Nick Hillman
Indiana University
The $85-billion-dollar-a-year student loan industry has profited handsomely thanks to years of Federal deregulation of the financial aid market. When Congress reauthorized the Higher Education Act in 1972, they opened the student loan flood-gate by allowing private groups (i.e. banks, lenders, private corporations) to benefit from the student loan “market.”
Politicians thought students, rather than the government, needed to take more financial responsibility when paying for college. So, since the mid-1970’s, and especially during the 1980’s, the feds deregulated the student loan industry, made it easier for lenders to take advantage of federal subsidies, reduced federal support for grants to student, and failed to provide aid that kept pace with the rising cost of college. Essentially, this deregulation created an environment that said it was ok to profit off the backs of needy students who can’t afford to pay for college.
Subsequently, private student loan companies popped up all across the country offering students ridiculously high interest rates on loans. Student debt skyrocketed so high that millions of students have mortgaged their future in the hope of pursuing a college education. Early in 2008, the U.S. House and Senate will craft a final compromise for reauthorizing the Higher Education Act, which will reign in the student loan industry and help make college more affordable.
I believe the best way to start cleaning up the student loan industry is through regulation and doing away with subsidies to the student loan companies all together. It’s time for legislators to show the nation that education is a public good that nobody should be profiting off of, and they can do this by taking control of the $85-billion-dollar-a-year enterprise. This is a very contentious policy position, especially to bankers and high rolling lobbyists who have made millions off of student loans, but this must be done in the name of serving the public good.
By moving federal student loans to the “Direct Loan” program, the government will save millions of dollars, students will graduate with less debt, and the private student loan industry will begin to get cleaned up. In a nutshell, the Direct Loan program cuts out the middle-man by providing colleges and universities (rather than lenders) federal student aid. The colleges themselves would administer student loan packages, and financial aid would become a more sustainable and affordable option for college students.
As Congress moves forward with reauthorizing the Higher Education Act, it will be imperative that they propose cutting the Federal Family Education Loan Programs (FFELP) and move toward Direct Loan programs. Some presidential candidates have proposed getting rid of the student loan industry by moving toward Direct Loans, so this is a topic worth keeping on the radar as we move into 2008.
November 28, 2007 at 8:29 pm |
Your assertion that private student loan companies are “offering students ridiculously high interest rates on loans” is a bit of an exaggeration. The rates on private student loans are not that much higher than the rates of federal loans offered. Private student loans were never meant to be an option for paying the entire expense of college, yet they were introduced to help bridge the gap between the federal loans, which have a limit that has not changed much in twenty years, and the actual cost of being in college for a year.
The fact that some students elect to take out private loans to fund an overpriced education is simply a commentary on the fact that no one is giving them good advice. I chose not to buy a Ferrari at age 16 because it wasn’t a sound decision. Had I been so careless as to take out a loan to purchase one, I certainly wouldn’t be blaming the dealership or the bank that gave me the loan. If parents, guidance counselors, and financial aid officers would start giving kids some good advice, we could move away from this issue and focus on the issues that truly could ruin this great country.
Why can’t we as a nation begin to take responsibility for the decisions we make instead of asking the government to make new legislation to keep us from hurting ourselves?
To see the rates of most legitimate private lenders, check out FinAid.org
As you can see, the industry is not looking to rip off students; the prices essentially set themselves and are a reflection of a students and co-signers credit rating.
November 28, 2007 at 8:58 pm |
Private loans carry variable (not fixed) interest rates. So, in the long run, yes indeed many students do pay ridiculously higher rates on their student loans. There is no debate to it, and there is no reason to justify these companies that are taking advantage of students.
“The industry is not looking to rip off students.” Really? Congress is investigating some private loan providers for basing their variable interest rates on race, gender, college characteristics, etc. Banks tried to get away with this type of redlining in the housing market back in the 70’s. Read this article and this one for more info. And then there is the whole student loan scandal where lenders have offered back-door deals to colleges in order to enroll more students into their programs. Sounds to me like the industry is working pretty hard to preserve their own best interests, rather than those of the students.
One last comment. We need to stop comparing the way we pay for an education to the way we pay for a vehicle. This does nothing to improve the discourse on the values of education. A college education is a public good….one’s education actually provides positive externalities to the public good. Buying a car is a private transaction between a buyer and a seller, with little to no positive externalities. Let’s try to stay away from lowering the quality of discourse to this level.
