[WASHINGTON, DC] – U.S. Senator Dick Durbin (D-IL) today asked Treasury Secretary Henry Paulson, Jr. to take a number of steps to ensure that students are protected in any plan to use federal relief funding to aid for-profit lenders of private, non-federal student loans. Durbin also expressed serious concerns about the ethics and practices of lenders who offer private, non-federal loans to students citing instances where lenders have taken advantage of students.

“These practices combined with the exponential growth of the private student loan market over the past decade have resulted in trouble for students,” wrote Durbin. “Too many borrowers now find themselves overwhelmed by high-interest private student loans with no hope for relief. Using taxpayer dollars to aid an industry that has been detrimental to so many students is very troubling.”

In response to reports last year of aggressive and highly questionable tactics used by lenders to market student loans and court the favor of colleges and universities to offer such loans to their students, Durbin joined Senator Edward M. Kennedy (D-MA) in introducing a bill to protect students and parents from exploitation by private lenders. Key provisions from their Student Loan Sunshine Act were included in the Higher Education Act Reauthorization signed into law earlier this year.

In order to protect students, Durbin is asking that the Treasury Department require private lenders in receipt of taxpayer dollars to:

• Increase consumer protections for private student loan borrowers;
• Cap interest rates;
• Offer income-contingent and income-based repayment options;
• Allow private loan borrowers to renegotiate more reasonable terms for their loan.

The plan, announced by Paulson last week, will use Troubled Asset Relief Program (TARP) funding to encourage lending to consumers such as car loans, credit cards and student loans. According to a November 28 article in The Washington Post, the plan has already come into question by student and consumer groups including the U.S. Public Interest Research Groups, the U.S. Student Association, the National Consumer Law Center, the Project on Student Debt, the Consumers Union and the American Association of Collegiate Registrars and Admissions Officers.

Text of the letter appears below:

December 3, 2008

The Honorable Henry M. Paulson, Jr.
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Ave. NW
Washington, DC, 20220

Dear Secretary Paulson:

I am writing to urge caution as the Department of Treasury moves forward with its plan to use Troubled Asset Relief Program funding to stabilize for-profit lenders of private, non-federal student loans and to recommend that consumer protections be incorporated into the plan.

I have serious concerns about the ethics and practices of lenders who offer private, non-federal loans to students.

• With no cap on interest rates, lenders charge high, variable rates on private student loans. As a result, lenders have enjoyed far higher profit margins on private student loans than on federal student loans.
• Direct-to-consumer private lenders skirt financial aid offices by marketing loans directly to students, often without informing students of the availability of lower-cost federal student loans.
• A recent report by Iowa’s attorney general revealed misdeeds by an Iowa lender that aggresively steered students to expensive private student loans.
• A proliferation of unlicensed, unaccredited trade schools have partnered with lenders to provide high-cost private loans to at-risk students at those schools.
• Lenders successfully lobbied for a provision in the 2005 bankruptcy bill that rendered private student loans almost impossible to discharge in bankruptcy.

These practices combined with the exponential growth of the private student loan market over the past decade have resulted in trouble for students. Too many borrowers now find themselves overwhelmed by high-interest private student loans with no hope for relief.

Using taxpayer dollars to aid an industry that has been detrimental to so many students is very troubling. At a minimum, the Treasury should require that any receipt of taxpayer dollars be contingent on the lenders’ agreement to increase consumer protections for private student loan borrowers. Private lenders that receive federal funds should be required to cap interest rates, offer income-contingent and income-based repayment options, and allow private loan borrowers to renegotiate more reasonable terms for their loan if they fall on hard times.

Thank you for your consideration of this request.

Sincerely,
Richard J. Durbin
United States Senator