The Dirty, Rotten, Crooked, Broken Student Loan System and the Immoral Bankers, Brokers, Collectors and Corrupt Politicians Who Make Billions Off of it While the Courts Garnish Wages and Destroy Lives
Introduction
The U.S. spends almost double that of anywhere else in the world on higher education and that’s before the interest charges are shackled upon the students. Nine million Americans are either in default, deferment or forbearance on their student loans with a million more each year. These students are Democrats, Republicans, African American, Caucasians, Latinx, Asian, Native American, young, old, married, divorced, LGBTQ, fathers, mothers—every single demographic that exists. It’s not a political party issue; it’s blatant criminal activity by our elected officials, their collection agencies and the Department of Education. For their own profit, they have created a life-long debt sentence for these students at the cost of our country’s future.
The student loan debt crisis didn’t just appear. The warning sirens have been blaring for over a decade with the causes going further back than that. The subprime mortgage crisis was also seen years before but again, the people who could have changed it, the politicians, chose to do nothing until it was too late and then they bailed out the firms to the tune of $30 trillion. That same year Goldman Sachs paid out record bonuses to the very people who caused it. Why was this allowed and why is the student loan debt allowed? Because nasty, rotten bankers, brokers, collection agencies, politicians and billionaires are making a great deal of money off of the dreams and misfortunes of students and the mismanagement of higher education (again allowed). Shame on them all. A pox on them all. There are solutions beyond the news bites and campaign rhetoric but solutions don’t pay as well.
The student debt crisis is not new. It wasn’t like a tornado that pops up with the warning sirens giving only minutes of notice before it destroys everything in its path. It has been in the making since the 1970s and touched down on land over a decade ago. It was seen then—sirens blaring, projected to get worse. The narrative never changed: Do not ignore this or very bad things will happen—and it has. Our elected officials didn’t just ignore it but instead they have actively, albeit quietly, ensured the system remained broken and has supported the loan “servicing” agencies in pushing their boots harder on the necks of borrowers for their own profits.
These numbers, including our $1.7 trillion student loan debt figures are always increasing so this is a snapshot of the first quarter of 2019:
- Federal loan borrowers in repayment: 18.6 million.
- Federal loan borrowers with loans in deferment: 3.4 million.
- Federal loan borrowers with loans in forbearance: 2.7 million.
- Federal loan borrowers with loans in default: 5.2 million.
11.3 million American citizens cannot make their payments. Twenty-five percent of all borrowers will go into default and that’s where the true ugly begins. At this point interest begins to quickly pile on and can double, triple, quadruple the original loan amount.
Once in default, the loan is sent to collections. This is also the point where the power finance players make their money. With the blessing of congress and the courts, wages are garnished, social security payments are garnished, tax refunds are taken in full, you are no longer eligible for deferments or forbearance, and your credit is ruined. This can also cost you your job, or prevent you from future employment. This will last until the loan is paid back or until death (except for private student loans where creditors can come after the estate).
How we reached this point can be very confusing (intentionally designed) so I’m going to attempt to deconstruct the main areas that facilitated the fraud and the areas that keep it going and growing. All of these issues have been previously reported by numerous journalists but have not always tied the relationships together of higher education, politicians (all branches of the federal government), collection/servicing agencies, financial institutions, billionaires and how they worked and continue to work together to commit such a monumental deception on the American public.
Beware phony advocates for reform that appear to speak on your behalf with partial fixes but do so just to ensure there are no real changes to the system that would result in any financial losses for themselves and the masters they serve. The predatory student loan industry exists because our elected officials are either corrupt themselves, don’t take the time to truly understand all the complex aspects of the abuse and fraud in the system (they choose to listen to the industry’s own lobbyists instead of their own constituents), or are just plain morons. Regardless, all kill American higher education.
The American student loan system—government loansharking enforced with judicial muscle. The mafia never had it so good.
No Good Deed Goes Unexploited
It is important to understand the history of how we arrived at our current crisis, because as I said it’s not new, it didn’t just happen last year. It was not only allowed but designed, fed and encouraged to be the devious monster that exists today. This is not the complete history but what is needed to bring us to today.
1944. The GI Bill was established to reward veterans who served their country during World War II to catch up with those Americans who remained in college during this time. Prior to this, many of these people would never have been able to afford to go to college before or after their service. This is really the first involvement we see of the federal government assisting citizens who didn’t have the wealth to attend college on their own. There were advocates who wanted this extended beyond veterans to allow more Americans to benefit from higher education, but the majority members of congress felt that since they never received that, no one else should either. No free rides was the mantra.
1958. The “Red Menace” swept the country and with Russia’s launch of Sputnik. Congress sponsored low-interest loans under national security. It’s of interest to also note that the National Defense Education Act also included debt cancellation for those students who became teachers. There was still no support for need- or academic-based undergraduate funding.
1965. President Johnson and the 89th Congress enacted the Higher Education Act (HEA). Title IV was the first true federal government commitment to providing college opportunity to students in need. This included the Guaranteed Student Loan (GSL) and College Work-Study Programs which also applied to middle-income families. Because the cost of education was somewhat affordable then, any loans to the middle class would have been a small percentage of the program. Enrollments increased and student aid appropriations took the lion’s share compared to other domestic social programs.
