New York State Attorney General Andrew Cuomo
Nicole Gibson, 26, took out six private loans from 1999 to 2004 to finance her education at the Rochester Institute of Technology in New York. Like thousands of college students across the U.S., Gibson was steered to private loans by her school's financial aid office and is now struggling to pay them off. Her monthly payments are $1,300 — almost exactly how much she earns each month as a graphic designer. With few places to turn to for help, Gibson contacted a number of lawyers to explore consolidation and payment-plan options, only to be told that nothing can be done. "One of them actually told me to marry a rich doctor," Gibson says. "Had I known it would be like this, I wouldn't have gone to college in the first place."
That's why Gibson was so struck by the findings of New York Attorney General Andrew Cuomo, whose office has been investigating the $85-billion-a-year student-loan industry since last November. Cuomo discovered that loan companies were bribing their way onto schools' preferred lender's lists, which students trust to lead them to the best deals.
Prompted by Cuomo's findings, the Senate began its own investigation and released a 600-page report in June that revealed misconduct among lenders, regulators and universities was much more common than previously thought. Violations included lenders paying for access to students, using official school logos to market their loans and working out of college financial aid offices — acts as insidious as they are unethical. The report also uncovered what Senator Ted Kennedy called "inappropriate marketing practices" used by lenders to over-emphasize private loans by omitting information about unsubsidized federal loans, which have lower interest rates than private ones and are not need-based. Now Gibson, like a growing number of people, wonders who is looking out for students.
News of such misconduct is all the more troubling given how much and how quickly the private student-loan industry has grown in recent years. As federal aid stagnates, more students are taking out private loans — often in mortgage-size amounts. In the past decade alone, the private student-loan industry has grown 913%, with companies like Sallie Mae, Citibank and Bank of America cornering a large share of the market.
Almost everyone agrees that private loans are worse for students than federal ones. While federal loans have capped interest rates, private loans, like credit cards, have variable interest rates that can climb as high as 18%. Private lenders are also not required to provide forbearance or deferment payment options to students. What's worse is there's almost no debt forgiveness to speak of when it comes to this type of loan. In 2005, Congress passed a law giving private loans as much protection from bankruptcy as federal ones. This means that now, unlike nearly every other type of consumer debt, private student loans cannot be discharged in bankruptcy unless "undue hardship" is proven, the standards for which are nearly impossible to meet. "They will chase you down like a dog after a bone for the rest of your life," said financial author Suze Orman in an interview with TIME.
Take Teresa Huber, who co-signed a Sallie Mae loan with her daughter, Sheena, to finance an education at Spencerian College in Louisville, Ken. Last January, Sheena, 22, died of lung disease just one semester before completing her degree. After sending her daughter's death certificate to the loan company, Huber received a one-sentence letter in response, which stated that the loan must still be re-paid. Though she has taken her case to bankruptcy court, Huber knows the law is not on her side and worries that she will still be paying off Sheena's loans by the time her 14-year-old daughter, Taylor, applies for college.
Conwey Casillas, Sallie Mae's director of public affairs, acknowledges that the previous bankruptcy law, which allowed students to discharge their loans after seven years of active re-payment, might be more appropriate, adding that the company would support revisiting bankruptcy laws for students who act in good faith but still struggle to pay off their debt. Martha Holler, a company spokesperson, defended Sallie Mae, saying: "We don't make the rules, but we do have to follow them."
Private student loans come under the regulatory umbrella of a number of agencies, including the Comptroller of Currency, the Federal Deposit Insurance Corporation and the Federal Trade Commission. In addition, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and other federal and state lending and consumer protection laws govern the industry. With so many watchdogs in place, one would think it impossible to break the law. In practice, though, this regulatory web seems to highlight the consequence of too much red tape. Testifying before the Senate banking committee in June, Cuomo called the agencies an "alphabet soup" in which responsibility became so diffused that none were doing the job. "They have the authority, but they didn't use it," he said. "Private loans are the Wild West of the student loan industry," Cuomo told members of Congress.
Given their youth and inexperience, students are especially vulnerable to the loan industry's fine print and confusing jargon. Kelly Bryan, 23, a graduate of Chicago's Columbia College, says she still doesn't fully understand how the process works. "It was like reading a foreign language," Bryan says of the myriad forms and paperwork she had to fill out while applying for loans. And while some students are simply not doing their homework when it comes to financing their education, Harvard law professor Elizabeth Warren warns that financial illiteracy is not the problem: "It's a little like mugging someone, and saying, 'Well, you should have run faster."
This lack of regulation cripples the country's financial future while enriching a select few, Warren argues. She says that students are being bamboozled into risky private loans they don't understand by an industry that "exercises influence as if it were part of the government, but collects profits as if it were a Fortune 500 company."
Congress has launched a flurry of legislation in response to the ever-widening scandal. One bill, the Student Loan Sunshine Act, would require loan companies to tell students about federal loan options before they take out private ones. Another, known as the College Cost Reduction Act of 2007, just passed the House in July. If signed into law, it will mark the biggest increase in federal education aid since the GI Bill. The money would also mean a sharp blow to private-loan industry — it aims to slash nearly $19 billion in government subsidies to private lenders. But the bill might not survive the summer; President Bush is expected to veto the legislation because it asks for $3 billion more in cuts than the proposal he made earlier this year.
But because these bills are mostly sponsored by Democrats in Congress, some industry insiders are calling the entire scandal nothing more than political grandstanding in the prelude of a White House election year. And recent votes in Congress seem to suggest the issue does not transcend party lines. In July, Senate Republicans rejected an amendment to the Higher Education Act that would have created a federal loan program to compete with the private student-loan industry. Known as the Federal Supplemental Loan Program, these loans would have been dispensed through the Department of Education, entirely removing companies like Citibank and Sallie Mae from the equation.
Whether these bills become law or not, students like George Mallone feel their financial destiny has already been decided. Mallone, a junior at Columbia University, launched a blog last fall titled "I Will Be Paying Off My Student Loans With My Social Security Checks," describing it as a place for students whose "loan repayment plans will terminate around the time we have flying cars and sentient AI killer robots." Mallone received just one response, from a fellow Columbia student, who wrote: "Do you mean the social security checks that I will never see in this lifetime?"