When Treasury Secretary Henry Paulson announced that he wanted to extend $60 billion of the $700 billion rescue package to non-bank credit card and auto loan firms, we called it “an irredeemably bad idea.” We urged Congress to stop this idea before it went any further.Well, there’s another piece of this proposed non-bank rescue: Paulson wants to use some of the $60 billion to bail out providers of high-cost private student loans – the “alternative” student loan market that had expanded with little federal oversight during the early part of this decade.
That idea is irredeemably bad, too, and Congress should weigh in to stop it.
The overwhelming majority of students do not use private loans to pay for college (only 8 percent of students in the college Class of 2007 took out private loans, according to the Project on Student Debt). And during the current credit crunch, federal Stafford, Perkins and PLUS loans are as available as ever to students and families at all income levels. This bailout is unnecessary.
Higher-education groups, including the American Association of Collegiate Registrars and Admissions Officers and the American Association of State Colleges and Universities, have urged Paulson not to bail out “providers of usurious private student loans.” The interest rates and fees on these private loans, they note, can be as exorbitant as those of credit cards.
“Most students and families do not use private student loans to pay for college, nor should they,” the college officials said in a Nov. 19 letter to Paulson. “Private loans are risky and expensive, and lack the protections, oversight, and regulations of safer federal loans.”
This proposed bailout comes after New York’s attorney general in 2006-07 revealed what he called “an unholy alliance” between many lenders and colleges involving kickbacks and the steering of students to preferred-lender lists.
Paulson hasn’t yet announced any formal plan to bail out private student loan providers so far. There’s time for California Sens. Dianne Feinstein and Barbara Boxer, and Rep. George Miller, who heads the House Education and Labor Committee, to get Paulson to drop this very bad idea.
Colleges and universities, instead, should be redoubling efforts to ensure that students max out on federal loans before they turn to higher-cost private loans.