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America's Student Loan Racket: Soaring Default Rates
by Stephen Lendman
Email: lendmanstephen (nospam) sbcglobal.net
19 May 2011
America's Student Loan Racket: Soaring Default Rates - by Stephen Lendman
An earlier article discussed Permanent Debt Bondage from America's Student Loan Racket," accessed through the following link:
It explained government/corporate complicity to rip off students for profit, a racket continuing under Obama. His July 2010 Student Aid and Fiscal Responsibility Act perpetuated the scam. It enriches providers, entrapping millions of students permanently in debt, because rising tuition and fee amounts plus interest, service charges, and late payment or collection agency penalties are too onerous to repay.
It's part of the grand scheme, of course, to transfer maximum public wealth to America's super-rich already with too much. Ongoing for over three decades, it accelerated under Obama, a corrupted Wall Street/war profiteer tool, destroying America for power and profit.
Millions of Students Permanently Entrapped in Debt
Many students, whether or not they graduate, have debt burdens approaching or exceeding $100,000. If repaid over 30 years, it's a $500,000 obligation, and if default, much more because debts aren't forgiven. As a result, once entrapped, escape is impossible. Bondage is permanent, and future lives and careers are impaired or ruined.
Congress ended bankruptcy protections, refinancing rights, statutes of limitations, truth in lending requirements, fair debt collection ones, and state usury laws when applied to federally guaranteed student loans. As a result, lenders may freely garnish wages, income tax refunds, earned income tax credits, as well as Social Security and disability income to assure defaulted loan payments. In addition, defaulting may cause loss of professional licenses, making repayment even harder or impossible.
Moreover, under a congressionally established default loan fee system, holders may keep 20% of all payments before any portion is applied to principle and interest due. A borrower's only recourse is to request an onerous and expensive "loan rehabilitation" procedure, requiring extended payments (not applied to principle or interest), then arrange a new loan for which additional fees are incurred.
As a result, for many, permanent debt bondage is assured. In addition, no appeals process allows determinations of default challenges under a process letting lenders rip off borrowers, many in perpetuity.
At issue is a conspiratorial alliance of lenders, guarantors, servicers, and collection companies enriching themselves hugely at borrowers' expense, thriving from extortionist fees and related schemes. It's a congressionally sanctioned racket, scamming millions of indebted victims.
Moreover, lenders thrive on bad debts, deriving income from inflated service charges and collection fees. They're more than ever today as default rates soar, lifetime rates now nearly one-third of undergraduate loans, higher than for subprime mortgages. In fact, they're higher than for any other lending instrument and rising.
Soaring Defaults During Hard Times
Since America's economic crisis began in late 2007, an April 21, 2009 Wall Street Journal (WSJ) Anne Marie Chaker article highlighted the burden on students headlined, "Student Loans: Default Rates are Soaring," saying:
The combination of economic weakness, rising tuitions and poor job prospects caused defaults on student loans to skyrocket. According to Department of Education numbers for those federally guaranteed, estimated FY 2007 default rates reached 6.9%, up from 4.6% two years earlier.
Conditions are now far worse according to a February 4, 2011 Mary Pilon and Melissa Korn WSJ article headlined, "Student-Loan Default Rates Worsen," saying:
They "rose to 13.8% from 11.8% for students beginning repayment in (FY) 2008 compared with those starting a year earlier," according to new Department of Education data.
They measure defaults within the first three years of repayment. Over their lifetime, however, they approach two and a half times that level, perhaps heading for 50% if economic conditions keep deteriorating while tuition and fee rates rise.
Students at for-profit schools fare worst at 25%, but sharp tuition increases at public and private nonprofit universities place greater burdens on their graduates, assuring rising defaults, especially over their lifetime.
Moreover, rising levels may cause many colleges to become ineligible for government-backed Pell Grants and other student loans. To qualify, they formerly had to show less than 25% of students defaulting within a two year window. If they breached that threshold for three consecutive years, or hit 40% in a single year, they could lose out altogether.
Now, under the 2008 Higher Education Opportunity Act increasing the default window to three years, the ineligibility threshold rose to 30%, penalties not beginning until 2014.
On March 15, New York Times writer Tamar Lewin headlined, "Loan Study on Students Goes Beyond Default Rates," saying:
For every student defaulting, "at least two more fall behind in payments," according to a new study. Conducted for the Institute for Higher Education Policy by Alisa Cunningham and Gregory Kienzl, it can be accessed in full through the following link:
It explains that around 40% of borrowers were delinquent within a five year repayment window. Almost one-fourth of them postponed payments to avoid delinquency. However, doing so made their interest and overall debt burden more onerous because escape is impossible.
Data from five of the country's largest student loan agencies showed only 37% of borrowers who began repayments in 2005 did so on time, a number now decreasing during hard times.
On April 11, Lewin headlined, "Burden of College Loans on Graduates Grows," saying:
"Two-thirds of bachelor's degree recipients graduated with debt in 2008, compared with less than half in 1993." However, rising debt burdens contribute to soaring default rates, especially for private for-profit universities. Moreover, given Pell Grant cuts and rising tuitions, students will be more than ever indebted and strapped to repay during hard times because Congress rigged the system against them.
As a result, education policy experts expect serious implications for future graduates. According to Lauren Asher, Institute for College Access and Success president:
"If you have a lot of people finishing or leaving school (entrapped in) debt, their choices may be very different than the generation before them. Things like buying a home, starting a family, starting a business, saving for their own kids' education may not be an option if they're trying to repay student debt."
Moreover, "(t)here's much more awareness about student borrowing than there was 10 years ago. People either are in debt or know someone in debt."
Many of them have their own horror stories about how predatory lenders, servicers, guarantors, and collection companies rip them off under an escape-proof system.
The entire scheme amounts to legalized grand theft, the equivalent of what Wall Street banks do to investors with impunity.
According to Deanne Loonin, a National Consumer Law Center attorney:
"About two-thirds of the people I see attended for-profit (universities). Most did not complete their program, and no one I have worked with has ever gotten a job in the field they were supposedly trained for. For them, the negative (debt default) mark on their credit report is the No. 1 barrier to moving ahead in their lives. It doesn't just delay their ability to buy a house, it gets in the way of their employment prospects, finding an apartment, almost anything they try to do."
A Final Comment
America today is characterized by a combination of rising poverty, unemployment, home foreclosures, homelessness, hunger, student debt entrapment, and despair, mocking the notion of a fair and equitable society.
Not at all under a corrupted political duopoly, sucking public wealth to America's super-rich, spurning popular needs, waging permanent war, and heading the nation for tyranny and ruin.
If that's not just cause to resist, what is? If not now, when? If not us, who? If that future doesn't arouse public anger, what will?
Stephen Lendman lives in Chicago and can be reached at lendmanstephen (at) sbcglobal.net. Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.
This work is in the public domain