September 26, 2008

Students to Secretary Paulson: Bail Out Distressed Borrowers, Not Banks

Washington — With talks over a $700-billion bailout package for the financial sector expected to continue into the weekend, a group of student and consumer advocates is asking lawmakers to leave student loans out of the plan.

In a letter sent to lawmakers leading the negotiations with Treasury Secretary Henry M. Paulson Jr. and other officials, the groups argue that using taxpayer money to purchase the assets of student-loan companies would be “hasty and ill-conceived.”

“In the wake of the fallout [from the subprime-mortgage crisis], loan companies have begun to think twice before providing high-cost loans to high-risk borrowers,” reads the letter, which is signed by 13 groups representing students, consumers, and colleges, including the American Association of State Colleges and Universities and the U.S. Public Interest Research Group. “Bailing out student-loan companies now could prove not only to be the wrong thing to do, but entirely counterproductive. Congress should not walk away from lessons learned.”

The letter goes on to argue that if such loans are included in the bailout, then Congress should provide student-loan borrowers with the same protections as homeowners, including the right to discharge their debt through bankruptcy.

“If private student loans are included in your final economic package, we urge you to send a message to the American people that Congress is looking out not just for lenders, but for students and their families as well.” —Kelly Field

Comments

1. With friends like these, families struggling to pay the ridiculously high tuition bills that some of these organizations’ members charge don’t need enemies.

   If the financial system were to go south, the private student loan market would go with it. It’s juvenile to think that bank CFOs would make an exception and hold their private student loan lines harmless, when every other line gets creamed. It’s not just high risk families that won’t be able to get loans.

   Horribly irresponsible letter!

   — David Starr    Sep 29, 09:26 AM    #

2. Perhaps, but it’s also a problem to assume that a financial system can be sustainable without some protections to borrowers.
   The regulations on student loans deny basic consumer protections to borrowers. Largely because of a very successful albeit unethical campaign by the large corporations controlling access to student loans. Borrowers cannot file for bankruptcy reorganization. And the SL companies routinely apply collections tactics which would not be allowed in any other arena of the financial industry. To paraphrase Dr. Warren of Harvard law the ‘student loan industry has been given powers the mob would envy’.
   And when any financial system uses extreme or predatory tactics there is a point where those subject to those same tactics can no longer sustain the demands. The edudebt industry has reached that point; for example one major company has increased its fee revenues 220% since 2001. Another overtly admits that its collections branch is its most profitable subsidiary.
   And academia is close to the break point on this issue. The obscene escalation in college costs was a trend which closely coincided with the shift to the privatized loan model. An event which did occur because there was a massive amount of money to be made by turning an entire generation into chattels for corporate lenders. Hence neither academia nor congress considered the long term effect. So if we elect to do a bailout without ensuring students and families have basic consumer rights restored…all we are going to do send billions down the maw of an industry which brought itself to a brink because of predatory practices in regards to its clientele. And really how is it reasonable to unreservedly bail out companies whom in some cases saw 2000% increases in stock prices,
   220% increases in fee revenues and still can’t seem to manage themselves away from the brink.
   There’s more here involved than a few billions in corporate bailouts. Academia cannot survive much longer if all it’s progeny acheive is a crushing debt. And to unconditionally hand out billions to a system which is no longer functional will only ensure the same conduct which brought it to the brink.

   — Atana    Sep 29, 11:23 AM    #

3. The dirty little secret, of course, is that this bailout has one intention only: restore the stock value of major financial institutions in which many legislators and their friends are portfolio heavy and in many cases heavily leveraged. These troubled institutions could easily borrow money to cover their debts, but the ensuing principle and interest would surpress profits and the stock value for years. This bailout is for investors and no one else. It is corruption and lying on an unheard of scale. It is a brazen daylight robbery, and your legislators are holding you up with a fake gun in your face.

   — DeeDee Pontiac    Sep 29, 12:52 PM    #

4. Thanks, Atana. Your statistics and view bespeak of a reality no one really wants to understand. It is amazing that our government will bail out a corrupt industry to the tune of billions, yet wants every dime of interest and penalties it can rake from the pockets of the poor, disabled and middle class. An “irresponsible letter,” cries Dave? How about a “horribly” irresponsible, corrupt, unethical, evil, immoral system — the student loan industry — that resembles a golden calf that is now so dead and bloated it is ready, along with its corrupt cousin, Wall Street, to explode. DeeDee is right; it may be a “fake gun” being held at our heads, but it still aims point blank at our economic hearts.

   — steve    Sep 29, 02:00 PM    #

5. As far as the economic gun, unfortunately what is currently happening is only the last shot in regards to the SL issue.
   It has been an longstanding economic issue, and one which has been detrimental to the common good. When congress and the executive branch privitized what had been a working system, the result was an unparalled transfer of wealth and pontential to a small group of corporate powers. Essentially our societies most intelligent, ambituous and creative became bound to, what was for many, a lifetime debt. As such the resources they could have directed into businesses or into the general consumer economy were lost. And as a result countries which do not use this system are outcompeting the United States. Their best people can apply their education to their own benefit or to that of their society. Eventually what we’ll get here is a ‘brain drain’ wherein our educated people will leave the US…having no other choice in order to make their decision to become education a viable choice.
   And to bail out the ‘dead and bloated calf’ without aiding those who’ve been its fodder…will only increase the already detrimental consequences.

