Most of us know that credit cards are the devil’s play toys and that we should avoid them at all costs (no pun intended). However, what we don’t know is that student loans have silently become a larger form of personal debt than consumer debt: Student loan debt is now a staggering $829 billion, compared to $826 billion in credit card debt.
America’s educational system puts people in more debt than its credit card companies — clearly, something is wrong. A data visualizer from collegescholarships.com motivated me to tell you about student loan debt and how it became so large.
In 1965, the Higher Education Act was signed by President Lyndon B. Johnson, enabling college students to get federally guaranteed loans and scholarships. Millions of students who previously could not afford college now had the opportunity to receive a higher education, regardless of their economic situation.
Things took a turn for the worse in 1998, when Congress eliminated the students’ ability to discharge government student loan debt by bankruptcy. This means if you face insurmountable financial struggle and you’re incapable of paying off student loans, there’s nothing you can do to waive it off.
By 2005, this non-discharge protection was granted to private student loan lenders as well, making their loans also permanently tattooed to their pockets. Interestingly, the same non-discharge laws apply to people who have debt from fraud and criminal acts; it’s nice to know that you’re treated exactly like a petty criminal.
This was the setup for a pocket-draining conundrum. Alongside the ability to discharge, other protections removed from student loans were the stature of limitations on collections, the Truth in Lending Act, the right to refinance and the Fair Debt Collections Practices Act. Lenders also don’t have to adhere to state usury laws, allowing them to charge higher interest rates than legal in the state.
In America, we have more protection from credit card lenders than we do from student loan lenders. Nice.
The most alarming ordeal is that the system is structured in such a way as to benefit from our inability to repay loans. Private banks are rooting for us to default because when we do, the government gives the bank the remaining balance on the loan and any remaining interest. At that point the government takes over the loan, which is a good thing because the government is so much more understanding than a bank anyway, right?
Wrong.
When a loan defaults, the government hikes your interest up 25 percent, meaning that by the time you pay it back (if you ever do), good old Uncle Sam will turn a huge profit, and there is nothing you can do to escape (Except die, or acquire brain damage).
25 percent of all government loans default. At community colleges, 30 percent of student loans default and at two-year colleges, 40 percent do. But the big breadwinners for the government are for-profit schools; they account for 43 percent of all student defaults.
Ka-ching. The government laughs its way to the bank.
Last year, President Barack Obama signed an overhaul of the student loan program. Obama called the bill, “one of the most significant investments in higher education since the G.I.” The bill eliminated subsidies, making all loan profits return to the government. This cuts Sallie Mae and other private lenders out of the formula.
Big government and tax payers win, yes, but what about the students?
We didn’t get any changes to our rights as borrowers. The government exploits us in the same fashion as before: granting us inescapable loans in the midsts of an awful economy and hiking our interest rates up 25 percent when we can’t afford to pay our bills. They are immune to just about every act written to protect borrowers from lenders, and they are even exempt from following usury laws.
I’m starting to feel like I took a loan from a mafia boss, not the United States Government.
Student loans are the most important investment most of us have made thus far in our lives. Age-old proverbs tell us that an education is an investment in itself, but the present system indicates that an education is an investment in Washington, D.C. The more we default, the more money they get. Combine our lack of borrower rights with increasing tuition and a weakening economy, and what we have is something that Visa, MasterCard and American Express can only dream about: a debt that is both cyclical and inescapable.
If you’re anything like me, the words “financial” and “aid” come together to mean food in your refrigerator, books in your backpack and knowledge in your brain. But in about four years, “financial aid” will turn into “financial played,” and you’ll find yourself in financial hole you can never climb out of.
Boy, debt-inflicted oppression sure is a great way to promote education.
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