One of the many problems facing our country today is the overwhelming student loan debt that some working people bear. One of the outstanding problems of these loans is that they amount to unconscionable contracts. It is a bold claim, so I’m going to cover a lot of ground today.
There are a number of factors that can make a contract unconscionable. An unconscionable contract is one that no capable, fair-minded person would willingly enter into. This kind of contract is terribly one-sided, giving almost all the benefit to the lender. Also examined are things such as the age and mental capacity of the person making the contract, the bargaining power of the parties (in this case a student fresh out of high school and a multi-million dollar corporation that specializes in lending money), and the clarity of the contract itself. When I say clarity, I mean that it is important that the person agreeing to the contract understands what is required of them at the time they enter into the contract – understanding the contract only after it has been entered into does not matter. This kind of loan, strictly speaking, isn’t illegal, but it is so morally reprehensible that it should not be enforced.
First, looking at the age and experience of the parties is bleak. We have a well-established company that specializes in lending money for profit, and a student fresh out of high school. The person in question almost necessarily must not be college educated, because a college education is what they are trying to finance. Frequently, the student loan process is so complicated that universities have a staff of advisors explicitly for that purpose, who handle nearly all aspects of the finance process. While getting some help understanding the process can be nice, having that much assistance provided by the university itself makes the situation look fishy, and it helps make it crystal clear that students don’t really understand what they are doing.
Next, we have to look at the bargaining power of the persons making the contract. On the one hand, we have a student, who is probably grateful to have been accepted to the university in the first place (low acceptance rates are a badge of pride at some universities), who has to get help from the university to understand how to get the money to attend. On the other is the lender, which technically isn’t the university, although it is where the university gets a substantial amount of their money. The lender gets to set all the terms of the agreement, The university is the ultimate beneficiary of the money, and has undue influence in getting students to understand and agree to the contract.
Students also feel pressured to accept loans. College is expensive, and there is almost no way that a person at the age of 18 is going to finance their own education out of pocket. They are on a strict time limit to come up with the money to pay for college, and we have already established that most students do not know how to negotiate for loans. Some students do not even have bank accounts yet. Colleges (and our society at large) have also spent a great deal of time and effort convincing students that a college degree is valuable. Analysis of college degrees frequently compares “people with college degrees to those without them” and determines that people with a college degree make substantially more money. The loans themselves are often positioned as an “investment in yourself” that will be a net gain once the extra earnings are considered. Waiting until after a student has been accepted to start looking for financing puts the student into panic mode, where money has to be secured quickly if they are going to start their college career on time. If, on the other hand, the finances were secured first, working out the details of finance before they had even decided which school to go to, students would not be in such a rush to get funding and would have more time to analyze their options. It might be a little impractical, but knowing how much money you could borrow and at what rate could help make your decision about which college to attend. Naturally, that is not an option.
Students are also at a dramatic disadvantage in terms of student loan repayment. It is not explicitly listed in the contract, but the student loan financiers have literally convinced our government to write special laws that say their particular kind of debt cannot be discharged in bankruptcy except in the most extreme cases – usually, it requires disability that prevents you from working (see the ironically named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). This means that, regardless of their financial circumstances, students will still be forced to repay their loans (with interest). If students stop making payments to their lender, the bank can have wages garnished so that they will definitely receive their money. If having the power to rewrite laws such that they let you hide a unique clause in every contract you issue without having it appear on the contract itself isn’t a disparity in power, I don’t know what is. I even understand why they wanted that law: Students of law and economics were graduating from college and immediately declaring bankruptcy to discharge their student loans. That point bears repeating: The students who knew the most about finance and bankruptcy were the ones who realized they were bankrupt immediately after graduation. For the rest of us, it might take a few years.
The last major point is the student loan rates themselves. These rates are often well above the market rate for similarly priced items; those are things like cars, boats, and houses. Lenders often cite the inexperience and low credit rating of the people they are lending to as justification for the very high rates, but that makes absolutely no sense in the context of a loan with special protections that cannot be discharged in bankruptcy. Instead, the effect of the high interest rate prevents the payer from ever making any headway on the principal, keeping them indebted for years. It is not unusual to have the interest rate set so high that the loan itself grows instead of shrinks over time. Even if a student refinances after building credit, they will still have years of unnecessary interest built up. Lenders claim that “special discharge conditions” and “income based repayment” justify having these excessive interest rates, but anyone with common sense understands that if a person cannot afford to pay their debt with their income, they are bankrupt.
And that is the problem: Many of our college graduates are literally bankrupt, but have no way to escape their debt.
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