An empty quad at the University of Illinois (Flickr: BParedo)
With a growing number of college grads finding themselves crushed under the weight of their student loan debt, the Obama administration is considering action that could derail the entire student loan industry. Groups who monitor campaign contributions, though, worry that the strength of the industry could block any shot at real change.
The student loan industry is big business. A total of $89.5 billion in loans was originated in the 2007-2008 school year, $22.5 billion of which was in the form of private loans. For students, the stakes are even higher. The default rate on student loans climbed from 5.2 percent to 6.9 percent in only a year, and analysts say the number is likely to rise as the recession continues.
Image by: Matt Mahurin
The amount individual students borrow is rising, too. The average graduate of a four-year college accrues $22,500 in student loan debt, according to the National Postsecondary Student Aid Study . Education advocates say that recent grads and current students are going to bear an increasingly heavy burden when it comes to repaying those debts both because of the growing amounts borrowed and due to the increasing reliance on private loans. For the 2007-2008 school year, 14 percent of students took out a private loan, compared to only 5 percent in the 2003-2004 school year.
The tough job market is another major hurdle. The national unemployment rate was at 8.5 percent in March, and there's evidence that new grads are hit harder than other groups by the country's shrinking job pool. Research by the National Association of Colleges and Employers revealed that companies are planning to hire 22 percent fewer new college graduates this year than in 2008. Even students who do land jobs after college might not be out of the woods; another NACE study found that the average starting salary for college grads had declined from 2008.
College students seeking financing can apply for federally-backed or private loans. Federal ones have some advantages in that the costs of borrowing are less and the loan programs have a few consumer protections in place: The interest rates are tied to the three-month Treasury bill rate plus a couple of percentage points, and graduates have a six-month grace period after graduation before repayment must start, although in this economy that might not be enough of a buffer. Deferring the loan is possible, although some agreements may tack on the extra interest that accrues during the deferral period. Former students with anemic job prospects can also extend the term of their loan, paying more interest but lowering their payment to a manageable amount each month. [HERE In the private sector, though, offering any of these options is no more than a courtesy on the part of the lender; there's no legal obligation for them to cut debtors a break. Since the amount of federal loan money a student can borrow is capped, many have turned to private loans to bridge the gap, especially as the cost of college tuition has risen steadily in recent years. "These lenders have borrowers over a barrel," said Edie Irons, communications director for the Institute for College Access and Success. "They can be uncompromising." Even in the case of death or a work-ending disability, she added, private lenders still seek to collect.
Private loans also cost more, sometimes much more. Interest rates are generally variable and several percentage points higher than those for federal loans. Add in a missed payment and default rates of up nearly 20 percent — as much as some credit-card interest rates — kick in. In addition, private loan rules about late payments are nearly always stricter; while it takes months of non-payment to be declared in default of a federal loan, private loans can move into default after only a single missed payment, damaging the borrower's credit. Since employers in some fields have recently embraced credit checks as part of pre-employment background screening, missed student loan payments could potentially damage a new grad's chances at a job that would allow them to make those payments.
Student loans differ from other debt obligations like mortgages or credit card debt in a few ways, but one of the most significant is their "stickiness" when it comes to discharging them in a bankruptcy. Student loans are one of the very few types of debt, along with child support and some taxes, that are virtually impossible to have dismissed in bankruptcy. In the case of private student loans, although these lenders aren't governed by the caps on loan amounts and interest rates imposed on their federally-backed counterparts, they still receive the benefit of the bankruptcy exemption.
While help is on the way via recently passed legislation many in the field worry that it's not enough. Provisions included in the College Cost Reduction and Access Act of 2007 give students clemency on some loan debt if they go into public service or work in low-income fields, but it only applies to government-backed loans. The Higher Education Opportunity Act of 2008, for instance, required for the first time that private lenders spell out in plain English how much students will be paying in interest and what kind of penalties are levied for missing payments; however, it doesn't go into effect until next year
"That's not going to keep [lenders] from making bad loans," said Deanne Loonin, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. "It's just going to require them to tell people when they make bad loans." Loonin says the legislation is a good start but limited in its scope because it only affects future would-be borrowers, not the many students and new grads currently saddled with cumbersome loans. "Going backwards, you still have all these people who are stuck. We also would like to see some relief for those people."
One major change Loonin and others would like to see is a modification of the bankruptcy rules surrounding student loans. An amendment that would have made student loans dischargeable via bankruptcy was sponsored Rep. Danny Davis (D-Ill.) last year, but was voted down.
The student loan industry is very generous when it comes to supporting politicians it hopes will look out for its interests. While plenty of banks that offer private loans are regulars on the donation circuit, the powerhouses of federal lending are also paying out large sums to favored lawmakers. The PACs for Sallie Mae and NelNet, two of the sector's biggest servicers of federally backed loans, turned up at number two and eight, respectively, in a list that of top finance-industry donors that also included banking giants like Bank of America and Citigroup. Sallie Mae gave $800,000 in 2008, while NelNet gave $250,000, according to the Center for Responsive Politics.
One notable recipient of this largesse is Rep. Paul Kanjorski (D-Pa.), who received a combined total of $15,000 from Sallie Mae and NelNet in 2008. Kanjorskiy is a vocal advocate of Sallie Mae. Public policy think tank New America Foundation pointed out in an online article Kanjorski's personal interest in keeping this lending powerhouse healthy; earlier this month, it shifted several hundred jobs into his eastern Pennsylvania district.
In the tug-of-war over who gets control of these billions of dollars in student debt, industry supporters invoke the specter of massive job losses as an objection to the government's plan to phase out the middleman in federal loan programs in favor of a direct lending system. Both Sallie Mae as well as the National Association of Student Financial Aid Administrators, an industry trade group, have come up with alternative plans that preserve the role of the servicers. They argue their plans can save just as much money and will preserve jobs, as well.
But it's not just donations and vote-garnering jobs; lenders also spend a lot of money on lobbying. "Sallie Mae spent $3.4 million in lobbying in 2008," said Sheila Krumholz, executive director of the Center for Responsive Politics. While this was down from 2007 levels, it's still a significant investment. "By comparison, Bank of America spent just $4 million," said Krumholz. "In lobbying is where they're on par with the heavy hitters. It explains where they're putting their focus."
With a new president who has already taken aim at education financing via a plan to phase out private loan programs and handle financing directly through schools, lenders are on the defensive. The administration's plan for overhauling student lending is facing a fight both from Republicans as well as from within its own party — a measure of how far the industry's fundraising efforts extended. "The fact that they were lobbying so heavily is indicative of the concern they had last cycle," said Krumholz. "It appears it was perhaps justified given what they're facing now. They may have seen the writing on the wall."
Martha C. White is a freelance journalist in New York.
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