November 28, 2007 at 9:15 pm |
Excellent points. The privateering student loan sharks have also begun to sell adjustable rate loans, much like the subprime ARM mortgages that have the housing industry doing spiral motions in the water. This will be terrible for the people that were suckered into them.
It looks like the loan industry has already picked up on this, judging by “loanwatcher’s” response. Bankers are the most dangerous people in our nation. Their loan officers have been trained to skew the truth on things or flat out not explain things fully. It is truely up to the individual to be completely informed.
Here is the reason why college costs have skyrocketed: EASY MONEY…
Any Tom, Dick, or Harry could get the money to go to college. All kinds of student loan sharking buisnesses sprouted up around the easy money to take advantage of the truely disadvantaged and that is the real shame here.
November 28, 2007 at 11:19 pm |
To speak to a few of Pete’s points, the subprime mortgage scandal was a result of credit standards being lowered at higher interest rates and the borrowers living up to their poor credit history. Variable rate loans do not fluctuate at the whimsy of the loan holder as your nickname “shark” might lead people to believe. If you visited FinAid as suggested, you would see that ALL of the rates are set at a fixed rate plus LIBOR or PRIME. So the variable is set by the market, not by the evil CEO’s as you have asserted.
Rather than argue against the incorrect parallel you make between student loans and subprime mortgages, I will simply quote Moody’s who I’m sure you will agree is a more trustworthy source than either of us:
“First, Moody’s indicates there is not any significant overlap between student loan borrowers and subprime mortgage borrowers. Further, 50-80 pct of student loans have a co-signer, who is legally bound to make payments on the loan if the student does not. Another factor is that the majority of student loans are made to borrowers who are still in school and not currently repaying the loans. Thus, their payment performance is not influenced by the current economy but the job market when they leave school, Moody’s said.”
An already expensive college or university jack’s up their prices for the same reason any business does, because people continue to pay it. So while you would like to blame a whole host of people for that problem, I offer the only realistic solution which is that students stop overpaying for their education by enrolling at overpriced colleges. There are many other options for college bound students that would get them essentially the exact same degree at a fraction of the cost. Getting a 200k degree in English Literature is just simply a really bad idea as far as I am concerned.
I respect Pete’s right to think the way he wants, I am just suspect of the easy fix congressional solutions which are already backfiring against the very problems they were intended to fix. As is so often the case, knee-jerk reactions to situations often leave us wishing we had explored the situation a little more before we created new legislation. Just my two cents. My blog was created to try and educate and I definitely agree with Pete that “It is truly up to the individual to be completely informed.”
StudentLoanWatcher
November 29, 2007 at 3:08 am |
The point I was trying to address in my original post was about ethics and the role Congress plays in reforming the obvious inefficiencies/inequities that exist in the current financial aid system. The wild wild west of the private student loan industry will soon come to an end, to the benefit of millions of students. Federally subsidized interest rates are currently 6.8% and will be cut in half in a matter of a few years, thanks to the few Congressmen and Senators who still believe education is a public good. Private loan rates often run in the double-digits because that’s what the “market” demands. The fact that we talk about “markets” in the same sentence as student loans and paying for an education shows just how sick and twisted our financial aid system has become. Indeed, deregulation of the industry has enabled “profiteers” to run amock of the aid system, and it’s time for a change.
November 29, 2007 at 5:53 am |
This isn’t my area of expertise at all; however, I’m concerned that StudentLoanWatcher equates the decision to take out a loan to attend university with the decision to buy a Ferrari. It seems pretty clear to me that a Ferrari is an unnecessary luxury item. Perhaps the argument is that some colleges are analogous to a luxury item when compared to the cheaper alternative of say, a state school.
I’m from Texas where the 10% rule would have prevented me from gaining entrance into the state school comparable to my current university. Bur I should probably not speak in specifics, since there are always exceptions to every rule. I question the soundness of the argument that a student should have to pick a lower ranked school, and forfeit the prestige/earning potential/connections/potential increase in quality of education/etc. because they can’t afford to take out a loan.
I also am concerned that the offered solution of “education” is too simplistic. It is hard enough to get families engaged in the college admissions process, as many Roosevelt Fellows demonstrated with last year’s “Diversity in Higher Ed” challenge. Now we are supposed to assume that people and parents in communities across the US have a support structure in place to advise high schoolers on the intricacies of soliciting and securing a loan?
