'The Student Loan Scam'
Not everyone would willingly choose to become the public face of the debt-ridden. Alan Collinge didn't exactly choose to do so, defaulting on $38,000 in student loans only after a series of missteps and strokes of misfortune, but he has embraced his situation with gusto, founding StudentLoanJustice.org to advocate for distressed borrowers and now writing a book, The Student Loan Scam (Beacon Press).
Collinge's tactics have at times been controversial -- he has been criticized for personally attacking student loan lobbyists, for instance -- but with the Obama administration putting the student loan programs front and center in its higher education agenda, the industry he writes about and his views are likely to remain relevant. In an e-mail interview, Collinge discussed his personal experiences and his assertion that none of the policy changes currently being debated will make a difference for borrowers without reform of federal bankruptcy laws.
Q. Can you give our readers the 1-minute version of how you ended up getting into such a jam with student loans? How much of your situation evolved because of your own (potentially flawed) decisions, and how much because of the unfair practices or policies or rules by other parties?
A. I originally borrowed $38,000 in FFEL loans for college, and graduated from the University of Southern California in 1999 with undergrad and graduate degrees in aerospace engineering. I took a job (with takehome pay of about $2,000 a month) as a researcher at Caltech out of school, consolidated my loans with Sallie Mae, and began making regular payments of almost $400 a month. I took a night job as a waiter, but keeping to a budget proved difficult, exacerbated by expenses related to a minor car accident and money I had spent trying to develop an invention since graduate school. I left Caltech in the summer of 2001 hoping to secure a higher paying position in the defense industry. Unfortunately, the economy after September 11th left me unemployed/underemployed for more than a year.
In December 2001, I requested a hardship forbearance, but Sallie Mae turned me down and put my loans into default. I tried repeatedly to negotiate a reasonable payment solution with Edfund, the guarantor, but they offered me no solution but to begin repaying on what had exploded to $80,000 by spring of 2003. I spent the next two years dealing with all manner of collection companies to negotiate a solution I could realistically afford, but by 2005, what had started as a $38,000 headache had become a $100,000 nightmare.
There is no doubt that my decisions after graduation contributed to my financial distress. I could have made wiser decisions about where to work out of college, and placed more emphasis on pay rather than other factors. I should have never left my job at Caltech without a solid position to go to. The fact that by 2002, I was working in a kitchen 90 hours per week for less than minimum wage was on account of my actions, and mine alone.
However, the explosion of my debt from headache to insurmountable proportions had much more to do with the predatory environment that gives the industry a perverse incentive to default student loans. Like most borrowers, I didn’t realize until well after graduation that federal student loans were the only loans in the nation that are largely non-dischargeable in bankruptcy, have no statutes of limitations, and can't be refinanced after consolidation. Nor do they realize that borrowers can have their wages, Social Security, and disability income taken without a court order, for example. Lenders are largely unwilling to negotiate with distressed borrowers, and act in a predatory fashion.
Had there been standard consumer protections in place to motivate the lending system (Department of Education included) to avoid default, I am certain that my forbearance would have been granted, and today I would likely be nearing payoff of my loans.
The systematic removal of standard consumer protections from student loans gave rise to a predatory guaranty and collection industry that, armed with the strongest and most ruthless collection powers ever allowed, proceeded to extract massive revenue from misfortunate borrowers. Many would consider this a success in government-business partnerships, given the profits for the lenders and the protection of the U.S. taxpayer. But the resulting system gave all parties involved an interest in a high default rate (there is some debate about the federal government’s fiscal incentive, but for all other parties, there is no debate), rewarding the system for providing horrible loan administration, confusing the borrowers, providing them with ridiculously bad, incomplete, misleading, and even dishonest information. Some lenders were even caught falsifying documents, and defaulting loans without ever attempting to collect on the debt.
The human cost of this system has been shameful. Millions of citizens have been strong-armed into either repaying several times more than they originally borrowed or being effectively relegated to second class citizens. Many have literally fled the country as a result, or even worse. Finally and importantly, the system has caused an inflationary spiral in tuition and other costs charged by our nation's colleges and universities. This affects everyone who attends college and their families -- borrowers and non borrowers alike.
Q. There are a lot of people who tend to think that the troubled borrowers whom your group represents have brought their problems on themselves. To what extent is that fair, and to the extent it's not, why not?
A. Personal responsibility in assuming and repaying debt is always important, as with any other type of lending system. However, this principle of personal responsibility has been used as a cover for corporate and governmental irresponsibility and predation for far too long. The disastrous effect this has had on millions of individual citizens, and for the public interest generally, is now becoming evident, and no amount of spin, personal attacks against borrowers, etc., can change the incontrovertible facts, and the logical conclusions that must be drawn from them.
One example: in the 1970's, the industry used anecdotal stories of students graduating college and then promptly filing for bankruptcy to convince Congress to restrict, and then ultimately remove, bankruptcy protections. This was a successful trick (for lack of a better word) that appealed to emotion rather than reason. In hindsight, it turns out that in fact, far less than 1 percent of federally guaranteed student loans were discharged through bankruptcy when they were treated as all other loans in the country.
Q. What are the two or three biggest problems with our current system of financing college enrollment for students and families, in your view?
A. There is only one core problem: The removal of standard consumer protections (such as bankruptcy rights, statutes of limitations, refinancing rights, and other free market protections) from the student loan system. This has caused other problems:
1. This removal had caused predatory behavior by the lending and collection industry.
2. The system has also demotivated the Department of Education. Because it has no financial interest in whether or not students default (arguably, it may be actually making, not losing, money from defaulted loans), it doesn't act in a way to ensure that students don't default. So, the Department no longer has an incentive to pressure universities to keep their costs low, their quality high, and the time in attendance low, and we all know the results. ED/lenders/universities can feebly point to penalties against lenders and schools for high default rates as sufficent incentive for them to want to avoid defaults, but it is well-known that this "cohort" default metric is very easily manipulated -- even under the new definition -- and is really a paper tiger. They would really would do better to be honest and admit it. The American public will greatly appreciate -- and is capable of handling -- candor, forthrightness, and complete/accurate information from the department, as opposed to the misinformation, disinformation, and lack of information that has come to be a hallmark of the Federal Student Aid office.
3. The system has also enabled the colleges to raise their tuition and other fees at double the rate of inflation for over 30 years now, which only exacerbates the problem for the borrowers, and extends it to affecting everyone who attends college -- non-borrowers and borrowers alike.
Q. The student loan industry has been very much on the defensive in the last couple of years, first from New York's attorney general and now from the Obama administration. I had more or less assumed that you'd be a cheerleader for the White House plan to end the lender-based guaranteed student loan program, given your experiences, but I've seen comments from you suggesting otherwise. What don't you like about the move to 100 percent direct lending?
A. I take no strong position on this debate. Any systems architect would be compelled to admit that it is more efficient, structurally. But whether it is a direct- or private-lender based system, the lack of consumer protections only ensures that the future system will be wrongly motivated, and the problems that arise from that will be perpetuated and enlarged. Private companies will likely be both servicing and collecting on student loans under the proposed system. This could -- and likely will -- sustain the same perverse incentives to default loans. In the absence of other revenue that they formerly had under the FFEL system (origination fees, interest, and subsidies), this incentive could even be increased, without strong and clear instruments in the contract language that guard against it.
Q. What should be done to improve the student loan system?
A. It’s simple. In the public interest, Congress should act decisively to return standard consumer protections to student loans, and also to terminate some of the more debilitating collection powers, such as state license suspension and seizing the Social Security income of senior citizens (for example).
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