Just Another Scam?

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In 1998, Alan Michael Collinge graduated with three engineering degrees from the University of Southern California. He also left school with $38,000 in student loan debt. After three years of struggling to make loan payments, Collinge defaulted on his debt in 2001. By mid-2005, he owed $103,000. Rather than sinking under the weight of so much debt, Collinge began obsessively researching how the $75-billion-a-year federal student loan system works. He also founded Student Loan Justice, a website where other borrowers could share their horror stories.

Collinge has now written a book on the subject. The Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back, released February 1 and published by Beacon Press, combines both his research and testimonials from Student Loan Justice to show how loan companies, schools, and even the federal government can exploit the federal student loan system to earn large profits while burying borrowers under unmanageable debt loads.

Collinge argues that congressional action over the past decade has turned federal student loans into a lifelong burdensome debt. One way this was done was by removing basic consumer protections, such as making it virtually impossible for student loans to be discharged via bankruptcy. This put student loans in the same category as overdue child support or unpaid taxes, rather than treating them as a form of consumer debt, such a car loans. Making matters even worse is that federal student loans also have onerous collection methods—meaning delinquent borrowers can see their wages, tax refunds, and social security garnished, get harassed at their workplace and home by collection agencies, and pay exorbitant collection fees that substantially increase their debt burden.

These are provocative points, but also rather complex ones. Fortunately, The Student Loan Scam does an excellent job of putting a human face on the borrowers who are trapped under mountains of debt, and it makes a convincing case for why students should think twice before taking out student loans. Whether Colligne’s book works as a whole, however, depends on what the reader hopes to get out of it, because his treatment of student-loan policy could have benefited from more subtlety. As a provocative warning about the dangers of student loans, The Student Loan Scam is well worth a read. But those hoping for a wonkish book that delves into the details of why student loans are a rip-off and suggests an alternative way for Americans to pay for college may find themselves disappointed.

Collinge relays several stories that underscore how bad student loan debt can get for borrowers. There’s Robert, who failed out of law school owing $42,000 for his postsecondary studies. He’s made $50,000 in payments and held the debt for far longer than the standard 10-year repayment period, yet still struggles to make his monthly interest payments, let alone put a dent in the principal he owes. Or Lorraine, who saw the debt she took on to go back to school following her husband’s death nearly two decades ago skyrocket eight-fold. Now she is forced to siphon money from her social security check to cover her payments.

Far and away the most engaging parts of the book, anecdotes like these underscore the terrifying ways a student loan, supposedly the key to higher education and a better life, can instead become an oppressive and life-ruining burden. They also reveal some of the unethical tactics collection companies and lenders use to hound borrowers, such as when they falsely claim to be from the Department of Education—a direct contradiction of existing collection laws. On top of shady practices like this are the collection costs of over 20 percent that borrowers who default must pay on their loans.

On the policy side, it is surprising to see Collinge highlight the dangers of federal student loans, because they are traditionally seen as the safest way to borrow for college. These include Stafford and PLUS loans, among others, and are either made directly by the government or by private entities in the Federal Family Education Loan (FFEL) Program. Either way, borrowers receive a fixed interest rate and special repayment options based upon income or an agreement to take a job in public service. (This is in sharp contrast to non-federally guaranteed private loans, which have high variable interest rates and almost never have favorable repayment terms.) Collinge discusses how, despite these favorable terms, federal borrowers are still subject to incredibly high collection costs, are often lied to or have trouble getting a straight answer about their loan status, and face harassment from companies trying to collect on loans.

But Collinge is not solely concerned with the erosion of consumer protections or the flawed fee structure of student loans. He devotes four of his nine chapters to exposing the people and entities that profit from the plight of student-loan borrowers, and how they do so. His rundown includes questionable collection practices by the giant lender Sallie Mae and its affiliate USA Group; members of Congress who have received generous campaign donations from FFEL lenders; financial aid officials at colleges and universities who took payments from loan companies to recommend their products to students; and several lenders who improperly billed the Department of Education for millions of dollars in subsidy payments.

Discussing the “villains” of the student loan program in depth certainly makes for good reading, though the attacks are uneven. While the discussion of Sallie Mae’s illegal collection practices is well done, a chapter complaining about the Virginia-based company because a top executive tried to buy the Washington Nationals takes too much of a general anti-corporatist tone to be effective. In other cases, Collinge’s points would have benefited from more accuracy and subtlety. For example, he criticizes the Department of Education because it makes money on every dollar it collects from a defaulted student loan. But this isn’t entirely true—that figure excludes most collection costs, and isn’t discounted to reflect that a dollar collected 20 years down the road is worth less than one collected today.

This lack of subtlety is not the only problem with the policy-oriented parts of the book. Collinge never clearly outlines the structure of the federal student loan system and how its various entities interact. As a result, readers unfamiliar with the loan programs may find themselves confused. He also has a habit of combining federal and private student loans in his discussions, making it difficult to tell which he is addressing. For example, a chapter on policy recommendations often combines the two issues under the same heading. The recommendations can also be hit or miss in other ways. Restoring some consumer protections, limiting repayment based on income, and discussing the rising price of college seem like good ideas. Reducing degree requirements to make graduating a quicker process does not.

Overall, Collinge is a very capable chronicler of the horror stories produced by the United States’ seriously marred student-loan system. He is less effective when he’s trying to relate the ins and outs of the rules and regulations that constitute that system. As a result, The Student Loan Scam works better as a series of cautionary tales and human interest stories than it does as the foundation for a policy argument. But given the sheer number of people whose lives are plunged into financial ruin simply because they want to pay for higher education, the book still serves an important function.

Ben Miller is a program associate in the education policy program at the New America Foundation. The views expressed in this piece are his own.

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