Student Loan News, Updates and Blog Posts

(Editors Note: Today we are running an abridged version of testimony that three major higher education associations have submitted to the U.S. House Judiciary Committee’s Subcommittee on Commercial and Administrative Law, which is holding a hearing this afternoon on the treatment of private student loans in bankruptcy. The three groups — the American Association of Collegiate Registrars and Admissions Officers (AACRAO), the American Association of State Colleges and Universities (AASCU), and the National Association for College Admission Counseling (NACAC) — argue for a reversal of a federal law that makes it exceedingly difficult for financially distressed borrowers to discharge private student loans in bankruptcy. At Higher Ed Watch, we have long argued that Congress should end this cruel policy, which treats private student loans (those without any government backing) much more harshly than nearly any other form of consumer debt, including credit cards.)

By AACRAO, AASCU, and NACAC

Bankruptcy law has restricted the ability of borrowers to discharge their federal student loans since the mid-1970s. For more than a decade, federal student loans have been non-dischargeable altogether, except for cases of undue hardship. While this exceptional treatment of federal student loans under bankruptcy law is harsh, federal student loans do provide basic consumer protections, their own specific discharge provisions, and flexible repayment options that serve as meaningful alternatives to bankruptcy discharge for borrowers. We therefore do not seek any change to the treatment of federal student loans in bankruptcy.

Our concerns focus on the treatment of private educational loans in bankruptcy. Beginning in the early 1990s, for reasons that were never articulated or debated, Congress began to extend the bankruptcy code’s exceptionally harsh treatment of federal loans to private educational loans. Until the 2005 bankruptcy reform act, this identical treatment was limited to private loans that were funded or guaranteed by states or nonprofits. This ill-advised expansion rendered a large number of non-federal loans non-dischargeable in bankruptcy, even if they had none of the important attributes that justified that treatment for federal loans.

In making this change, Congress appears to have assumed that states and non-profits would voluntarily configure their educational loan offerings in a manner that would eliminate the need for bankruptcy discharge for their borrowers. It should come as no surprise to any observer of the student lending industry that the exact opposite occurred. Nondischargeability of educational loans provided eligible lenders with a carte blanche to impose ever harsher conditions on borrowers. Many of these borrowers were unaware that unlike with federal loans, the promissory notes they were signing would obligate them to repay the loans even in cases of school fraud, school closure, or total and permanent disability.

The primary benefit to eligible issuers of these loans was that the bankruptcy code’s unorthodox treatment of their loans insulated them from the economic consequences of otherwise untenable lending practices. Predictably, these lenders were at the forefront of predatory educational lending practices, and began to provide high-dollar private-label loans to borrowers without much concern about their ability to repay the loans. Low-income students, particularly those attending expensive for-profit career schools, were targeted through collaborative marketing and origination relationships between schools and lenders, who in some cases jointly forecasted future default rates of more than 50 percent on the subprime loans that they aggressively promoted.

The comparative advantage that the "non-profit" issuers of such private-label loans enjoyed was quickly seized upon by other predatory providers, who sought a similar advantage for their products. In 2005, again without hearings or debate, Congress extended the exceptional bankruptcy treatment initially afforded only to federal loans to all educational loans. That unfortunate change, in turn, led to an explosion in subprime educational lending practices, which this ill-thought-through federal incentive unwittingly facilitated. Predatory lending targeting low-income and minority communities expanded, while an entire new line of "direct-to-consumer" programs targeted middle- and upper-middle-income families with easy, but punitively harsh educational credit offerings. The most salient feature of these programs is that their issuers were substantially shielded from the consequences of their high-risk products by the fact that borrowers could not discharge these predictably unaffordable loans even in bankruptcy, and that the promissory notes were really a modern indenture instrument.

In addition to its fundamentally negative consequences of promoting irresponsible lending practices, the vagueness and imprecision of the actual language of the 2005 amendment has created loopholes for additional fraudulent and abusive practices. For example, the statutory language fails to define the "educational loans" that it excludes from eligibility for ordinary bankruptcy discharge. This lack of precision allows virtually any credit transaction with families with students in school to be arguably nondischargeable. This same imprecision makes it impossible to track and analyze the scale and scope of the private-label educational loan market, since colleges may well be entirely unaware of credit that might be marketed to their students and their families. This same lack of institutional awareness makes it quite likely that families and students may be induced to borrow more than their actual unmet need.

