More Oversight on Private Lending

Inside Higher Ed has some good information on further regulation that’s needed on the private loan industry. It seems the investigation conducted by New York Attorney General Andrew Cuomo (started by Elliot Spitzer before he became governor of New York) is prompting more insight into this industry, which boomed in the early part of this decade. A lot of the necessary changes were addressed by the Higher Education Opportunity Act passed by Congress this summer. There are two outstanding pieces of business:

Congress stopped short of embracing two major changes that advocates for students and many financial aid officers argued would truly protect students from being hamstrung by unnecessary private loan debt: (1) requiring college officials to “certify” that a student needs the money he or she is preparing to borrow from a private loan provider and (2) allowing borrowers to discharge private loan debt in bankruptcy. The first provision was strongly opposed by some lenders who provide loans directly to consumers, and the latter ran into significant opposition from senators who had little interest in reopening wholesale changes made to federal bankruptcy laws in 2005.

That’s right. If you go bankrupt with student loan debt, the government has afforded that debt the same protection (meaning you still have to pay it off) as child support and taxes. This seems to me like a major loophole in the legislation. No other industry gets such special protection. Why student loans? I would understand if it covered direct lending from the federal government, but it covers private loans from lending giants like Sallie Mae.

UPDATE: Okay, so I seem to have gotten this a bit wrong, but that’s what we have post updates for, right? When you stop paying federal loans (these are the ones that come through after you fill out your federal aid application and will have names like Stafford), perhaps because you can’t afford to, the government still pays of almost all of the loan off. The government will still try to collect on that loan from you, though, and recover some of their costs. This was actually explained really well on the financial page in the New Yorker a while ago. It seems that private loans, though, while not reimbursed by the government if the borrower defaults never go away, even if you manage to go bankrupt and unable to pay off your debt. In other words, both federal and private loans aren’t something you can get rid of — even if you go bankrupt.