As a follow-up to my recent post on the student loan “bubble,” I chatted with Alan Collinge, author of The Student Loan Scam: The Most Oppressive Debt in U.S. History — and How We Can Fight Back. Collinge is also the founder of studentloanjustice.org and a self-described “complaint box for the [student loan] industry.”
It goes without saying that Collinge is not a fan of the current lending practices (he calls them “predatory”) and likes to reference the rising student loan default rates as evidence of a deteriorating student loan market that will soon, like other inflated bubbles, burst. It’s only a matter of time, he says.
Collinge’s primary proposal to alleviate the problem is reinstating bankruptcy protection laws for student loan borrowers. (In 2005 lawmakers issued an amendment making it nearly impossible to discharge student loans in bankruptcy protection without “undue hardship.”) Collinge supports proposed legislation, the Private Student Loan Bankruptcy Fairness Act of 2010, which aims to reverse part of the 2005 law by allowing private student loans – which offer far fewer repayment options than federal loans – to be discharged in bankruptcy.
Proponents like Collinge believe bankruptcy protection on a loan instrument will make lending practices more fair. “Bankruptcy is a fundamental free market mechanism…not so borrowers can run off and avoid their debts, but for two critically important reasons,” says Collinge. “One, it keeps lenders honest and working in the interest of borrowers and two, [bankruptcy protection] controls market prices.” Critics predict the opposite. They think lenders would raise interest rates in that environment to offset their losses.
While passionate, Collinge is skeptical that the proper reform will take place – at least not from within the system. Instead, he foresees fed-up borrowers joining forces. “Consumers are going to just stop paying regardless of the powers that be. People are at some point simply not going to put up with…the lending system.”
Image by m00by, via Flickr.com