Consumer Law

Student loan ?crisis? just an invention?

By Sarah Byrnes

I just had an interesting chat with Deanne Loonin, a staff attorney at the National Consumer Law Center and one of the nation’s leading experts on student lending law.  She was venting her frustration at the recent news cycle about the ?crisis? in student lending.  If you were paying attention, you would probably think that students are facing difficulty getting loans these days.  (You might also be concerned about the soaring cost of college, but that?s another can of worms.)

But despite all the recent fuss, Loonin is clear in her post on the Consumer Law & Policy Blog that ?there has been no change in a borrower’s ability to access federal loans.?  Yes, some private lenders are getting out of the federal student loan program.  But plenty of others are still making loans, and we still have the government-backed Direct loan program.  As the Project on Student Debt puts it,

While some lenders are scrambling to fill a financing gap, the system is quite secure for students. That’s why we can say with confidence: everyone who qualifies for and wants a federal student loan will get one.

As for private student loans (not to be confused with privately issued government guaranteed loans), there has been some stricter underwriting, but on the whole, that’s a good thing:  ?It is in some ways a good thing if it signals greater responsibility on the part of lenders to make loans only to those who can afford to repay? (Loonin).  So despite reports from the Boston Globe, New York Times and even NPR, the student lending ?crisis? was really blown out of proportion.

So why the drama?  Well, last year the government cut its subsides to the lenders who make private loans through the government program.  Lenders have been rather PO?ed ever since.  In order to check off some of the wishes on their list, they took a manageable problem and manufactured it into a ?crisis? requiring government aid.

And it?s working.  President Bush recently signed a law that authorizes the Education Department to buy outstanding federally backed loans from private lenders.  While this would theoretically help if there was a crisis adversely affecting students, it does something else more immediately according to Politico:  saves the hides of the lenders who are currently facing losses.  But, given that there is no threat to a student?s ability to get a loan, why are their losses considered a national crisis deserving of what some are calling a ?bail-out??

Full post as published by Caveat Emptor on May 14, 2008 (boomark / email).