Thursday, March 25, 2010

Slowing Predatory Student Lending

A little-noticed provision in the health care reconciliation bill passed by the House on Sunday and now being considered by the Senate may make a big difference for future college students. The change eliminates the billions of dollars in paperwork fees that the federal government pays to private lenders when they lend money to college students. Although much more needs to be done to reform the student loan business, this move is a useful first step that will help keep students from getting caught up in the often predatory lending practices of the private companies that make college loans.

Many students imagine that since the loans are loosely associated with the federal government, they must be offered in a somewhat scrupulous manner, but that is not necessarily the case. Borrowers who take more than four years to complete college, or who become unemployed in the first ten years or so after college, risk running into hidden fees that can boost their college debts by a factor of two or three. If borrowers aren’t careful, they can end up owing around $1 million on college loans that had an original principle of $200,000 or so. This is more money than some of them can ever hope to pay off, with the possible result that lenders will be attaching 25 percent of their retirement checks, if they can ever retire. Student loans are bankruptcy-proof, so for some unlucky borrowers, there really is no hope of ever getting above water financially.

A lifetime of debt and impoverishment, the modern form of indentured servitude, is not what student loans are supposed to accomplish. The government pays for student loans with the idea that the education will help people improve their lives, and of course, that happens often, but not often enough. Part of the problem is that college costs too much, but clearly, the loans themselves are part of the problem also. A more substantial set of reforms are needed, but for the federal government to stop pouring billions of dollars into the paperwork for a program that is snaring thousands of teenagers every year into a lifetime of perpetual poverty — that is, at least, a step in the right direction.