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Want to Fix the US Student Loan Crisis? Put Colleges on the Hook

Helaine Olen
The Guardian

The question of student loans is taking on an increasing urgency everywhere but Washington.

Rates on federally subsidized loans doubled to almost 7% on July 1,thanks to Congressional bickering and dithering. The latest attempt to roll back the rates failed to get out of the Senate earlier this week, when sponsoring Democrats failed to break a Republican filibuster against the bill.

There's a clear double standard here. If you are a Congressman who needs to fly somewhere, you can rely on your fellow elected officials to bail you out with special legislation designed to exempt air traffic controllers from the impact of sequester within a day or so. If you are a student who needs to know student loan rates so you can actually apply for one before the start of the academic year later this summer … well, good luck to you. No majority in Congress has your back.

Senator Elizabeth Warren wants to set the rate at 0.75% for the next year, the same rate the Federal Reserve charges banks that borrow money from them on a short-term basis.Others – including many Republicans and President Barack Obama – would like to see a floating rate tied to the ten-year Treasury note.

Conventional wisdom calls the nation's $1tn in student debt "risky."

That's because about 85% of that money is held by the federal government, which has to approve just about everyone eligible who applies. The weight of those billions has bolstered the arguments for conservatives asking the government to back off on subsidies for student loans.

Think about this for a moment. Federal student loan borrowers do not need to put up any collateral – like, a down payment. No house or auto secures the loan. They do not need to prove they will graduate from college or ever make a decent living. Nothing secures the loan. If you don't pay your mortgage, the bank can foreclose on your home, but no one can rescind your education or college degree. They do not need to know when they sign up for the loan when they will begin to pay their loans back and under what kind of payment plan.

What could be riskier than giving money to someone like this? "If you walked into a bank and said 'I don't know when I will repay your loan but what kind of loan will you give me?' they'd laugh," says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation.

There's another way to see it.

Balderdash, says Catherine Ruetschlin, a policy analyst at the progressive think tank Demos. "Student loans are nearly no risk," she says.

We are, after all, discussing loans that are so sticky, more than one commentator has compared them to indentured servitude. You can't excise them in bankruptcy court unless you can prove "undue hardship" – something considered an almost impossible standard to meet – so you are on the hook for life. "Inability to discharge is a significant benefit to the creditor," Ruetschlin notes dryly.

And when it comes to federal student loans, the government can garnish wages, tax refunds and Social Security checks, all in an attempt to get their money back – and it's not hard for the federal government to get all that info, after all. Chasing people down for their money isn't free – the federal government contracts the job out to more than two dozen collection agencies, which receive commissions of up to 30% for every loan holder they convince to pay up.