Student Loans in The United States - Criticism of US Student Loan Programs

Criticism of US Student Loan Programs

The federal student loan program has been criticized for not adjusting interest rates according to the riskiness of factors that are under students' control, such as choice of major. Critics have contended that this lack of risk-based pricing contributes to inefficiency and misallocation of resources in higher education, and lower productivity in the labor market. However, recent research indicates that while high levels of student loan debt, coupled with high default rates, present a number of challenges for individual student loan borrowers, they do not necessarily place a substantial burden on society at large.

After the passage of the bankruptcy reform bill of 2005, both federal and private student loans are not discharged during bankruptcy (prior to the passage of this bill, only federal student loans were unable to be discharged). This provided a credit risk free loan for the lender, averaging 7 percent a year. In January 2013, the "Fairness for Struggling Students Act" was unveiled. This bill, if passed, would once again allow private student loans to be discharged in bankruptcy.

In 2007, the Attorney General of New York State, Andrew Cuomo, led an investigation into lending practices and anti-competitive relationships between student lenders and universities. Specifically, many universities steered student borrowers to "preferred lenders" that charged higher interest rates. Some of these "preferred lenders" allegedly rewarded university financial aid staff with kick backs. This led to changes in lending policy at many major American universities. Many universities have also rebated millions of dollars in fees back to affected borrowers.

The biggest lenders, Sallie Mae and Nelnet, are criticized by borrowers. They frequently find themselves embroiled in lawsuits, the most serious of which was filed in 2007. The False Claims Suit was filed on behalf of the federal government by former Department of Education researcher, Dr. Jon Oberg, against Sallie Mae, Nelnet, and other lenders. Oberg argued that the lenders overcharged the U.S. Government and defrauded taxpayers of over $22 million. In August 2010, Nelnet settled the lawsuit and paid $55 million.

The New York Times recently published an editorial endorsing the return of bankruptcy protections for private student loans in response to the economic downturn and universally increasing tuition at all colleges and graduate institutions.

In June 2010, the amount of student loan debt held by Americans exceeded the amount of credit card debt held by Americans. At that time, student loan debt totaled at least $830 billion, of which approximately 80% was federal student loan debt and 20% was private student loan debt. In October 2011, the total amount of money owed in student loan debt was said to exceed $1 trillion.