As the price of college tuition continues to rise, up 1,120 percent since 1978, students seeking ways to pay for the opportunity to join America’s middle class regularly turn to private student loans. According to a report from the Consumer Financial Protection Bureau, American college students owe over $150 billion in private loans, and the majority of these loans have cosigners. These cosigners, often parents of students, are now facing severe collection practices for the loans that helped their children earn a college degree.
It is no secret that the price of college is rising. To put the increase into context, since 1978, the 1,120 percent bump far surpasses the cost increases of many other areas in the economy. A Bloomberg report noted that the increase in college tuition has risen four times faster than the consumer price index. During that time, medical expenses have risen 601 percent, and the price of food rose 244 percent.
With the lack of pathways to the middle class that existed for their parents and grandparents, today’s students find few other routes to financial stability other than paying for a college degree.
Unlike other financial transactions, student loans benefit from several government enacted protections. But the protections favor the lender instead of the borrower. There is not a bank that would loan $200,000 to an 18 year-old, no matter how high he or she scored on a standardized test, or what type of business plan is proposed. Private loans cover the amount needed to satisfy the ever growing tuition demanded by American institutions and are often the only way to ensure a student’s tuition is covered after government loans are exhausted. Despite the fact that the money is going towards a college education, the fact remains that these private loans require a stable financial record and respectable credit score. These are things that 18 year-olds simply have yet to establish. Cosigners are the last bet to cover the exorbitant tuition.
While the private student loan industry is nothing new, the industry has enjoyed government protection since a bill was passed in 2005. Private lenders, third party companies with little to no restrictions on lending and collecting, sought protection when lending to students. According to Stephen Burd, a senior research fellow at the New America Foundation, private lenders began lobbying congress to pass legislation. Sallie Mae alone, a company that deals in both public and private student lending, spent $9 million on lobbying efforts, as well as contributed at least $130,000 in campaign contributions from 1999 to 2005.
The lobbyists argued that, in order for private lenders to have confidence to distribute loans, protection was needed from borrowers seeking a free education. Citing the possibility of irresponsible borrowers intentionally filing bankruptcy, the lobby was successful in persuading congress to place private student loans in the same category as alimony, child support, tax evasion, and fines owed to the government. The Orwellian title of the bill was the Bankruptcy Abuse and Consumer Protection Act. Stephen Burd refuted the notion that cheating lenders was a common practice. “There isn’t data. A lot of these restrictions have been put on because of anecdotal information.”
Now, parents of students unable to pay back these private loans suffer severe collection practices and are often forced to take extreme measures to protect themselves financially. Today’s parents are being held responsible for their children’s college education, and with the option of bankruptcy off the table, taking out another loan or cashing a 401k are the only remedies for the massive student debt.
Many of the loans fall into delinquency, or even default, based on a few circumstances. First, with the economy still trying to rebuild and job prospects lagging behind those of previous generations, many college students find decent paying jobs scarce. Second, private loans do no fall under the same collection regulations of federal loans. Private lenders can charge exorbitant interest rates and don’t have to restrict monthly payments to manageable amounts, despite the monthly income of the borrowers.
Federally backed student loans are offered with relatively low interest rates, and often locked in, as long as congress continues to pass legislation to keep them reasonable. Private loan interest rates often exceed 7 percent. These rates can rise when borrowers struggle to make timely payments.
After the private lender has satisfied an obligation to contact the primary borrower, the student, the lender then begins to contact the cosigner almost exclusively. Eventually, these loans end up in the offices of debt collectors, and that is where the cosigners begin to suffer not only credit rating drops, but enhanced collection tactics.
The firm of Weltman, Weinberg, and Reis is one of the debt collection agencies that has taken on the practice of retrieving money from cosigners. According to a representative that wished to remain nameless, the student loan recovery department at the firm is currently the largest department. When asked how often large loans are paid off, the representative didn’t have an exact number, but confirmed that many parents are taking extreme measures. “These loans are usually paid off by taking out another mortgage, another loan, or cashing in a 401k.” The representative stated that this is a normal part of the collection process, which, for the collection firm, can yield a 15 to 25 percent share a student loan that can be anywhere from $50,000 to $100,000.
Financial experts are warning parents not to cosign on loans, even student loans for a child, due to the disastrous default rate among American students, and the probability of becoming responsible for the high debt. For American parents, the question centers on what is better, a child’s college education, or future financial stability as parents approach retirement.