US students choosing exile over debts
Photo - Jim Wilson
George Binning
As student debt in the US hits $700 billion American international students are resorting to self-imposed exile rather than paying off their “exploitative” student loans.
Sallie Mae is the primary student loan company in the US with over 10 million borrowers holding a total debt of over $126.9 billion. The company has attracted extensive criticism from borrowers across the world, with accusations of predatory lending practices.
Andrew Wilbur, an American PhD Candidate in the Department of Geographical and Earth Sciences, graduated from Glasgow University in 2005 with total balance of $29,048.52 on his Sallie Mae student loan.
Since then he has made over $5,000 dollars in payments but his current balance stands at $33,227.90.
The variable interest rate on Wilbur’s loan has been as high as 14%. He has since decided to stop making payments, even though this means he cannot return to the US.
He explained: “I took the loan and have tried to pay it back in good faith, though I now feel like it was sold to me in bad faith, with the conditions so difficult that I’ll never get on top of it. For that reason, I can’t return to America to work or buy a house. My credit rating will be ruined and any income I make will be swallowed up by loan repayments. It’s just not worth putting up with that – paying Sallie Mae to make my life a misery.”
The U.S. Department of Education recently reported a rise in the student loan default rate from 5.2% to 6.9% in the past year. Wilbur went on to criticise Sallie Mae’s practice of running its own debt collection agency.
He said: “The fact that Sallie Mae actually owns its own debt collection agencies who profit when you default on your loan shows how exploitative the system is.”
Patricia Nash Christel, a spokesperson for Sallie Mae, pointed out that the company was able to be flexible on repayments when borrowers were in difficulty.
She said: “Individuals need individual loan repayment solutions, and in this environment, we want to work with students to make sure they can successfully manage their loans. We do everything we can to offer counselling and individual flexibility to help students avoid default.”
The burden of student debt is often carried over generations. Sculpture and environmental art student Kira Thomas told Guardian that her grandparents had to act as cosignatories for her Sallie Mae loan as her mother was still paying off her own student loan.
Provided she makes every payment on her private loan, which constitutes 80% of her total borrowing, she will eventually pay back more than twice the $43,000 she borrowed.
“I am worried that if my grandparents get to old to cosign and I am unable to borrow more I will have to drop out of art school.” she said.
Caleb Churchill, a photography student at Glasgow School of Art, originally took out loans totaling $85,031 in 2005. Since then, in spite of making regular payments of over $500 per month on the accrued interest, he now owes Sallie Mae over $94,000.
However, he took a different view on his situation, as he explained:
“This is the way it goes, the way the system is structured. I don’t understand why students borrow from Sallie Mae then bitch about it; they should know the conditions before they sign up.”
American student loans are divided into federal and private loans; federal loans are limited but have a lower interest rate as they are guarunteed by the government; private loans have higher interest rates and no state subsidy.
Speaking for Sallie Mae, Christel claimed that their private loans had a higher risk for the lender: “Sallie Mae offers private loans, which are different from federally guaranteed loans in that all risk is assumed by the lender and there is no government guarantee.”
However in the case of federal loans, companies such as Sallie Mae are able to take payments from a debtor’s social security fund or pay check if they default on a federal loan, giving the lender total security.
Alan M. Collinge, spokesperson for the resistance group StudentLoanJustice.org, was more critical of the American loan system than Sallie Mae itself, citing the gradual reduction of borrowers protections as the reason for the exploitation of student loans.
He said: “Student Loans are the only type of loan in modern US history to be specifically stripped of bankruptcy protections, statues of limitations, refinancing rights, and other fundamental consumer protections.
“The root cause of most of these problems lies in the fact that Congress removed these fundamental protections. This has made it more lucrative for the system when students fall behind, and has caused predatory behavior to occur. This predatory lending system also has contributed greatly to the astonishing rise in tuition costs – much like in the subprime home mortgage industry.”
Christel defended the practicality of their student loans:
“When compared to other types of consumer debt, for example credit cards or car loans, student loans offer a variety of options.”
Collinge called for a solution to the problem, he said: “The answer is simple: Congress must, at a minimum, return the standard consumer protections to student loans that it took away. This is at a minimum.”
In accordance President Obama has already expressed a desire to expand the availability of Direct Loans from the Board of Education, thus bypassing the private loan companies. This move is being resisted by lobby group America’s Student Loan Providers.
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I’m an American living in Scotland and I have consolidated student loans with Sallie Mae.