   — Atana    Sep 29, 02:37 PM    #

6. Atana, why not push to repeal the Clinton-proposed law that made federal student loans not dischargeable in bankruptcy? Why should the creditor with the deepest pockets—the federal government—have the biggest hammer to use?

   — David Starr    Sep 29, 04:05 PM    #

7. Actually the restrictions on bankruptcy protections and student loans is a trend which dates to the late 70’s. And the reason that the bankruptcy protections have not been restored has nothing to do with any condition which would benefit the federal government or students and families. The reason for bankruptcy protections being obstructed resides in how the regulations are written regarding student loans and defaults. Under the current regulations the loan providers get the surety money from the government should a loan default. Additionally they can still collect from the student, including unprecedented powers of garnishment and harassment which are often aided by the co-opting of state authority. It is not uncommon under these conditions for these companies to inflate the orginal loan amount 2-3 times over. So it is not to the advantage of the loan companies to work with borrowers or the federal government. Because in the manner which the regulations were sweethearted for the edudebt companies…they can collect the original amount, plus sureties, plus enhanced fees. For students and families caught in this vise, there is no way to make reasonable accomodation. Hence the reason that some have gone to the extremes of suicides or leaving the country. Not that those alternatives have achieved much, there have been even been instances of companies trying to collect (in an abusive of aggressive manner)from grandparents and other survivors of the dead.
   The irony is under the proposed bailout the loan servicers are potentially getting accomodations which they themselves would never give to their clients.

   — Atana    Sep 29, 05:34 PM    #

8. I am trapped by divorce in a home I cannot sell with a daughter in college that I cannot support while also paying my mortgage. Although I have been able to support my daughter and keep the house while she finished high school, I now am faced with sending my keys to the mortgage company. I refuse to have my daughter screwed to the wall by student loans, so voluntary foreclosure, here I come.

   — Wendell Warren    Sep 30, 11:35 PM    #

9. M. Warren condolences on your unfortunate circumstances. Situations like yours are an increasingly common example of the effect of the privateering which has so compromised higher education. The only people who benefit from these exhorbinant loan terms, are the silk suited schemers who co-opted what had been a workable system. They’ve made billions by wrecking the lives and aspirations of millions. And now having exhausted the wellspring of their profits, and managing so poorly those same profits they want more billions for a bailout.
   All to support a system which never served the common good, and never should have been allowed to become so unduly powerful.
   The problem is, the costs of this system be it directly borne by students and families via obscene loan debts, or indirect costs such as the proposed bailout…cannot be sustained. It will reach a point where academia will lose students, simply because it will become an economic fools game to obtain an education. As an academic at a gateway institution ethically I have had to tell students to be very careful about pursuing their education further. And after the costs of this bailout many may not be able to pursue their education any further. The necessary resources being directed to the few rather than the many. So much for the ‘life of the mind’ it’s been conceptually foreclosed upon…
   At that point, which may not be too long in coming, will we say it was all worth the costs, or even necessary?

   — Atana    Oct 1, 11:13 AM    #

10. Remember the reports in the wake of the Enron scandal, with all the bragging about socking it to grandmothers in California? We seem to have a lot of this kind of lack of moral scruples loose within the loan industry. Atana is right in pointing to the S&L scandals of the 70’s which also came from deregulation. We obviously learned nothing from that debacle about how lenders when give the chance will all too willingly become hogs feeding at the trough. I have to laugh every time I hear about our “free enterprise” system, which has become ludicrously dependent on government subsidy. Deregulation has just been removal of government oversight while leaving the subsidy. These folks are like the teenager given a credit card by parents who decide to have it automatically paid until they wake up one day and discover their kid has drained their financial assets. It doesn’t take a genius to recognize the kind of salaries (and even higher income) paid to people “working” in the financial services area represented increasingly immoral and unethical behaviors, and now we all apparently are going to have to pay for their overt gluttony. Let’s just hope we can avoid revisiting the nightmare of the 1930’s (which devastated my parents’ lives along with many others). The current administration clearly ignores the lessons of history. January can’t come soon enough.

    — CW    Oct 1, 06:19 PM    #

11. “I have to laugh every time I hear about our “free enterprise” system, which has become ludicrously dependent on government subsidy. Deregulation has just been removal of government oversight while leaving the subsidy.”

    CW that’s the hapless irony, or moral shock about the whole situation. The SL industry has never been free market having been reliant on government subsidy, sureties and even regulations favoring certain companies. Now they’ve run the system to collapse by their excesses it’s time for the government to come and and bail out their free market lending system which only existed because of the government?
    Why not consider using this money to establish an equitable student funding system wherein corporations aren’t funneling off resources? Yes it was their money but that was backed by government sureties in a system which was lobbied into being to benefit these few large corporations. Which have behaved in a admittedly immoral manner. Perhaps its time to use public money to directly support students rather than indirectly applying it to support corporate middlemen.
    At least then academia might be able to breath again morally better aires…

    — Atana    Oct 1, 06:56 PM    #

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