loan borrowers should have the same protections as others. "There's no conceivable basis for why student loans should not be dischargeable in bankruptcy," said John Pottow, a professor of Law at University of Michigan Law School who has studied the history of bankruptcy protections for student loans. "It's poor policymaking and it reflects an underrepresented constituency, namely student borrowers, who are far less well-heeled than the student loan industry."
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