For the student loan industry, the reality is the opposite: Lenders hope their borrowers default, because they actually make more money that way. Not only can they charge usurious interest, but they also get to bury defaulted borrowers with punishing penalties and fees. Moreover, student loans are the only loans for which bankruptcy protection is prohibited. Pile on collection fees from agencies assigned to chase and harass borrowers for what they owe, and repayments can inflate to several times the original balance.
All of this comes from Alan Michael Collinge's necessary new exposé, and it calls to mind the Inquisition, minus the religion. That Collinge writes from personal experience makes "The Student Loan Scam" passionate and informed. When he graduated in 1988 with three engineering degrees from the University of California, he consolidated his $50,000 in student loans with Sallie Mae, the government-sponsored company that later privatized and is now the leading student loan company. When he fell slightly behind on his repayments, Collinge says, the company assured him that if he continued his regular payments, he'd be assessed only a one-time late fee.
That fee mushroomed into a monthly charge, however. When he called Sallie Mae, the company refused to strike the fees. He tried to consolidate his loans with another lender offering better terms, only to learn that federal law bans that after the first consolidation. Collinge, whose political action committee, StudentLoanJustice.Org, catalogs such cases and advises the victims, is not the most extreme example. Some folks have fled the country or committed suicide to escape the stress and collection efforts of the loan industry. Even an earthquake won't shake these guys, who, Collinge reports, defaulted one borrower (without notifying him) after a California quake destroyed his apartment.
This mess, according to Collinge, is the work not only of greedy industry types but also their lackeys in political office. "Know that I hold you in my trusted hands, I have enough rabbits up my sleeve to be able to get where we need to," Ohio Representative John Boehner told a dinner hosted by a Sallie Mae executive. There are several such quotes here, and in some cases here the industry's actions have drawn legal penalties. (Some, former industry insiders included, compare student lenders to loan sharks.)
Collinge calls for laws granting student borrowers the same consumer protections enjoyed by other indebted people. The book would have felt more balanced, without losing its muckraker's sting, had he provided more of the industry's defense. What little he serves up is pretty flabby. Stripping bankruptcy protections for student loans, he writes, was based on "undocumented anecdotal examples of students who filed for bankruptcy immediately upon graduation. In fact, most of the anecdotal incidents involved credit-card debt, not student loan debt."
Adding to the book is not a suggestion made lightly. For a slender volume, it reads long in places. The chapter on the grassroots rebellion against the loan industry, in large part a memoir of Collinge's activism, could go.
He's performed a service nonetheless. He notes that Thomas Jefferson and Henry Ford declared bankruptcy at various times in their lives - an important reminder, in our materialist, money-is-merit culture, that hard times can befall even the talented, and that bankruptcy shouldn't always be stigmatizing.
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