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House Omits Protection Against “Wild West” Lenders

The House of Representatives took care of many issues for low-income students when it approved its recent Higher Education Act renewal bill. But one topic left by the wayside is championed by a Congressional Black Caucus member — more help for low-income borrowers unable to pay for costly, high-interest private education loans.

Rep. Danny Davis, D-Ill., says students need more protection from such private loans, which some critics have labeled the new “Wild West” of student lending. In particular, he says borrowers should be able to write off such debt during the bankruptcy process, a right that existed up until 2005. That year, with an exploding private loan market, Congress agreed with banks to rethink that option. As a result, those who declare bankruptcy cannot escape the crush of private student loans that often carry double-digit interest rates.

“Unlike federal student loans, private loans lack basic consumer protections,” Davis says. Yet bankruptcy law treats them “in the same severe manner as people trying to escape child support payments, alimony, overdue taxes and criminal fines. People should not be punished for trying to get an education.” While bankruptcies may be rare, borrowers with heavy debts currently can wriggle free from all other types of consumer borrowing except private student loans. That happens even though the student loan’s goal is to help individuals improve their academic and career prospects.

Rep. George Miller, D-Calif., chair of the House Education and Labor Committee, notes that some private loans charge students interest rates of up to 20 percent. “We ought to understand what that means to the future of these students,” he says.

But Davis’ amendment to change the bankruptcy policy failed by a vote of 236 to 179, with some Democrats joining most Republicans to vote down the idea.

Critics of Davis’ plan say it would send another jolt to an already unsteady lending market. It “will add uncertainty and additional risk to student lending,” says Rep. Howard “Buck” McKeon, R-Calif. “This will further restrict students’ access to loans at a time when they’re already finding it harder to obtain loans due to the current instability of the credit market.”

Providing bankruptcy protection to a small group of defaulters would also raise interest rates for all borrowers with questionable credit ratings, says Rep. Ric Keller, R-Fla.

“The kids from wealthy families, whose mom and dad have a high credit score and have lots of assets to back up as collateral, nice home, Mercedes, are going to get student loans,” Keller says. “The poor kids in the future, whom you’re trying to help, whose parents don’t have a high credit score, are going to have to pay a lot higher interest rate for loans and origination fees.”

Private loans have tripled in popularity during the last five years, with total volume now of more than $17 billion, the College Board reports. Since the government does not guarantee these loans, interest rates depend largely on the credit ratings of borrowers or their parents.

While once used mainly by graduate and professional students, private loans now represent one in every five student loans, according to The Project on Student Debt, a California-based research and policy group.

“When borrowers are in financial distress, they have almost no options for managing this type of high-risk, high-cost debt,” says Robert Shireman, the group’s executive director. “People who take out private loans to pay for their education deserve at least the same bankruptcy relief as those who rack up debt buying clothes or electronics.”

Student groups also fought for Davis’ amendment. “Our generation is graduating at the highest level of debt,” says Gabriel Pendas, president of the United States Student Association. While the HEA bill has many helpful elements for students, he tells Diverse, the Davis amendment was one example where lenders won enough bipartisan support to stop a student- friendly proposal.

As passed by the House, the HEA bill does have some new protections for private loan borrowers. The bill would require lenders to inform students about the availability of federally backed loans, so that students may be able to avoid costlier private loans. Another provision would make it easier to compare loan terms. Colleges could no longer “brand” private loans with their own names when the actual lender is a bank or other financial institution.

These provisions now go to a House/Senate conference committee that will negotiate a final HEA bill. Such negotiations are expected to last into the spring.

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