BUSINESS
05/10/2009 05:12 am ET | Updated May 25, 2011

"Too Small To Help": No Relief For Students Trapped In Debt

A new report released Thursday on the private student lending industry offers a bit of deja vu.

"It's the same sad story: irresponsible lending," says Deanne Loonin, author of the report and director of the National Consumer Law Center's Student Loan Borrower Assistance Project, in an interview with the Huffington Post. "The loans that aren't performing were either very high rate or to otherwise high-risk borrowers at schools with low graduation rates."

The report (PDF), titled "Too Small To Help: The Plight of Financially Distressed Student Loan Borrowers," laments that "unlike the lenders that made these loans" -- potential beneficiaries of the government's TALF and TARP bailouts -- "the borrowers are 'too small' to help."

Private lenders like Sallie Mae, Wells Fargo, and Citi relaxed their standards as the economy boomed and extended private loans to more students at lower-tier schools -- students often already maxed out on federal loans and unlikely to able to pay up.

The report calls out the newly infamous process of securitization for fueling bad lending: [C]reditors made and sold loans to borrowers, but with the specific goal of selling them to investors. Loan products were thus developed for the repackaging rather than to provide the most affordable and sustainable products for borrowers."

The study notes that lenders are inflexible with student borrowers, refusing to settle or cancel a loan even if the debt-holder dies. In March the Huffington Post profiled the DiGregors, a family that had been hounded by debt collectors sicced on them by Sallie Mae after their son Tony died before graduation. Collectors only stopped calling to threaten the DiGregors after their senator got involved -- after over a year of harassment.

Loonin's report says the Obama administration's Home Affordable Modification Program for modifying mortgages should be a blueprint for student borrowers. The report says the government should require lenders benefiting from bailout funds to work with borrowers, restore bankruptcy rights to student lenders, and increase industry regulation in the areas of underwriting and interest rates, among other things.