Anya Kamenetz

How a New Generation Can Avoid Getting Bankrupted by Student Loan Payments

On March 30, President Obama signed a historic student loan reform first attempted by President Clinton back in 1993. By cutting banks out of the lending program, he saved a projected $40 billion in subsidies that will be redirected to the Pell Grant, making college more affordable for millions of students. The bill also expands access to Income-Contingent Repayment, which allows graduates to limit their student loan payments to 10 percent of income, a standard rule in other countries.

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McConnell Gets His Payback from the Debt Industry

Tonight, President George W. Bush will speak at Louisville's Seelbach Hilton at a $2,000-a-plate fundraiser for Senate Minority Leader Mitch McConnell to pay him back for his support for the White House's policies.

The event comes roughly on the second anniversary of the day the U.S. Senate passed a sweeping bankruptcy law overhaul, the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCA). Despite widespread criticism from both consumer organizations and conservative talk show hosts, Sen. McConnell, then Senate Majority Whip, provided the legislative muscle to push through that bill. It was one of the President's priorities.

But the bankruptcy law has made it harder for Americans to get out of debt. It imposes credit counseling requirements and a means test designed to push more people into Chapter 13 bankruptcy, denying them the right to fully discharge debts.

Moreover, the bankruptcy bill is one of the most egregious examples of pay-to-play politics in recent memory. According to the Center for Responsive Politics, the credit card and commercial banking industries have given $224 million to federal candidates and political parties since 1989, contributing 62 percent percent to Republicans and 38 percent percent to Democrats. The industry greased the skids for over a decade to be able to write preferential legislation into law.

Senator McConnell managed the floor fight to pass the bill, and he has received more than $535,000 in campaign contributions from the credit card and commercial banking industries. Just a few months before the bill's passage, McConnell raked in $60,000 from executives at two financial giants, UBS and Citigroup, at a New York City fundraiser. He was served well by his chief fundraiser, former banking lobbyist Alison Crombie Kinnahan.

Senator McConnell contends the bill was necessary to stop bankruptcy fraud. Yet bankruptcy lawyers and judges call it a "monumental failure," adding red tape without limiting fraud. Ninety percent of people who declare bankruptcy do so because of job loss, medical expenses, or divorce. Kentucky, it should be noted, ranks 9th in the country in bankruptcy rates, according to the American Bankruptcy Institute.

This story speaks volumes about how well the moneyed interests are heard in Washington, and whose voices are left out. Sometimes money helps pass a law. Other times it buys complacency in face of an emerging crisis. Let's stay with the credit card industry.

Students are particularly hard hit by an industry that aggressively markets on college campuses. Author Robert Manning estimates that credit card companies pay $1 billion to 300 universities for the right to set up tables on the quad and offer bookstore promotions. One industry insider at a major credit card company revealed that students constitute 25 percent of their new account goals. At a time when families and students are feeling more and more squeezed by tuition hikes, many turn to the offer of "easy money" through credit cards for textbooks, school supplies and other necessities. Final-year college students have an average balance of $2,864, and a quarter of them are putting their tuition on plastic.

Credit card debt is not priceless, as one ad wants us to believe. Young Americans aged 18 to 25 have seen their average credit card balances grow by 24 percent from 2001 to 2005. Bankruptcy filings among those under 25 doubled in the 1990s. Multiple surveys and books have chronicled the devastating impact of high debt on young adults' ability to choose a career, live independently, buy a house, start a family, and save for their own futures.

What does this have to do with President Bush, Senator McConnell, and fundraising?

We can all but guarantee that the stories of indebted young people won't be discussed over dinner with President Bush and Senator McConnell this evening. Nor will donors ask McConnell about oversight of credit card industry practices on college campuses. It is safe to assume that no one will ask Senator McConnell about cracking down on the most abusive practices of the industry, like tripling the interest rate for one late payment.

