Consumer-Law Advocacy Group Calls for Student-Loan Reform

April 09, 2009

The National Consumer Law Center issued a report this morning calling for lenders to help borrowers get out of debt and for government to help low-income students pay for college in a fiscally responsible way.

Because lenders have failed to offer flexible terms to borrowers who needed more time to pay off their loans, the report argues, the government should require any lender that accepts federal funds to create policies that promote loan modification over aggressively trying to collect money from those who clearly can’t pay off their loans yet.

“We have found private lenders to be universally inflexible in granting long-term repayment relief for borrowers,” wrote Deanne Loonin, the report’s author, who is a staff attorney at the law center. “Lenders that had no problem saying ‘yes’ to risky loans are having no problem saying ‘no’ when these borrowers need help.”

The report, titled “Too Small to Help: The Plight of Financially Distressed Private Student Loan Borrowers,” also says those who truly cannot repay their loans should be able to file for bankruptcy, which was made much more difficult by Congressional action in 2005.

The advocacy group also calls for more government oversight of the student-loan industry. Such loans should face the same standards that others do, so that only people who demonstrate the capacity to pay them back can receive them. Lenders should have to disclose more information to potential borrowers, and fees and interest rates should be regulated, the report says.

“If the government chooses to bail the lenders out by purchasing large portions of bad debt, the lenders will suffer no consequences for their irresponsible actions,” the report says. “They could return to irresponsible lending.” —Megan Eckstein