November 29, 2007 at 6:14 am |
Nick,
Interest rates for federally subsidized loans can drop to zero and it won’t do a thing to help students. That was my whole point. Federal loan limits are currently $3500 freshman year, $4500 sophmore year, and $5500 the remaining years. With the average cost of a private four-year college topping 30k this year and the average price of four-year public college coming in at 12k, how would you propose kids get a degree? So whether you want to call it a “market” or not, it is economics, and those economics are not in favor of the student.
I’m afraid to break it to you, but the private student loan industry is going nowhere but up. So now it is up to students to make better choices about which college to attend and which degree to get.
November 29, 2007 at 9:23 pm |
Loanwatcher seems deeply offended by my “sharking” statements, that’s exactly what it is.
Look at this poor girl – http://biz.yahoo.com/ap/070930/student_loans_the_spiral.html?.v=3
Sorry, I’m not exactly sure how to link here, you may need to copy and paste.
Anyhow, She is facing an adjustable rate that can go up to 20% APR. If that isn’t Guido style interest, I don’t know what is. Sure it’s based off of LIBOR and the FED’s fund rate, but many of these loans have teaser rates that baloon and sometimes double the monthly cost of the borrowed money within several years. They are criminal loans that in my opinion prey on the hopes and dreams of those that are trying to lift themselves up the class ladder. It’s a new road to Serfdom, a stumbling block dropped in our way by Banksters.
Cut off the cheap, easy money and college costs will fall. Get the private Student loan industry out of bed with our colleges and our Congress.
November 29, 2007 at 10:39 pm |
Haha, I am not deeply offended by anything you say, just trying to spread truth instead of lies, and solve problems instead of name calling. I read that article from start to finish and nowhere in that article does it speak of “teaser” rates. That statement is simply not true. There are NO private student loans that have a teaser rate. Private student loans are based on a tiered system according to credit rating just like most loans that you will take out in life, the better your credit rating, the lower the rate. The only adjustments that will ever be made will be as the result of a change in the LIBOR or PRIME rate, which happen to be down for the year and historically fluctuate somewhere between 8% and 1% over the past 10 years…….so Pete, your thoughts while amusing, are just plain wrong.
Name-calling is what you do when you have no real case to make. All I ask is that you get your facts straight.
November 30, 2007 at 2:51 am |
You’re right Studentloanprofiteer… Everything is Peachy… Nothing to see here sheeple…. Move along…
The FED’s Fund rate or “Prime” has been in the 15%+ plus range in the past. All Banks charge “Prime” + some percentage, sometimes outrageous.
So in your opinion “ARM” style loans to kids is a good thing for our Country? Afterall it’s revolutionized the housing market, right? Foreclosures are up 94% this year genius…
Private banks will defer interest (teaser rate) and principal payments until you have completed college. A few of them have a reduced interest (teaser) rates during this time. I looked deeper into the subject. Places like http://www.nextstudent.com/ have student “consolidation loans with “introductory” or “teaser” rates. They will also give first time school debtors up to $130,000 without proof of income, even in some cases without a co-signer. hmmm…. That sounds like a well regulated lending site.
In fact banks are very eager to get and imbed themselves into the student debt racket. The reason: Student debt can never be erased like credit card debt. It’s a sure thing, if you don’t pay willingly they will take it straight out of your paycheck. If you went to school and became a doctor or lawyer, they can pull license and put you out on the street.
No problem here… education is very affordable… Just sign here…
Which Bank do you work for Studentloaner? Which college?
December 1, 2007 at 12:05 am |
I think studentloanwatcher is missing an important element in this debate. Higher education is a public good. It is not a luxury, and it is more then just a tool for individual social mobility. The reason we need students to go to top notch schools is because that is where our future leaders and problem solvers come from. These schools provide the expertise that many overburdened public institutions can not. The reason we spend public money on education is that market forces will not cover the costs of it, but we need it nonetheless. Claiming that public funding of eduction and regulation of education funding is somehow an evasion of personal responsibility is simply incorrect. We use regulation to correct market failures all of the time. There is nothing wrong with government trying control the negative externalities of economic activity, it is one of the useful roles government can play in the economic life of our nation.
