He who controls the purse strings makes the rules.
Education finance policy. Sounds boring right? It may not be the hottest topic out there but it is definitely an important one. Especially considering concerted steps are being taken to destroy private student lending.
Step 1: The Healthcare and Education Reconciliation Act of 2010 (Obamacare).
Along with taking a major step in the control of the health care industry, this Act also consolidated the distribution and management of all subsidized loans under the Department of Education by implementing the Direct Lending program.
Before this, Sallie Mae and other lenders would disburse the aid to the schools as well as provide their own private loans. Now, as the title suggests, the federal government disburses aid directly to participating schools.
Step 2: The Dodd-Frank Wall Street Reform and Consumer Protection Act.
This Act created the Consumer Financial Protection Bureau. The CFPB was created to “protect families from unfair, deceptive, and abusive financial practices.”
Recently the CFPB has taken it upon itself to release 2,000 complaints about private student loans. Why would a federal agency release a non-empirical study on the drawbacks of private lending and not federal lending? Pathos.
Step 3: Chuck Schumer’s Private Student Loan Bankruptcy Fairness Act
This law has not been passed yet but it is Senator Schumer’s baby. It would allow only private student loans to be discharged in bankruptcy. Right now they can be discharged but only by proving undue hardship (which is very difficult).
Doing this could be the straw that collapses private lending.
The CFPB and Democrats in Congress are trying to pin the entire student loan problem on private lending. This is a gross misrepresentation of the facts.
In 2009 private student loans made up only 20.6% of the total debt balance. If trends remained the same, the current $1 trillion student debt balance is overwhelmingly made up of federal student loans.
The default rate among private student loans is low, 5.1 percent.
That is lower than the cohort default rate (8.1 percent), which is a combination of federal and private loans.
If the bulk of the student loan debt balance is made up of federal loans and the default rate among federal student loans is higher, why are Democrats only scrutinizing private lending as if it was the sole problem?
If private lenders are eliminated and colleges were entirely dependent upon federal aid participation, what would colleges do if the ED says “Do X or we prohibit your school from participating in Title IV.”? Colleges would either succumb or shut their doors.
In addition to this, the ED is planning on making it very difficult for schools like Hillsdale College, who do not participate in federal aid programs, to provide their own student loans. Why? Control.
Maybe we should ask the CFPB to look into Federal Student loan complaints. If you would like to ask, you can contact them here:
Phone: (202) 435-7000