My Loans Consolidated

Obama’s bill to overhaul federal student lending and channel about $80 billion in savings for education initiatives has stalled in the Senate. After 4 months of sailing through the White House, it is now stuck there. Last Wednesday, Obama tried to address this and exhorted the Senate to finally pass the bill. He is convinced that this will revitalize community colleges and make colleges more affordable. However, Republican minority opposes this bill and sharp questions from some Democrats and the Democratic majority has now put it on hold.

Obama feels that he is running out of time. The new student loan legislation would require all colleges to use direct government lending starting on July the 1st this year. The timing to pass the bill is obviously significant.

Currently, students have the options to choose between direct lending and a federal program that guarantees student loans made by private banks. The legislation now will be cutting banks out of the equation and from here the administration expects to reap $80 billion over the next decade for increased student aid, community colleges, early childhood education and others. Now that the bill is stuck in the Senate, we will have to see if America’s future can still be saved.

It is sad to see that the whole generation of young people in the US have to face something like a financial Armageddon in their future. They are being promised a better future by obtaining education but this promise has turned back against them as it has been used as a means by which student loan lenders trap the young generation in enslaving debt and outrages usury. Very often these young people begin their life on their own already trapped in a debt cycle which is almost impossible to get out of. Many never get out of them their entire life.

The problem is that lenders just prey on these inexperienced kids by giving them easy credit with low teaser rate, which adjusts dramatically after the introductory period. Moreover, it turns out that in 2007, the New york Attorny General Andrew Cuomo discovered in a nationwide investigation that three major student lenders, Sallie Mae, Citibank and Education Finance Partners, had given universities kickbacks in exchange for being designated their “preferred lenders.” The investigation led to a settlement of $6.5 million. This was covered by Trial Magazine in the September 2009 issue, written by Carmel Sileo, in the article titled Student Loan Lenders Face Scrutiny–and Lawsuits.

According to Alan Collinge, author of the book The Student Loan Scam: The Most Oppressive Debt in U.S. History and How We Can Fight Back,  student loans have the highest default rate compared to other loans such as credit card, home loans, car loans and others. Student loan has similar characteristics as the mortgage and housing market. Just like mortgages during the housing boom, student loans are easily available and eagerly taken out by borrowers. Just like homeownership,  higher education is promoted as the key to middle-class prosperity, a solid investment worth borrowing for. Just like mortgages, some private education loans were securitized and sold in bundled packages that mixed high-risk and low-risk borrowers.

And just like mortgage borrowers are now facing foreclosure, students face loan burdens so heavily that default is just inevitable. Students and mortgage borrowers just have too much in common. Both are usually poorly educated regarding financial matters, especially when it comes to making decisions on borrowing. And both can eventually harm the economy severely if a large number of them defaults on their loans. Just like the mortgage defaults gave a devastating impact to the economy, so will the student loans defaults.

Obama’s new plan for the student loan repayment may help. But there is just no easy solution for this. And the fact that the legislation is currently still on hold by the Senate, we wonder whether this bill is eventually going to pass or not.

Regarding Obama’s new plan, student advocates praised him for removing “middleman” lenders like Sallie Mae and make all student loans direct government loans. But we still need to wait and see for the bill to pass and to be proven effective before we know that another financial meltdown in the student loans industry is coming.

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