Student loan scandal threatening U.S. economy

The Bakersfield Californian
June 30, 2015

Roughly $1.2 trillion in U.S. student loans are jeopardizing the present financial well-being and future retirements of generations of Americans. And the Wild West-like behavior of the student loan industry is making the situation worse.

Consumer abuses have become so rampant that the federal Consumer Financial Protection Bureau recently opened an investigation of the industry. People can submit comments which will be used to make rules to rein in student loan processors. Go to www.consumerfinance.gov and click onto “Tell Your Story.”

Skyrocketing student loans are a product of a financial “perfect storm.” Tuition and fees at public universities have been creeping up for the past several years. But when the Great Recession hit in 2009, lawmakers cut tax support for higher education, shifting skyrocketing costs to students and their families.

At the same time, many parents lost their jobs. Unable to pay for their children’s college educations, they borrowed — many from their retirement accounts. Student access to part-time jobs to help pay for college also disappeared with the Great Recession’s job cutting.

Not to fear. “We’re from the government and we’re here to help” was the response. The spigot on high-interest-rate federally-backed student loans was opened.

With a typical student’s loan balance climbing to $30,000 and maybe even more than $100,000, the availability of easy money erased concerns. But clearly students and their families did not consider the consequences of leaving college with debt equal to many mortgages.

Financial observers note that as with mortgages during the housing bust, the student loan industry also is now plagued by hucksters and crooks.

Generally, lenders contract with student loan servicing companies to collect payments and advise borrowers. But the incentives tied to the contracts often encourage companies to provide the least amount of services to borrowers and keep them in debt for has long as possible.

According to the CFPB, nearly 8 million Americans, or 1 in 5 people with student loans, are in default. And while programs have been created to help, loan modifications often are hard to obtain. Some service companies are slow to process payments and correct mistakes. Companies lose paperwork and incorrectly account for loan pre-payments. Students often are not told when the processing of their loans has changed hands and they lose track of how much they owe.

“Student loan servicers often make more money when they spend as little time as possible on each account, and they typically get paid more when a borrower is in repayment longer,” CFPB’s director, Richard Cordray, recently told the Associated Press.

An army of private “student loan counselors” has now popped up with offers to consolidate loans and with promises to qualify borrowers for debt reduction programs. While many of the claims are downright bogus, others are just offers to fill out paperwork in exchange for high fees.

Concern over these problems should not be limited to those with outstanding loans. Mounting student debt is slowing the nation’s economic growth, forcing families to cut spending and delay such things as home buying. Entrepreneurs also cannot start new businesses if they are saddled with debt. And a generation of cash-strapped baby boomers is heading into retirement after already spending their nest eggs on their children’s educations.

Stronger rules requiring the fair and efficient servicing of student loans is critically needed.