The student who chose to exile himself instead of being financially responsible is madness. Can’t feel sorry for you there, buddy. You’re making the rest of us pay for you. If more borrowers 1) read the fine print, 2) understood the terms and 3) did their homework, they might not be in the position they are today. It’s because of people defaulting on loans and thereby making it harder (or impossible) for others to get loans and making everybody else pay for the borrower’s mistake/greed/naievety/whatever. It’s one of the reasons the world economy is how it is today–in ADDITION to predatory lending practices and greedy financiers and other factors.
Variable interest rate?? 14%? Man, they saw you coming. I got a flat 6%, which may be working against me because of how things have tanked, but at least it’s not variable or 14+%. And living here where the pound is still stronger than the dollar, if only slightly, helps.
I’ve dealt with student loans for years and lenders ARE flexible and there to help–if you ask! I’ve defered my loans because of financial hardship several times, or arranged to make smaller payments just to pay something towards my debt. I’d rather deal with student loan lenders than private bank lenders ANY day.
Lenders are quick to jump on students in order for them to get into debt. I hate seeing companies offering credit cards on universities. But no one is forcing you to take a loan. You may need it, but there’s no gun pointed at your head.
Yes. Reforms are needed, but in the meantime, grow up, accept your responsibility, and pay your debt.
I agreed to the interview with the paper in the hope that the resulting article would highlight the engineering of insurmountable debt for private profits in the American loan industry. I didn’t want my own circumstances sensationalised, though that’s what I find myself reading. The campaigns for student loan reform have faced a very difficult media battle since there is clearly a lack of awareness about the impossible conditions placed on new graduates with private loans, partly due to the complexities of the different private / federal loan schemes, and partly due to the stripping of consumer protections being a fairly recent development.
Z Brown – You’re lucky to have a loan locked in at 6%. But with no refinancing options, those of us at variable rates are unlikely to ever make much headway into the principal balance, particularly under Sallie Mae’s capitalised interest policy, which adds every fee and interest hike onto the existing principal, which is then charged at the going rate. It’s disingenuous to call me financially irresponsible when, as the article states, I have repaid more than $5,000 of my loan, only to watch the balance inflate, seemingly at random. With most other kinds of debt, I would be able to seek alternatives, but due to the influence of the loan cartel in Washington, I can’t sell off my debt to another company to get a better deal. I’ve looked into getting a private loan with a British bank to get a fixed interest rate, but because of my status as a student with a low income, I can’t qualify for any deal that would offer monthly payments that I could afford.
And no, nobody held a gun to my head to make me take the loan. The choice was one of continuing my Master’s course after I’d borrowed to the limit on my federal loan, or drop out halfway through. Obviously I chose to complete the course. It wasn’t as if I was given a range of options by Sallie Mae – in fact everything was communicated over the phone (so no small print to read) and within a week or so the full private loan sum was in my bank account. Believe me, I’ve been though all the self-recriminations over my ‘mistake/greed/naievety/whatever’ and spent many sleepless nights trying to figure out ways to overcome the fact that the money I keep throwing into the hole doesn’t bring me any closer to the surface. I’ve stopped blaming myself, though. If you take a look at http://www.studentloanjustice.org you’ll find many people far worse off than me through actions no more irresponsible than simply wanting an education.
I’m sure you’ll remember how we were always persuaded that no matter what our socio-economic standing, there was help available to any American that sought a higher education. Do your research and you’ll find a vast body of evidence to suggest that the student loan industry extends and exploits poverty, rather than assisting graduates to overcome it. This is the fundamental problem here. The US Department of Education has endorsed predation and usury and the country is worse off for it. I agree that students need to understand the terms of the loans and do their homework – that’s why campaigns like Student Loan Justice exist.
In the meantime, I think it is completely illogical to subsidise the practice of usury and finance predation tactics just to uphold standing conventions. The game has been fixed and playing by the old rules is pointless. I support Robert Applebaum’s student loan forgiveness campaign but realise that it will be a very, very bitter pill for the public to swallow.
I implore anyone who reacted to this article with the predictable but entirely understandable feeling that this is a nightmare of our own making, and we ultimately bear responsibility, to do some research on Sallie Mae and its CEO Al Lord, the American student loan cartel, its lobbying successes and these companies’ ties to Congress. A very different picture emerges and a lot of mysteries are explained.
See here for a recent interview with Allan Collidge. Interesting views in the comments…
http://www.insidehighered.com/news/2009/05/05/collinge