Beggars’ Bailout: Student Loans are a Banking Bonanza

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Claiborne Pell, the former senator who helped create government loans for students to go to college, died on Thursday at age 90. His vision of affordable education for all, however, didn’t last quite as long. Private loans with hidden fees, little disclosure of total cost and packages designed to look just like government-subsidized direct loans have turned education loans from a social good into a banking bonanza and our educational institutions into profit centers for predatory lenders.
As Pell knew, and as we seem to have forgotten, a university is more than just a social experience; it is where our country renews itself – culturally, economically and politically – and that renewal is most effective when large and diverse segments of the population are a part of it. However, our current lending and borrowing structure discourages many from attending college and practically turns those who do into paupers after they leave.
The federal government sets a limit of $31,000 for subsidized loans. The average cost of four years of school, however, is currently over $57,000. Here at UC Irvine, four years of tuition and fees alone will cost you upwards of $28,000 (if you are unfortunate enough to be a non-resident, it is more like $80,000). Add housing, food, Jagermeister and a couple of bad decisions in Las Vegas and it’s easy to see why the average college graduate walks offstage with a diploma and more than $20,000 in debt. That might not be so bad if the debt is all direct loans from the government, which have a fixed, low interest rate and reasonable repayment options. The problem is that most of this debt is held by private lending institutions that have variable interest rates that can reach more than 20 percent, along with other hidden fees and stringent rules about repayment.
Private loans are expected to reach about $15 billion this year, 900 percent more than a decade ago. College is getting more expensive, and banks are reaping the benefits of more students needing more money. What makes the problem worse is that many students don’t know what they are getting into when they take out private loans. Lending agencies do all they can to fool people into thinking the loans operate just like federal direct loans, and they don’t disclose all the information about the loan until after it has been approved. What compounds this problem is that private lending agencies have been in bed with college financial aid programs and officers, creating a situation where the people responsible for educating students about their loan options are getting kickbacks from private banks every time a kid signs up for one of their toxic loans. It is a scheme designed to funnel money to banks, while at the same time burdening people with debt that will take their entire life to repay, even with that good job everyone thinks they’ll get after graduation.
One solution that has been put forward is to extend the limit on federally subsidized loans. Allowing students to borrow more money at low interest rates directly from the government makes it less necessary for them to take out private loans. Since federal loans are more attractive than private ones, expanding federal loans would also force private lenders to either lower their rates and create better packages, or lose the college loan business altogether.
However, we need an expansion not only of loans but also of grant and scholarship programs at both the state and federal level. Universities supported by tax dollars should have their mission be to become more affordable, if not free. Anyone who meets the necessary qualifications should be allowed into state schools and should get the support they need to ready themselves for leadership positions in our cultural, economic and political institutions to contribute to a new vision of the United States. The flip side of this, of course, is that students who are supported by the state – by taxpayer money – need to take responsibility for their education and put forth the necessary effort to prepare themselves for the opportunities and obligations ahead.
This plan would take some congressional will, something that has been lacking over the last 10 years, as Congress presided over the privatization and auctioning off of the public trust (coincidentally, Pell retired in 1997). It would also take money, but in this atmosphere of bailout billions, why not reserve a little of the easy cash going to the banks and mortgage institutions for impoverished college students? More education, more opportunity for innovation, more investment in our national economic health, more money spent on Natural Light — it seems like a pretty good way to kick-start the economy.

Brock Cutler is a graduate student in the history department. He can be reached at bcutler@uci.edu.

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