1972. This was a big year in higher education. The reauthorization of the HEA laid the foundation for today’s student loan system including establishing the term “postsecondary” to recognize that not everyone needed a four-year bachelor’s degree but did need further education of some sort. This would allow financial aid for those students attending community colleges, trade schools, vocational schools and students attending part-time. The reauthorization also included:
- Pell Grants began as a way students could directly receive federal aid beyond the campus-based programs.
- Private schools were now allowed to participate fully in receiving these monies.
- State Incentive Grants, which provided matching dollars to help states expand their need-based grants.
- Hidden quietly in the darkest corners of Title IV where mold feeds and vermin defecate, they established the Student Loan Marketing Association, AKA Sallie Mae, as a publicly chartered corporation to increase funding to guaranteed student loans (GSL).
The Old Sons of Bitches
In the early 1970s, while the protests of the Vietnam War were still in full swing on college campuses throughout the country, legislators became paranoid that these long-haired, lazy, hippie pinkos would use the bankruptcy system to get out of paying the federal government back for their student loans. (This was the early 70s and our government was completely controlled by wealthy, white men who did think like this.) This fear had nothing to do with reality and there was no evidence to support this position. At that time their main target was those pursuing medical and law degrees that were higher priced. Keep in mind that the degree costs were a small fraction compared to today’s tuition.
In 1973 the Congressional Commission on the Bankruptcy Laws of the United States issued a report which included that student loan debt cannot be discharged for five years after graduation. Three years later the Education Amendments of 1976, Section 439A, was adopted even though the Government Accounting Office reported less than one percent of student loans had gone to bankruptcy. Now, no student loans could be discharged in bankruptcy until five years after graduation, or unless the borrower could prove repayment imposed “undue hardship” (which was never defined by the law makers). While this passed it did have more than a few critics. Michigan Congressman James O’Hara stated that establishing this “treats educational loans precisely as the law now treats loans incurred by fraud, felony, and alimony-dodging. No other legitimately contracted consumer loan … is subjected to the assumption of criminality which this provision applies to every educational loan.”
In 1978, with the passage of the Bankruptcy Reform Act, the exception to bankruptcy discharge of student loans was moved from the Higher Education Act to the U.S. Bankruptcy Code at 11 USC 523(a)(8). While Congress sought to reverse the earlier exception, the Senate’s version prevailed maintaining the inability to discharge student loans for five years and adding that it applied to loans backed by the government and nonprofit institutions of higher education.
In 1979, Congress wanted to address the problem of lack of participation by lenders (although this wasn’t known to be a problem by anyone) so they quietly passed an amendment giving banks a higher rate of return on student loan by linking them with changes in Treasury bill rates. Prior to this the government set a cap on what lenders would make. With banks making more money, the student loan industry was born.
Just because the corrupt say it’s legal, doesn’t mean it’s still not corrupt.
The Noose Tightens
1986-92. Loan volume shot up again after the 1986 and 1992 Higher Education Act (HEA) reauthorizations. In 1990, the Crime Control Act extended the period before student loans could be discharged in bankruptcy from five years to seven years and then a year later the statute of limitations on defaulted loans, six years, was totally eliminated by the Higher Education Technical Amendments. There was a failed push to increase Pell Grants to reduce the reliance on loans and instead Congress raised the borrowing limits of students and created a new unsubsidized loan for the middle-class that was no longer based on financial need. This meant anyone could now take on a student loan regardless of their income or parents’ income. Smelling more money could be made off of the well-meaning, caring, loving parents, they also uncapped the Parent Loan (PLUS) program. Now parents could borrow, on behalf of their children, the full amount of their children’s’ educational costs. Because of these changes, enrollment took off and in a two-year period the amount borrowed increased over $10 billion.
The Student Loan Reform Act of 1993 revised how loans are serviced and financed, allowing for more students to take out more loans. This also established an income-based repayment plan stretching out to a home mortgage length of 25 years. The Department of Education responded by creating more than 70 complex rule-making packages, further complicating the regulatory process for students, schools and the government itself.
By 1998 the Higher Education Amendments, Section 971 eliminated the seven year period required before a student loan could be discharged in bankruptcy. There had been no debates or hearings on this prior to President Clinton signing the bill into law. This meant there was no longer a statute of limitations nor could student loans even be considered for bankruptcy – ever, unless the ambiguous, indeterminate, undefined “undue hardship” provision could be proven.
In 2005 the final nail was hammered into the hands of student borrowers by Congress with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. This meant all federal and private educational loans were excepted from bankruptcy discharge unless the undefined “undue hardship” could be proven (note: you have a better chance of being hit by lighting, which would probably be a welcome relief to my student loan borrowers, than having a judge dismiss a student loan in bankruptcy).
The politicians, with help from their financial keepers, knew by now that money, lots and lots of money, could be made off of student borrowers. By increasing funding to everyone, by ensuring every kind of nonprofit and private educational institution was eligible to receive federal and private loans, by supporting the skyrocketing costs of higher education, by removing the only tool that could provide some kind of market correction (bankruptcy), and by placing student loan debt in the financial markets (SLABS) which allowed those on the inside to make billions of dollars, they had successfully created the most devious, destructive system ever in the history of the United States.
This is the first installment of a five-part series by Alan Yeck reflecting on the student loan system, its challenges and the far-reaching effects it can have. For a full works cited list, please view the last installment in the series (scheduled to be published April 1st, 2020).
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