Unfortunately, it is almost inarguable at this point that the federal student loan system has become fundamentally predatory due to the Congressional removal of standard consumer protections, combined with congressionally sanctioned collection powers that are stronger than those associated with all other loan instruments in our nation’s history. These actions by Congress have created an inherently predatory, state-sponsored lending and collection system where the motivations of the various functional elements of the system are fatally misdirected. The system that has resulted promotes inefficiency in administration, unchecked inflation, bureaucratic malaise and conflicted oversight. Moreover, the resulting system promotes needless and expensive complexity and redundancies, fails to encourage academic excellence, and ultimately, promotes delinquency and default.

While this system has been extremely lucrative for student loan companies, universities, and even the federal government (who are MAKING, not LOSING tons of money on defaulted student loans), it causes massive harm not only to borrowers and their families, but also to non-borrowing students and their families, due to the dramatic inflation that the system promotes. The nation suffers a massive cost due to the large amount of wealth trapped in this system, the quality of the education received by the citizens, and the public’s opportunity cost associated with the materialistic career paths that citizens are forced into at the expense of public interest work, and entrepreneurship.

And no, I am not exaggerating in any way when I say that the federal government makes money on defaulted loans. According to the Wall Street Journal (John Hechinger, 2004), and also a more recent article by Finaid.org, the "recovery rate for defaulted student loans by the federal government is between 120-123 percent!! That is, for every dollar paid our in default claims on loans, one dollar and twenty three cents are recovered from the borrowers, A typical recovery rate for unsecured credit cards, by contrast, is less than fifty percent of the outstanding balance...far less!

Imagine a credit card customer who racked up 50 grand in charges and interest, suffered a significant and negative financial setback. Now, imagine that somehow, VISA found a way to get $60,000 back...and not just from this one borrower, but from EVERY BORROWER in the same situation! This is what is going on with federally guaranteed student loans, and something similar is undoubtedley happening with private loans, although that data is not publicly accessible.

This has nothing to do with the debt or the borrower, and everything to do with the consumer protections behind the debt. I hear lending proponents self righteously characterizing defaulted borrowers as drains on the taxpayers. In actual fact, the reverse is true. Imagine a business where you harass, embarrass, and threaten misfortunate citizens all day long, and as a result receive large amounts of their wealth, unearned. I frankly cannot imagine who could and would do such a job, but I suspect that those who insult defaulted borrowers, and those who extort unearned wealth from them are the same people.

Also, the government, lenders, and universities have been egregiously misleading the public for years and years by claiming that the "default rate" was low, and getting lower, at around 4-7 percent. This is really the biggest lie. In actual fact, I estimate that ultimately about 1 in 3 borrowers are defaulting on their loans. 33 percent.

Even throwing out for-profit schools points to a default rate of about 29 percent. This is higher than the default rate of any other loans I am aware of subprime ninja loans included!

This comes from a 2003 IG estimate made based on real data. This report has been completely buried by the propaganda over the years, and but for the luck of an intrepid reporter doing real Investigative journalism (Nick Perry at the Seattle Times), would probably never have seen the light of day.

Importantly: this problem exists across both Direct Loan (DL), and Federal Family Education Loan (FFEL) Programs. People are led to believe that under the new system, the middlemen are cut out. This is completely false. Sallie Mae and others will still be both servicing, and collecting on student loans in the same conflicted and predatory manner as before.

In the public interest, the consumer protections that were removed by Congress must be restored by Congress at the earliest opportunity. By returning these consumer protections, the motivations of the system’s functional elements will be reoriented such that most, if not all of the deficiencies mentioned above will go away over time.

Come to studentloanjustice.org