Unstacking the Deck for Student Loan Borrowers

Published

November 19, 2015

Mitchell D. Weiss is an experienced financial services industry executive and entrepreneur. He is an Executive in Residence at the University of Hartford and co-founder of the university’s Center for Personal Financial Responsibility. His books include Life Happens: A Practical Course on Personal Finance from College to Career and Business Happens: A Practical Guide to Entrepreneurial Finance for Small Businesses and Professional Practices—both of which are now undergraduate courses that Mitch teaches at the university and elsewhere.

The proliferation of mandatory arbitration clauses in our everyday borrowing, purchasing and even working lives is once again making news.

In their excellent New York Times series, business writers Jessica Silver-Greenberg, Robert Gebeloff and Michael Corkery note that the use of this constitutional-rights-limiting language has become commonplace to the point that we’ve come to accept it without challenge.

Why? Because we have no choice but to do so.

I first wrote about this matter more than a year ago. I was trying to understand why so few class-action lawsuits were initiated despite the enormous volume of grievous complaints that had been (and continue to be) lodged against companies that administer public and private student loan agreements.

Then I learned that it’s because the governing documents subject such disputes to individual arbitration.

There’s an awful lot of money at stake here, as the industry’s defenders are making plain with fresh attack ads. Still, aggrieved borrowers have little recourse but to wait for others to take up the battle: Until the Justice Department challenges practices it deems “unfair and deceptive,” the Department of Education cites and fines its transgressing subcontractors, Congress elects to legislate a permanent solution, or the Consumer Financial Protection Bureau addresses the issue as the Dodd-Frank Act authorized it to do (which is what’s made the agency the target of the aforementioned ad campaign).

For student borrowers, however, the use of arbitration clauses in education-related loan agreements is just one more example of how the financial-services industry has tipped the scale in its own favor. A case in point is the virtual inability to discharge these debt obligations in bankruptcy. Thanks to an effective lobbying effort by college-tuition lenders and others, Congress assured second-class citizenship for student borrowers within the context of its 2005 overhaul of the bankruptcy statutes.

So between a sympathetic judiciary that paved the way for these Constitution-subverting clauses to spread beyond what, arguably, the framers of the Federal Arbitration Act of 1925 originally intended and a legislative branch that appears all too willing to accommodate the economic interests of its financial-industry benefactors, higher-education borrowers have been dealt a really bad hand.

The damage, however, is not limited to the surrender of these rights and strategies. It’s that the concept of good-faith negotiation has been fundamentally undermined.

Think about it. Why should a lender resolve a payment problem when it’s assured that it will ultimately collect all that it’s owed — and then some — even if it has to wait to garnish the borrower’s Social Security benefits to do so? Moreover, what’s to stop that same lender (or its agents) from pushing the limits of acceptable practices with as many customers as it can when it knows that their ability to band together in protest has been neutralized?

The notion of negotiating in good faith has become obsolete because there is no longer a compelling reason for that to occur, unless…

Nary has a week gone by without some mention of the $1.2 trillion student loan debacle-in-waiting. Yet despite all that talk, little has been done to legislate a universal restructuring of these loans (i.e., interest rate reductions in tandem with repayment term extensions) so that they are more likely to be repaid in full.

Why? Because lower rates and longer durations translate into higher federal deficits and diminished investor returns.

But what if instead of complaining about the game, we insisted on reshuffling the deck? What if we restored dischargeability and jury trials for education-related debts? I’ll wager that not only will we experience a renaissance of good-faith negotiations, but we’ll also see quick action taken on restructuring the entire student-loan portfolio.

Why? Because given a newly altered legal landscape coupled with the uncollateralized nature of these loans, lenders will be more apt to take that deal than their chances in court.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners