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The Interest Rate Debate: The People Are Not Impressed

Below is the edited essay. Thanks to Brian, Veronica, and Milton for the help on this. Please send to publications/sites you think may publish it. Because of the nature of this effort, we cannot grant exclusive rights on this, if anyone asks...feel free to use this as a template for your own piece if you're so inclined.

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Regards,====================================================The Interest Rate Debate: The People Are Not Impressed

Make no mistake about the student loan interest rate “crisis” Congress is foisting upon us. It is a distraction – a tempest in a teapot. As with many of the student loan debates, going back eight or more years, this does nothing to affect structural problems in the student lending system. Worst-case scenario, should Congress do nothing, and interest rates on subsidized student loans for undergraduates double, the impact on affected students would be around $9 per month, or about $1000, per borrower, over the ten-year repayment period. There really is nothing more to this issue.

It's not interest rates getting people out in the streets shaking their fists. It is the shocking increase in sticker price for college year after year, the resulting debt laid upon students, and the structurally predatory nature of the lending instrument causing the outcry. For years this has been true, and yet Congress continues to dramatize and politicize small issues; the resolution of which does nothing to bring costs down, address the ever-increasing amounts students must borrow, or fix the predatory lending system standing behind it all.

The unprecedented, and unjustified, removal of bankruptcy and other standard consumer protections caused this system to become predatory. Defaults are now a preferable outcome for all of the lending elements; collection companies, who are often owned by the lenders; guarantors, who make the majority of their income through penalties and fees attached to defaults; and the Department of Education, which receives $1.22 for every dollar it pays out on default claims. Even experts, who utilize a completely inappropriate “fair value” accounting method that greatly exaggerates the cost, acknowledge the government profits more if loans default.

This isn't right. When a lender benefits from defaulted loans, bad things happen. Unchecked increases in price, horrible loan administration, and inadequate oversight of the lending system are just a few that even the most conservative economist is compelled to recognize are unacceptable, indefensible, and intolerable. The only way to fix a lending system stripped of bankruptcy, and other bedrock consumer protections is to restore those protections.

Even Sallie Mae has publicly advised that bankruptcy laws for student loans need to be revisited. At the same time, however, a leaked Sallie Mae memo revealed that the company's top priorities included keeping bankruptcy protections absent from student loans, second only to growing loan originations.

Since 2006, the pattern remains the same: Meaningful legislation is introduced to return bankruptcy rights to private loans, and is followed by a flurry of other bills aimed at fixing only narrow aspects of the lending system. Congress seizes upon and makes a big commotion of the latter. First came the Sunshine Act, which was designed to end a slew of conflicts between colleges and lenders, and eventually circumvented administratively by the Federal Reserve. Then came the Income Based Repayment (IBR) program, followed by the Gainful Employment Rule, which was quickly bureaucratized into mush by the Department of Education.

Now, more than seven years later, the interest rate debate is sucking all the air out of the room. The old “student advocates” continue ignoring bankruptcy protections. Even the newly-formed Consumer Financial Protection Bureau (CFPB) isn't living up to its name, leaving the most critical consumer protection problem in the country unaddressed in favor of advocating for, among other things, a bailout of private lenders in a refinancing scheme which is more about federalization than refinancing.

For all the rhetoric on helping students and championing Higher Education, the people see plainly now that Sallie Mae and the federal government have been the big winners. The citizens, of course, have lost a great deal, and stand to lose much more if, at a minimum, standard bankruptcy protections aren't returned to ALL student loans.

Republicans could demonstrate the “invisible hand” can actually work for common citizens by shaking off the cronyism, and advocating for the restoration of lender risk, consumer bankruptcy protections, to the market. Democrats might show that they haven't abandoned the bread and butter principles the party was built upon by standing up to the banks, at long last, instead of pretending to.

With bankruptcy rights returned, the Department of Education will be compelled to crack the whip on the schools to lower their prices and improve their quality, while kicking diploma mill colleges out of the program. Congress will be compelled to impose lower, rational lending limits. Tuition will come down to reasonable levels, and taxpayers will save bundles of money.


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