Recently, President Obama appeared before a gymnasium crowd of almost 10,000 students on the campus of Georgia Tech in Atlanta to announce what he termed his “student aid bill of rights,” a set of initiatives designed to help ease the financial burdens on America’s college students and graduates; said the president at his Atlanta appearance, “We’re trying to tackle this problem from every angle. We want to make this experience more affordable, because you’re not just investing in yourselves, you’re investing in your nation.” Among the steps taken by the president on behalf of student borrowers was a directive that requires loan servicers to keep borrowers more up to date on all available repayment options. President Obama further called for a single website to be created at which student borrowers could see all of their federal loans in one place, and also suggested the design of another website that would serve as an official location at which students could lodge complaints about their loans and lenders. Needless to say, the president’s speech was cheered wildly by those in attendance that day on the Georgia Tech campus, but the reality is that almost nothing the president discussed as a solution to the continually-growing student loan crisis in America will make a material difference in the debt loads facing America’s young college students.
There are many components to the student loan problem, but one that’s not talked about as much as it should be is all of the consumer protections that began disappearing from student loans in the 1970’s. The bottom line is that, starting in 1978, lobbyists for Sallie Mae and other similar entities were able to get their pals in Congress to pass laws that made it very difficult to discharge student loan debt in bankruptcy; in 1998, they went further, and made it outright impossible to discharge (further protections were added in 2005 for the benefit of private lenders). One of the consequences of this…rarely mentioned…is how these moves contributed to the beginning of the manic rise in tuition cost; as soon as colleges saw that their lender pals were now protected from student loan borrowers using the protection of bankruptcy, schools knew they could basically charge what they want, because the student borrowers would be stuck with the debt, no matter what – that’s partly why you now see really mediocre schools, all across the country, getting away with charging $35,000-plus a year in tuition (NOT including room, board, etc.) So, the schools can charge as much as they can get away with, and their lender friends can loan for all that money, knowing THEY’RE protected against a borrower filing bankruptcy. If you bring back full bankruptcy protection for new students, going forward, then schools would have to take steps to help make sure that costs were manageable, because they’d know that their lender-enablers would now be at real risk. The bottom line is that the now-unholy alliance between schools and lenders is breeding a bunch of young graduates who are now, largely, financially handicapped just as they embark on their professional lives.
Now…remember when I said earlier that almost nothing the president outlined in his recent Atlanta speech would be of any real utility? President Obama actually suggested the possibility of a revisiting of the blanket bankruptcy protections now enjoyed by the student lending sector, with an eye to shifting some of the protections back to the favor of the borrowers. While no such moves would help current graduates carrying heavy student debt loads, a change that would allow future borrowers the ability to discharge student loan debt in bankruptcy would go a long way to fixing the problem over time, as both schools and lenders would have to remain cognizant of the fact that a young graduate crushed with debt would have an option to “reboot” his life and walk away from the onerous obligations – the natural consequence of that is that schools would not be able to raise tuition in an unbridled fashion, because they would know full well that their compatriots in the student loan industry could be left holding the bag.
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