Student loans: Is the federal government a predatory lender?

Last month, the former student loan giant Navient settled a lawsuit with the attorneys general of several states. Among other things, there were claims made that Navient had made loans to students at schools with low graduation rates — schools where Navient supposedly knew a high percentage of borrowers would be unable to repay them.

Navient denied violating any laws in the settlement, but the suit brought renewed public visibility to the plight of unreasonable student loan debt. Giving students who have different economic circumstances flexibility to borrow is good policy. Saddling someone with debt they can never reasonably be expected to repay is not.

Predatory lending is more than obscene interest rates or pressure sales tactics. A loan program that extends credit while also knowing that a sizeable fraction of its borrowers will never earn enough money to cover the cost does just as much harm.

In this regard, the real offender may actually be the federal student loan program itself.

You get a loan! You get a loan! And you get a loan!

Under the current system, someone living at or near the poverty line can get up $57,500 in federal student loans without a single credit check on their willingness or ability to repay. They can take these loans without regard to their future career path — as long as it leads to an approved degree or certificate — or how little in wages they may eventually earn. It does not even matter what the university’s graduation rate is, whether it be 20 percent or 80 percent.

Detractors will tell you student borrowers are obviously not being steered into high interest rates loans, which are currently at 3.73 percent. They will also tell you the federal government is not profiting off these loans or that you will likely never find another loan product ever with such generous repayment, forbearance, deferment and default assistance options.

They would be right. But if these loans are so manageable, why is there a national push to cancel anywhere from $400-billion to $1.4-trillion in federal student loan debt, a push that is even being echoed among some of the nation’s most high-profile politicians?

How can a loan program with all of its generous repayment and default assistance programs have roughly one million borrowers at least six months behind on their payments before the pandemic? Why are half of the complaints about student loans lodged with the Consumer Financial Protection Bureau (CFPB) about federal student loans?

Turning a blind eye

Offering up low-interest loans without any credit checks does not buy a free pass from scrutiny. The government knows around two out of every five college students that it lends to will not complete their degree. Still it puts no brake on continuing to lend billions of dollars to these students year after year after year. It knows the students it over-lends to and (who disproportionately struggle) are more likely to come from lower-income and minority households.

The federal government knows it has culpability here. Gainful employment regulations, while only applying to vocational programs, are a frank admission that not tying borrowing to wages and the ability to eventually repay the debt hurts student borrowers. The annual disclosure statement the Department of Education put in place only a few years ago — and strangely stopped just a couple months ago — to remind students just how much debt they were accumulating shows the U.S. Department of Education is acutely aware that borrowing is being taken to extremes.

Nobody is suggesting that the federal student loan program be closed. But it is time to acknowledge that it has become a massive white elephant in need of serious reform.

Time to take a different road

There is no shortage of policy paths forward. Perhaps it’s time to talk about requiring schools to graduate a minimum percentage of their cohorts to remain eligible to participate in the federal student loan program.

Maybe Congress should consider requiring schools cosign the loans they expect their student borrowers to take on.

Perhaps we are at the stage where the total amount someone can borrow depends in part on what academic program someone enrolls in.

Where discussion is concerned, nothing should initially be off the table. For years, borrowing for college was compared to the sub-prime mortgage crisis for the amount of money it foists on minority and low-income students. The repayment pause and the widespread debate around student loan forgiveness should be seen as an equally worthy time to consider how to craft a student loan program that protects both borrowers’ and taxpayers’ interests.