Mr. Chairman, the subcommittee’s hearings today are a very important first step in documenting and addressing the problems associated with the highly unorthodox special treatment that Congress opted to extend to private educational loans. As stated above, the unconditional extension of non-dischargeability to private loans has created a perverse incentive for risky lending practices that victimize borrowers and reward the most irresponsible lenders at the expense of other creditors. This fundamental distortion of the bankruptcy code also rewards shoddy schools by enabling them to arrange for inappropriately large private-label loans for their students through collusion with subprime lenders. We find it particularly offensive that entities profiting from these predatory practices justify their special treatment in the bankruptcy code by claiming that non-dischargeability lowers the cost of all private educational loans. There is no evidence that the enactment of the 2005 changes lowered the cost of loans, and therefore, no reason to believe that its repeal would increase the cost.

Legitimate private educational loan programs are subject to underwriting criteria to ensure reasonable prospect of repayment. Bankruptcy, let alone dischargeability in bankruptcy, is not even remotely probable factors for such programs. As previously stated, we believe that non-dischargeability of loans has facilitated the marketing of subprime loans to more vulnerable populations, and that their unorthodox treatment has served as a powerful incentive to promote over-borrowing. We urge the subcommittee to examine a complete exclusion of private educational loans from the special bankruptcy treatment previously reserved only for federal loans.

Mr. Chairman, we thank you for your leadership on this important issue, and stand ready to work with you and your colleagues as you act on the findings of today’s hearing.

The American Association of Collegiate Registrars and Admissions Officers is a nonprofit, professional association of more than 10,000 higher education admissions and registration professionals who represent approximately 2,500 institutions in more than 30 countries. The American Association of State Colleges and Universities represents more than 400 state colleges, universities, and systems of higher education throughout the United States. The National Association for College Admission Counseling represents more than 11,000 college admissions officers, high-school guidance counselors, and financial-aid administrators. The groups’ views are there’s alone and do not necessarily reflect those of the New America Foundation.

Tuesday Observation

I’ve heard from hundreds of malcontent students about the bailout packages the government has been handing out like beads at Mardi Gras this year. It’s not that they disagree with the plans necessarily, but rather, are asking where’s mine? I even blogged about the cash for clunkers plan last month and how those funds would be better served through the Pell grant program. But it appears some crafty scholars could wait no longer to see if the federal government would throw them a life line. They took the bull by the horns and made their own bailout plan.

Whether by keen instinct, dumb luck, or fantastic legal counsel students in financial peril have watched gleefully as their federal loans have been charged off. So how are they doing it? They are filing for bankruptcy. But that in itself is not the bailout of which I speak. The bailout is tied to the fact that these are currently enrolled students. What that means of course is that their debt is not due while they are in school, but bankruptcy courts have been rolling these good standing loans in with all of their other financial discharges.

So basically these students are getting a free education (or partly free) while their lender receives a bankruptcy claim on their non-defaulted student loan. Schools are not too happy about this because it goes against their cohort default rate, but students are skipping in the streets. In addition, because their loans never officially fell into a default status they remain eligible for more student loans in the future.

These students are clever little devils.

Tuesday Observation
I’ve heard from hundreds of malcontent students about the bailout packages the government has been handing out like beads at Mardi Gras this year. It’s not that they disagree with the plans necessarily, but rather, are asking where’s mine? I even blogged about the cash for clunkers plan last month and how those funds [...]

Is there a looming student debt crisis at our nation’s for-profit colleges and trade schools? The latest data from the U.S. Department of Education’s National Center for Education Statistics (NCES) certainly seems to suggest so.

According to an analysis of this data by the College Board, 60 percent of bachelor’s degree recipients at for-profit colleges graduate with $30,000 or more of student loan debt. That’s one-and-a-half times more than graduates at higher-cost private colleges and three times more than those at public universities and state colleges. At the same time, one in five students who earn associate degrees at proprietary schools graduate with a debt load of at least $30,000. That’s four times more than associate degree recipients at community colleges. [The average annual salary of associate degree recipients is around $38,000.]

The data in question comes from the 2007-08 edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The study provides the most comprehensive data available on how students and their families pay for college.

But even this data doesn’t provide a complete picture of the burdensome amount of debt proprietary college students are taking on — as it does not include median debt levels for the millions of low-income and working-class students who drop out each year from for-profit colleges and trade schools buried in debt but without the training they need to find jobs that will help them repay their loans. Many of the largest publicly traded for-profit school chains have an extremely spotty record of graduating students.

Overall, according to the study, 92 percent of full-time students attending proprietary institutions took out loans in 2007-08 to finance their education. In comparison, two-thirds of students at private colleges, and a little more than half of those attending four-year public colleges, borrowed student loans that year. This is not entirely surprising as for-profit colleges tend to be expensive and serve the most financially needy students.

