Consumer Law Report Blasts For-Profit Colleges for Private-Label Student Loans

A new report issued in January by the National Consumer Law Center accuses for-profit colleges of saddling their students with unregulated private-label student loans that force these students into high interest rates, excessive debt, and predatory lending terms that make it difficult for these students to succeed.

The report, entitled “Piling It On: The Growth of Proprietary School Loans and the Consequences for Students,” discusses the boom over the past three years in private student loan programs offered directly by schools rather than by third-party lenders. These institutional loans are offered by so-called “proprietary schools” – for-profit colleges, career schools, and vocational training programs.

Federal vs. Private Education Loans

Most loans for students will be one of two types: government-funded federal student loans, guaranteed and overseen by the U.S. Department of Education; or non-federal private student loans, issued by banks, credit unions, and other private-sector lenders. (Some students may also be able to take advantage of state-funded college loans available in some states for resident students.)

Private student loans, unlike federal undergraduate loans, are credit-based loans, requiring the student borrower to have adequate credit history and income, or else a creditworthy co-signer.

The Beginnings of Proprietary School Loans

Following the financial crisis in 2008 that was spurred, in part, by the lax lending practices that drove the subprime mortgage boom, lenders across all industries instituted more stringent credit requirements for private consumer loans and lines of credit.

Many private student loan companies stopped offering their loans to students who attend for-profit colleges, as these students have historically had weaker credit profiles and higher default rates than students at nonprofit colleges and universities.

These moves made it difficult for proprietary schools to comply with federal financial aid regulations that require colleges and universities to receive at least 10 percent of their revenue from sources other than federal student aid.

To compensate for the withdrawal of private student loan companies from their campuses, some for-profit colleges began to offer proprietary school loans to their students. Proprietary school loans are essentially private-label student loans, issued and funded by the school itself rather than by a third-party lender.

Proprietary Loans as Default Traps

The NCLC report charges that these proprietary school loans contain predatory lending terms, charge high interest rates and large loan origination fees, and have low underwriting standards, which allow students with poor credit histories and insufficient income to borrow significant sums of money that they’re in little position to be able to repay.

In addition, these proprietary loans often require students to make payments while they’re still in school, and the loans can carry very sensitive default provisions. A single late payment can result in a loan default, along with the student’s expulsion from the academic program. Several for-profit schools will withhold transcripts from borrowers whose proprietary loans are in default, making it nearly impossible for these students to resume their studies elsewhere without starting over.

The NCLC report notes that more than half of proprietary college loans go into default and are never repaid.

Recommendations for Reform

Currently, consumers are afforded few protections from proprietary lenders. Proprietary school loans aren’t subject to the federal oversight that regulates credit products originated by most banks and credit unions.

Moreover, some proprietary schools claim that their private student loans aren’t “loans” at all, but rather a form of “consumer financing” – a distinction, NCLC charges, that’s “presumably an effort to evade disclosure requirements such as the federal Truth in Lending Act” as well as a semantic maneuver meant to skirt state banking regulations.

The authors of the NCLC report make a series of recommendations for reforming proprietary school loans. The recommendations advocate for tough federal oversight of both proprietary and private student loans.

Among the NCLC’s favored reforms are requirements that private student loan companies and proprietary lenders adhere to federal truth-in-lending laws; regulations that prohibit proprietary loans from counting toward a school’s required percentage of non-federal revenue; implementing tracking of private and proprietary loan debt and default rates in the National Student Loan Data System, which currently tracks only federal education loans; and centralized oversight to ensure that for-profit schools can’t disguise their true default rates on their private-label student loans.

Other proposed reforms the NCLC supports include modification of federal bankruptcy laws and expansion of federal college loan debt relief programs.

The NCLC argues for a modification of current bankruptcy laws that would allow student borrowers to discharge onerous student loan debts in a bankruptcy petition without having to meet the current, nearly-impossible-to-satisfy “undue hardship” tests. Amidst more relaxed bankruptcy rules and strengthened non-bankruptcy alternatives, the NCLC maintains, fewer borrowers would find themselves hopelessly mired in student loan debt.

New CDC Report On Seat Belts

Seat belt laws were created fairly recently in the United States, and their implementation has varied across states and vehicles-the consequences of which have proven detrimental on numerous occasions. One night last fall, a father and his daughter were traveling down a San Diego highway when he suddenly lost control of the vehicle and swerved into oncoming traffic. His daughter was ejected and died at the scene of the accident. The vehicle, a 1956 Volkswagen Beetle, had never been outfitted with safety belts, nor was the father ever required by law to install any. Given the strong relationship between occupant protection and the use of safety belts his daughter may have survived the accident had she been wearing one.

An estimated 12,713 lives were saved by seat belts in 2009. Moreover, more than 72,000 fatalities were prevented between the years of 2005 and 2009, according to the National Highway Traffic Safety Administration (NHTSA). In California, 574 of the 1,963 vehicle occupants killed in motor vehicle collisions in 2008 were not wearing any safety equipment, according to the California Highway Patrol’s accident statistics. As much as drivers who “buckle up” have improved the safety of motor vehicles, there were no laws mandating their use until New York enacted the first one in 1984. In the following years, every other state would follow, except for one: New Hampshire.

