Oppressive student loan rules leave borrowers open to abuse

The Baltimore Sun

For four months this year, while Congress was overhauling student loan laws, I traveled the country in a beat-up RV meeting with citizens and legislators. My mission was simple: Persuade Congress to restore consumer protections to student loan borrowers. After 22,000 miles, 42 states and five flat tires, I can't help but feel that my efforts were a waste of time. And gas.

Sure, the House and Senate passed the College Cost Reduction Act. The bill includes some attractive provisions for those headed back to campus this fall, including interest rate reductions, loan forgiveness for public service, Pell grant increases and income-contingent repayment plans for future graduates. But it doesn't fix a fundamental problem: Basic consumer protections were stripped from student loans in the mid-1990s.

Reacting to much-publicized stories of student-borrower bankruptcies and a default rate of 22 percent in the late 1970s, Congress required seven years of repayment before borrowers could declare bankruptcy on federal student loans. In 1998, this qualifier was done away with, rendering all federal student loans non-dischargeable except in the most dire circumstances, such as total and permanent disability.

Congress also took away the freedom of borrowers to shop for student loans in a competitive marketplace. Many college students graduate with two or three types of student loans and choose to consolidate them either to simplify repayment or to pay them back over more time. But once they've consolidated, borrowers become captive to that one loan company. They can never refinance again.

But this is only the tip of the iceberg: Sallie Mae and other student loan interests also had lobbied heavily for legislation that took away other standard consumer protections, including adherence to the Fair Debt Collection Practices Act (student loan companies were specifically exempted in 1996), and statutes of limitations (removed for student loans in 1999). Student loans were also exempted from "truth in lending" regulations, the rules that require lenders to point out key information - annual percentage rate and fees - to borrowers on all loan documents.

Congress also let lenders levy massive fees - often as high as 25 percent of the balance of the loan - on those having trouble making payments. Student loan companies got draconian collection powers, including the right to garnish a borrower's wages, tax refunds and Social Security or disability payments. Some states even got into the act, suspending professional licenses of student borrowers in default.

This has led to serious abuse. From 2001 to 2005, Sallie Mae's fee income (penalties and fees collected on delinquent debt) increased by a whopping 107 percent. In 2003, Albert Lord, then Sallie Mae's chief executive, bragged to shareholders that the company's record profits were attributable to this increase.

This is no small problem. Between 3 million and 5 million Americans end up in default on their student loans.

In 1965, Congress created the grants and loans programs of the Higher Education Act to help Americans achieve the dream of higher education. Now, it is time to help those whose lives have been turned into nightmares by the student loan industry.

Alan M. Collinge is the founder of the political action committee StudentLoanJustice.org. This article originally appeared in the Los Angeles Times.

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