Additionally, I think one of the reasons that colleges can charge so much is that they are able to refer students to the private market to cover unmet need. This is what makes the close relationship between financial aid offices and private lenders so troubling. As a borrower it is difficult not to think that you are absorbing the cost of this mutually beneficial relationship. Who does pay for those trips and revenue sharing? I am guessing those costs get passed on to the students holding the loans. I have one of the “reputable” lenders listed on your website, and they were singled out as spending a great deal of money on influencing financial aid officers. This kind of relationship is simply inappropriate, financial aid officers should not receive benefits from lenders because it is their job to work in the interest of students without influence from the loan industry.
December 1, 2007 at 6:21 pm |
amyframe, fantastic points about the importance of school. I could not possibly agree more with you. I think where our path splits is that I just simply do not think that everyone out there needs an Ivy League education. For certain degrees and certain specialties, it is crucial that you aim high and get the absolute best education you can. If I ever am unfortunate enough to get cancer, you can be sure I will choose a doctor trained at Johns Hopkins University over one with a degree from a local Community College. Having said that, if you want to become an Art Historian, perhaps a state school would be a good idea. As a teacher myself, I can assure you that I believe every single American, regardless of socio-economic status, should have the right to an education……and that includes a college education. But we cannot give that away for free or a large majority would take it for granted, and learn none of the important lessons that one needs to be a success both for them self and for the nation.
As to your assertion that I am somehow pimping loan companies that were involved in the Attorney General’s investigation into preferred lender lists, I just reread my site and as far as I can see, I don’t link to or suggest a single loan company or product. I do put as many tools on my site as possible, including links to FAFSA as often as humanly possible because I think that it is the most underutilized tool that students have. By the way, that site is for the FREE Application for Federal Student Aid. I link to scholarship sites which all have very good reputations for helping students. I link to and comment on articles that I believe to be off-base. Most importantly, my site attempts to comment on as many helpful tools as possible for students looking to cope with the extremely difficult process of funding College. I did it myself many years ago, am still paying back my own student loans which I very possibly could be paying off until I retire, and I did it all willingly and without the help of handouts or the desire to go chapter 9 and pass my debt on to someone else.
Many of your points are excellent ones, and like so many others, I think we are not that far off on what we both ultimately would like to see our education system become, but keep any personal accusations to yourself please. My site is designed to give useful information and perhaps help a few students find some help that is lacking from parents and financial aid officers who are too busy or too apathetic.
December 1, 2007 at 11:15 pm |
Nothing I wrote was meant to be a personal attack in any way. I was simply illustrating that it was the mainstream loan companies who were involved with this not fly by night lenders. I am not suggesting in any way that you are involved with this, I used your website as a reference because you refered readers to it in your first post.
March 25, 2008 at 6:42 pm |
StudentLoanWatcher is obviously a hack-man(person?) who works for one of the private student loan lenders. The analogy of buying a Ferrari to purchasing an education was the first giveaway. The second was his/her firm denial of “teaser rates” which private loan lenders have been offering students when they wish to consolidate their private loans.
The result?
These students now have a consolidated loan that, after the first year “teaser” interest rate, gets jacked up to a rate equal to or HIGHER than the original rates on their loans!
Personally, I still can’t believe this is legal.
May 5, 2008 at 8:19 pm |
The direct loan program is still charging >8% interest rates to students receiving unsubsidized loans. This isn’t much less than what most private loan companies are charging, it just puts the risks of default on the tax-payers as a whole!
The student loan programs set up by the federal government are incredibly inflationary, so I’m not sure it matters who administers them. College & university budgets are based on students paying debt into the education system, and the reason why Congress & the Federal Reserve are scrambling to save the industry is because those schools are counting on that debt-money.
May 8, 2008 at 4:58 pm |
Good observation about DL charging 8%, John, That’s a point that shouldn’t be overlooked. However, I like DL because it gives borrowers confidence that their rates won’t balloon up when market conditions worsen. The Feds need this kind of intervention to avoid a mess like the ongoing housing crisis that was a direct result of the fed’s failure to regulate.
Yes, tax-payers would have to pick up default costs, but we need to ask why students are defaulting in the first place. Defaults are bound to occur regardless of how well intentioned aid policies are, but institutions (especially for-profit diploma mills) need to be doing more to help their students prevent default in the first place.
Thanks for the comments and the food for thought. It’s going to take a lot of convincing to get me to agree that private loans would be better than federal loans. One thing I’m sure we can agree on is that the current aid system is broken in too many ways…is there any way we can have a “do over” and just start an entirely new delivery system? Of course not, that’s the bad thing about bureaucracy, so I suppose this debate will go on forever.
July 26, 2008 at 12:30 pm |
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