Student loan borrowers shouldn't get a degree in debt

Lenders must improve transparency and guidance so consumers can make informed decisions on loans for education

Published: March 2013

High school seniors across the country are anxiously waiting to hear whether they were accepted to their college of choice. Deciding to go to college or university can do great things for your future. But for many Americans, the decisions they made about student loans have ultimately given their finances a failing grade.

Unfortunately, too many graduates and their parents find themselves trapped under student loan debt that they can’t afford to pay back. What’s even worse is that in some cases, this type of staggering debt might have been avoided through a different loan option.

Consumers Union, the policy and advocacy arm of Consumer Reports, has long believed that the student loan industry needs more transparency so that consumers can make better informed decisions when it comes to student loans. Many consumers don’t understand the differences in their loan options, including the differences between federal and private loans—a choice that can add thousands of dollars in unnecessary debt.

And while in 2008 Congress began requiring colleges to provide mandatory entrance and exit counseling to all students taking out a federal loan, a 2012 survey (PDF) found that more than 40 percent of students with federal loans believed that they had not received any kind of counseling, either online or in person.

Student loan debt is also unlike any other type of debt in that it’s almost impossible to eliminate when declaring bankruptcy. This is the case even with private loans, which are no safer than credit cards for financing higher education. Thanks to recent changes in the bankruptcy code, student loan borrowers are penalized more for investing in their education than they are for declaring bankruptcy due to credit card debt. To make matters worse, borrowers with private student loans find lenders unwilling to refinance or modify the loans, leaving them locked into a debt that they simply cannot pay.

Lawmakers have taken steps to make the student loan industry more consumer friendly, including introducing Consumers Union endorsed bills that strengthen loan counseling standards for federal loans, treat private student loan debt like any other unsecured debt, and shine a light on private lenders. Recently the Consumer Financial Protection Bureau also announced that it would expand its oversight of certain student loan servicers and started a new Paying for College website to help students understand their options.

We welcome and support those efforts, but think that Congress and regulators could do more to better protect students investing in their future. That’s why Consumers Union recently announced its Seven Principles for Fair Student Lending:

Before Borrowing

  • Transparency: Lending options should be easily comparable
  • Borrowing Options: Schools should help students find the most affordable loan options

Paying Back the Loan

  • Flexible Repayment: Borrowers must be given reasonable options
  • Reasonable Costs: Fees should be reasonable and proportional to services provided
  • Accountability: Students should have access to effective and timely loan inquiries and dispute resolution
  • Fairness: Abusive, unfair, or fraudulent practices must not be permitted

Inability to Pay

  • Reasonable Relief: Loans shouldn’t be a lifelong burden

We believe that a college degree should open opportunities for students, not become a lifelong trap of debt for borrowers and their families. We will continue to work with lawmakers and regulators to help ensure that students are treating fairly by lenders.

To read more about Consumers Union’s Seven Principles for Fair Student Lending and learn more about student loan issues, visit DefendYourDollars.org.

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