US: Regulating student loans

Although hailed as an important step towards reining in the 'wild west' practices associated with student loans, Congress' recent financial reform legislation is not seen as going far enough in protecting the interests of the more than 18.2 million students who study in the US.

In a measured statement United States Student Association president Lindsay McCluskey applauded Congress "for taking the difficult but necessary steps to reform the nation's financial framework" in its creation of the Consumer Financial Protection Bureau (CFBP), the first federal agency dedicated to safeguarding consumer rights within the free market economy.

But she also voiced concern that the new consumer watchdog agency had not been given enough authority to curb the often predatory and deceptive marketing practices of private lenders as affects private student debt.

These concerns and those of organisations such as the Project on Student Debt relate to the 'watering down' of the so-called Wall Street reform bill as it passed from the House of Representatives to Senate.

In this regard, the CFBP's enforcement authority extends only to organisations worth more than $10 billion annually. The top student lender, Sallie Mae, would therefore be exempt from regulation because it has deposits of only $5 billion.

Another issue concerns the failure of Congress to include a provision of the House version that attempted to steer students away from private lenders toward safer federal loans.

Awareness of federal loan eligibility has long been a concern to student advocacy groups, which point to US Education Department statistics showing high numbers of undergraduates indebted to private lenders when lower-cost and lower-risk federally subsidised loans were also available.

In 2007-08 two-thirds of all those students who borrowed to fund their studies could also have taken out cheaper federal loans.

But private lenders are not the only culprits. The for-profit sector of higher education has also been guilty of employing tactics to recruit - and then make indebted - students for unnecessary educational programmes.

Statistics show that while only 7% of the higher education student population in the US attend for-profit institutions, nearly half of all the defaulted loans in 2009 came from students who had attended these so-called 'career colleges'. Among this cohort, most came from low-income backgrounds or belonged to minority groups.

It has been estimated that about two-thirds of all students graduating with bachelor degrees in 2007-08 had debts slightly above $23,000. The average cumulative, annual debt increase of 5.6% since 2003-04 has been attributed to progressive divestment in higher education, state budgetary cuts and skyrocketing costs - in addition to the financial collapse of 2008.

In-state tuition rates at four-year public colleges alone rose on average by 6.4% in 2008-09.

Although much of this debt comes from safe, federal loans, an alarming proportion comes from uncapped, variable interest rate loans - some of which, in recent years, have been as high as 18% with rigid repayment plans.

The CFBP legislation comes on the heels of the Obama administration's reform of the way students fund post-secondary education in the Student Aid and Fiscal Responsibility Act of March 2010. In particular, the government's replacement of former President George W Bush's Federal Family Education Loan with a Direct Loan programme was viewed as a victory for American students in its elimination of the excessive subsidies banks earned serving as middlemen.