Student advocates want private lenders out of new program
A $200-billion federal consumer-lending plan shouldn't benefit private providers of student loans, several groups tell Treasury Secretary Henry Paulson.
Reporting from Washington — Student advocacy groups are urging the Treasury Department to prevent a new $200-billion consumer-lending program from benefiting private student lenders, which they say are largely unregulated and prey on students with risky, high-interest loans.
The program, announced this week and developed by the Treasury and Federal Reserve, is not aimed specifically at the student loan market. Its much broader goal is to encourage lending to consumers -- including car loans and credit cards -- as well as help the financial system by increasing liquidity in the credit markets.
But groups including Consumers Union, the nonprofit group that publishes Consumer Reports magazine, and the American Assn. of Collegiate Registrars and Admissions Officers say the money will also help prop up private providers of student loans, which often offer high and variable interest rates but not the consumer protections guaranteed under federal loan programs.
Private student loans, a primary focus of a nationwide conflict-of-interest scandal last year, are the fastest-growing segment of the $85-billion-a-year student loan market.
"A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and would actually be detrimental to many students and consumers," advocacy groups said in a letter last week to Treasury Secretary Henry M. Paulson after he signaled that the department was developing the program. "However, if you continue to pursue any form of rescue for private student loans, it would be unconscionable to do so without also providing better consumer protections."
The plan's effect on student lending highlights the potential unintended consequences from the enormous bailout program as officials rush to rescue the nation's financial system.
Michelle Smith, a Federal Reserve spokeswoman, said the program's formulators were solely concerned with trying to salvage the economy, not with broader discussions of student loan policy. Such issues, she said, would be more appropriately addressed by the Bush administration, which thinks private loans are an important part of the financial aid system.
Officials in the lending industry hailed the new plan as a crucial step toward ensuring that the private student loan market does not collapse.
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