"The Over Regulation of Private Education Loans"
Contributed by Blair Rugh, Trinovus
My youngest daughter is a school teacher in the Atlanta area. She recently got her master’s degree and is now working on her doctorate. Obviously she got her intellect from her mother. Last summer she called and asked to borrow a reasonably small amount of money. She had a grant for her tuition to graduate school, but the grant would not be paid to her until a couple of months after her tuition was due, therefore she needed to borrow the tuition for about 90 days. She had been to the teacher’s credit union where she banks, but they told her that, because it was an education loan they could not make it to her, as they did not have the systems necessary to generate the proper disclosures. Imagine that. A teacher’s credit union cannot make an education loan to a teacher. If she wanted to borrow the money to go to Las Vegas or to squander it in some other way, the loan would not have been a problem, but if she wants to borrow the money to improve her education, she needs to be protected. In any event, I charged her a five percent origination fee and twenty percent interest, took her two children and husband as collateral, and made her the loan.
I did not think much of it at the time, but this week I received a copy of a letter that a good friend of mine, one of our subscribers, who is the compliance officer in his bank, sent to the CFPB in response to its request for comments on student loans. With the letter he enclosed a letter he had written in 2009 in response to the Fedʼs request for comments on the student loan proposals. The following are some excerpts from his letters:
“On behalf of ..., a community bank serving the credit needs of its community for over a century we would respectfully request a thorough re-visitation to this proposal regarding private education loans. As proposed, we feel that unintended consequences would result in community banks not being able to adequately serve the personal needs of consumer customers regarding education related needs or desires due to the cumbersome disclosure requirements.
Our understanding is that numerous basic, simple, closed-end, personal loans that are routinely and quickly made would fall into the proposed requirements. Here are just a few of many examples:
- A student working his or her way through a local college may need small education loans for books, tuition increases, and the like from time to time
- Personal loans that may range from $500 to $1000
- A working mother may borrow $1200 to take a course offered at a local technical college to better her position in the workplace
- A typical, normal bank customer in good standing may want to borrow $3000 - $5000 short-term for post-education needs for a child
All of the examples would be character loans which may be unsecured or secured by various types of non-real estate collateral.”
These examples illustrate that, while there may be problems regarding long-term education loans from non-regulated lenders that need to be addressed, the short-term education loans that most community banks make are a totally different product. To lump them together under the same onerous regulatory burden will force community banks to cease making education loans that enable their customers to try to better their position in society and could force them to go to lenders that could be abusive.
Congress and the agencies have to realize that there is a cost of regulation on the person being regulated. Initially that cost will either be absorbed or passed on to the person that the regulation is trying to protect. But, when the cost of regulation becomes too oppressive, then the business being regulated ceases to offer the product. This represents the zenith of regulatory success. The way to avoid anyone being harmed by an education loan is to make education loans illegal.