More disturbing is the extent to which proprietary school students are being asked to rely on high-cost private student loan debt to help cover their costs. In 2007-08, 43 percent of students at for-profit colleges borrowed private student loans, compared to 28 percent at private colleges, 15 percent at public four-year colleges, and 7 percent at community colleges. As we reported in April, the proportion of private loan borrowers at proprietary institutions has skyrocketed over the last five years. In 2003-04, about 15 percent of students at these schools took out private loans.

Meanwhile, the median debt load of bachelor’s degree recipients at for-profit colleges in 2007-08 was $32,653. In comparison, the median debt load of students graduating from private colleges was $22,375, and from public colleges was $17,700. A quarter of these proprietary school students left with $40,000 or more in debt, compared to 22 percent at private colleges, and 10 percent at public universities

Nearly two-thirds of bachelor’s degree recipients graduated from proprietary institutions that year with private loan debt, compared with 42 percent at private colleges and 28 percent at public colleges.

The news isn’t much better for students who earn associate degrees at  proprietary schools. Overall, nearly all associate degree recipients at for-profit colleges graduated with student loan debt in 2007-08, and 60 percent had private loans. The median debt load for these graduates was $18,783. In comparison, only 38 percent of associate degree recipients at community colleges graduated with debt, and only 15 percent had private loans. The median debt load for those students was $7,125.

In looking at this data, we think that it is critically important to understand the population of students that for-profit colleges and trade schools serve. According to the Career College Association, 43 percent of proprietary school students are members of minority groups and almost half are the first in their families to attend college. Of those who are of traditional college age, more than 50 percent come from families with an annual income of less than $40,000.

Research shows that each of these factors correlate with a student’s likelihood of defaulting on their student loans. And in fact, the Department of Education estimates that about 40 percent of federal student loans going to for-profit students ultimately end up in default. That’s compared to about 12 percent for college students overall. [Unfortunately, there is no comparable data available on private loans.]

For-profit college lobbyists and leaders like to talk about the role they play in helping low-income and working-class students achieve their dreams. But by loading up financially needy students with unmanageable levels of debt, including high-interest private loans, they are actually destroying the dreams of many of their students.

The time has come for policymakers to take notice — before this looming crisis becomes full blown.

“Republicans haven’t given up on the guaranteed-loan program, Rep. John Kline of Minnesota said today. They have just been preoccupied with health care and other pressing issues,” The Chronicle of Higher Education reports. “‘I remain hopeful we can keep some private capital in this and keep the private sector involved,’ the new top Republican on the House education committee told three higher-education reporters in an interview. ‘We’re not rolling over.’”

“The chairman of the House Education Committee has dismissed a last-ditch plea from the private student loan industry and is throwing his support behind President Obama’s plan to end the role of private banks in the federal education lending systems,” The New York Times reports. “Mr. Obama’s plan remains deeply contentious in Congress, and still faces strong opposition from private banks that for decades have earned big profits for handling federal student loans. But after mulling the issue for months, Representative George Miller, the California Democrat who is chairman of the Education Committee, now plans to introduce legislation next week that would rely on direct government lending to replace the federally subsidized loans made by private banks. Administration officials who have reviewed drafts of the legislation said that it substantially adopts Mr. Obama’s proposal.”

This newsletter addresses multiple topics related to the National Student Loan Data System (NSLDS) Enrollment Reporting process.

“Student Loan Corp. (STU) is feeling a little lonely these days – and that could devastate its business,” The Wall Street Journal reports. “The company, a subsidiary of Citigroup Inc.’s Citibank N.A., was the only publicly traded dedicated student lender not chosen last month for the government loan-servicing contracts analysts say could help save the industry. Student Loan wasn’t even picked as a finalist. A source familiar with the contracts said servicing capacity was a major consideration in choosing the final four recipients.”

“The 35 guarantee agencies that work with lenders, borrowers, and the U.S. Education Department to administer bank-based student loans have evolved into inefficient middlemen that waste taxpayer money, the New America Foundation said today in a policy report released just as Congress prepares to debate a student-lending plan that could eliminate the need for guarantee agencies,” The Chronicle of Higher Education reports. “The agencies, intended to insure banks against default losses and thereby encourage them to offer better rates on student loans, have become largely administrative bodies, according to the nonprofit group’s report.”

“Republicans haven’t given up on the guaranteed-loan program, Rep. John Kline of Minnesota said today. They have just been preoccupied with health care and other pressing issues,” The Chronicle of Higher Education reports. “‘I remain hopeful we can keep some private capital in this and keep the private sector involved,’ the new top Republican on the House education committee told three higher-education reporters in an interview. ‘We’re not rolling over.’”