On Wednesday, September 23, the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law held the first ever hearing about student loans and bankruptcy, “An Undue Hardship? Discharging Student Loans in Bankruptcy.” Lauren Asher, president of the Institute for College Access & Success testified as an invited witness.
Over the past decade, the private student loan market expanded dramatically along with the overall credit market, fueled by easy access to capital. As with subprime mortgages,lenders marketed private loans very aggressively and financed them primarily through securitization, maximizing short-term profits regardless of borrowers’ actual ability to repay. There were no regulations to limit the dangers of private loans or to restrict the way they targeted young people with no borrowing experience. Prospective borrowers were not even entitled to clear information about actual terms and costs that would enable them to shop around before signing a promissory note. Private student loans remain largely unregulated, Congress included some basic disclosure requirements in the HEOA will go into effect early next year.
Private student loan volume began mounting well before the change in bankruptcy law: it increased eight-fold between 1997 and 2005, and it peaked at $19 billion in academic year 2006-07. Student Lending Analytics, which monitors industry trends, projects that volume in 2009 will be $10-12 billion. This drop parallels changes in the larger economy due to the credit crunch, which hit the private loan industry hard in the fall of 2008. While quite a few lenders left the market and private loans are now more likely to require a co-signer and a higher credit score than in recent years, private student loans are still available. Sallie Mae continues to make a third of its profits from private loans, and they along with Chase, Citibank and other major lenders offer and actively promote their private loan products. As these lenders work to expand their market share, credit unions have entered the field and seek to position themselves as a source for more affordable private loans.
In a particularly disturbing development, some large, for-profit colleges have begun making a lot of their own private loans directly to high-risk students. For example, in a recent call with investors and analysts, Corinthian Colleges, Inc. said it plans to make $130 million of such loans in the current fiscal year, on top of $120 million last fiscal year. They fully expect a shocking 56 to 58 percent of the borrowers to default. Yet they consider these loans good investments because they will increase enrollment and with it a profitable flow of federal grant and loan dollars that outweighs the planned writeoffs. Corinthian owns more than 80 colleges across the U.S. through its Everest brands. According to the Associated Press, ITT Education Services, Inc. also expects to make $75 million in loans directly to its students this Calendar year, and Career Education Corp. expects to reach $50 million.
These are attempts to get around market corrections that have appropriately reduced access to subprime private loans for very high risk borrowers, and to justify prices for-profit education and training programs that may exceed federal aid limits. As mentioned above, Sallie Mae has stopped lending to these types of schools because of similarly high default rates and other questionable practices. But whether the source is their own school or an outside lender, the students who are sold private loans they cannot afford are stuck with them even in bankruptcy, while the lenders are free to move on.