Seat belt laws fall into two categories: primary and secondary. In states where primary laws are in effect, law enforcement officials may stop a vehicle and issue a citation when either a driver or a passenger is not wearing a belt. An officer may only issue a citation for not wearing a safety belt after the vehicle has been pulled over for another violation in states with secondary laws. “Currently, 31 states, including California, the District of Columbia, and Puerto Rico have primary seat belt laws, and 18 states have secondary laws”, explains Jim Ballidis, a California personal injury lawyer.

Compliance has been higher in states with primary laws than in those with secondary laws, according to NHTSA. A recent telephone survey by the Centers for Disease Control and Prevention confirmed NHTSA’s finding: drivers in California, Oregon, and Washington-all states with primary laws-reported the highest seat-belt use in the country. Coming in first place was Oregon, where 94% of the people surveyed claimed to be seat-belt wearers, followed by California with 93.2%, and Washington State with 92%. Surprisingly, New Hampshire did not rank the lowest. Whereas 66.4% of people surveyed there said they always use a safety belt, only 59.2% of people in North Dakota reported the same.

As seat-belt use has increased, the number of vehicle occupant fatalities has decreased, according to the National Occupant Protection Use Survey (NOPUS). The recent CDC study noted a similar correlation between seat-belt use and injuries resulting from accidents: between 2001 and 2009, the injury rate among motor vehicle occupants decreased by 16%, while between 2002 and 2008, the number of people using buckling up rose from 81% to 85%.

Motor vehicle accidents are the leading cause of death for people between the ages of 5-34 in the United States. Safety belts have the potential to reduce the risk of fatal injuries during a crash by approximately 45%, according to the CDC. Considering these two facts, everyone should buckle up.

The UK Parliamentary Select Committee Report

The offence of blasphemy, last successfully prosecuted in the UK in 1977, has now been abolished. However, an analysis of the offence is instructive and the history leading up to its abolition will be briefly recounted. Following a 1985 report by the Law Commission, which concluded that the offence should be repealed, and a similar recommendation by the UN Human Rights Committee, in 2002, the House of Lords appointed a Select Committee ‘to consider and report on the law relating to religious offences’. The Report did not offer a conclusion regarding the law of blasphemy, but offered several possible options for reform which will be discussed later. The report, in its approach to religious freedom, mostly encompasses the identity aspect of religious freedom rather than its expres­sive-critical aspect, as will be seen in the following discussion.

In its analysis of the law under the Human Rights Act 1998, the Committee saw in the prohibition a contravention of freedom of expression (Article 10) and of the obligation not to discriminate in the application of the right to religious freedom (Articles 9 to 14). It thus looked at the equality of protection of religious freedom of the members of groups, which the blasphemy laws either did or did not protect. The Report did not consider religious freedom as a critical- expressive right, the religious freedom of the blasphemer, which is impaired by blasphemy laws.

The Select Committee suggested three options for reform the offence of blas­phemy, without choosing between them: ‘leave as is’, repeal, or replace with a broader offence. The reasoning behind each of the approaches reveals more of a community-identity approach than an expressive-critical approach to religious freedom. One reason for the first option, leaving the law unchanged, was that blasphemy law was part of the legal fabric; this reasoning underscores the law’s constitutional heritage and national identity, which should be tampered with only for weighty reasons. This is a viewpoint that sits squarely within the community perception of the right to religious freedom.

Under the reasons in support of the ‘repeal’ option, the Report stressed that the common law offence of blasphemy was discriminatory as it protected only one religion. The Report also stated that the most serious deficiency of the blasphemy offence is that UK courts had interpreted the offence as one of strict liability. The Report did not directly ask, however, whether any offence of blasphemy would be commensurate with respect for religious freedom. An expressive-critical approach would raise this question and answer it by noting that a blasphemy offence is incommensurate with the right to religious freedom.

Under the option of replacement of the offence with a broader, non-discriminatory provision, the Report suggested the use of the Indian Penal Code provisions as a starting point, particularly Article 295A, which states:

Whoever, with deliberate and malicious intention of outraging the religious feelings of any class of citizens of India, by words, either spoken or written, or by signs or by visible representations or otherwise, insults or attempts to insult the religion or religious beliefs of that class, shall be punished with imprison­ment… or with a fine, or with both.

The Indian Supreme Court viewed this Article as commensurate with the Indian Constitution’s provisions of freedom of speech and freedom of religion. The Indian approach, as the Report itself noted, is based on the uppermost con­sideration of preventing religious strife in a particular political context. The Report envisioned problems with such a law, namely potential misuse for political prose­cutions (which it did, however, see as unlikely to occur in the UK) and the difficulty of defining hurt to religious feelings.

Yet the more basic objection should stem from a view of religious freedom that sees the value of this right in the freedom to criticize and debate issues of religion and belief. Even deliberately insulting speech is not necessarily without merit; some effective conveying of religious ideas for and against religions is deliberately provocative and insulting. There is, however, speech that effectively silences, through propagation of hate or intimidation, members of a religious group from expressing their own voice and enjoying their rights as equal citizens. This speech should be more narrowly defined and is better addressed through prohibitions on hate speech.