Even if these issues were raised tonight, Congress -- and Senator McConnell -- have shown who they really owe: campaign donors, like the credit card industry. They are the ones that foot the bill for the polls, television and radio ads, recorded calls, and direct mail that sugar-coats who politicians really represent in Washington.

As the mountain of debt young Americans carry grows larger each year, students know their obligations to repay will be sticking with them for life.

Given how Senator McConnell and Congress paid back the credit card companies and commercial banks so handsomely two years ago, the campaign finance system may not be that much different. Every election puts politicians further in debt, just not to us.

You Are Not Your Credit Rating

Imagine that private companies kept a lifetime, detailed record on you. The file determined how much you paid for necessities like a home, car, insurance, and electricity, or even whether you were able to buy them at all. The file would also keep track of when you were offered a job and how much you earned. Now imagine the majority of these records contained mistakes, and that there was no good way to correct them.

Sound like a totalitarian nightmare? That real-life permanent record exists here in the U.S. It's your credit report, and experts say the situation really is that bad. The worst effects fall on people of moderate to lower income as well as racial minorities -- groups that basically pay more to borrow money, if they're not shut out of the credit system altogether. Federal regulatory efforts to correct the mess have been struggling along for 10 years, but private companies are trying new approaches.

Ninety percent of American adults have credit reports. Your credit score depends on what the report says about your number and types of accounts held, length of history, late and overdue payments, whether cards are maxed out, and other information. Then creditors use that score, ranging from 350 to 850, to determine how much to charge for a loan. Someone with a low credit score, in the 500 to 589 range, may be assessed a mortgage rate that is three times higher than someone with an exemplary score over 700.

Currently, according to credit bureau Experian, the nation's average score is 33 points shy of prime, at 677. Providian Financial Corporation estimates that if the average consumer credit score were raised just 30 points, Americans would save $16 billion annually on lower credit card finance charges alone.

The power of these reports is growing. With more use of consumer credit and the ease of accessing info online, credit checks are used by everyone from car insurers to utility companies to prospective employers. And the volume of disputes from individuals has been growing too. According to privacy expert Evan Hendricks, author of Credit Scores and Credit Reports, just one company, Capital One, received about 1,000 disputes per day, in 2001. By 2003, the number had grown to 4,000 per day.

Almost every independent organization that looks at the issue has found a large percentage of errors in credit reports. A 2004 national study by the U.S. PIRGs, for example, found that 79 percent of the credit reports reviewed by consumers had at least one mistake. One out of four reports contained serious errors, like false delinquencies or misattributed accounts, which could lead to being denied a new credit card or offered a much higher rate on a loan.

The fundamental bug in the credit report system, says Hendricks, is the inadequacy of the investigation system. Hendricks has contended in testimony before Congress that "chronic inaccuracies," "inadequate reinvestigations,"  "non-responsiveness," by consumer reporting agencies characterize the industry. He also found there was rampant reinsertion of deleted information and many instances of impermissible use of credit reports. The official dispute "investigation" process involves nothing other than a superficial comparison of the credit bureaus' records with information supplied by creditors. Therefore, even in cases of identity theft, wrong information often persists. The most effective way to ensure results is to threaten a lawsuit.

On May 22, the Federal Trade Commission closed a public comments period on the Fair and Accurate Credit Transactions Act. The FTC is writing regulations to try to improve the report dispute process. The public comments on the site relate Kafkaesque journeys of negotiating with an opaque and unresponsive bureaucracy to fix damaging credit information.

"There were birthday errors, addresses listed where we have never lived, accounts that were closed still showed open," wrote a woman applying for a mortgage. "When I disputed one of the items on my credit report they sent me a one line statement that said it had been verified to be accurate...How was it verified, who should I contact, am I supposed to just take their word for it?"

It is time to stop taking the credit industry's word for it that the reporting and dispute system is fair. If you lack the bureaucratic savvy or patience to dispute a credit mistake, and can't afford to hire a lawyer, mistakes will probably stay on your report. If your report carries blemishes, even if they are bogus, it is more likely you will be offered a high-cost loan. According to a study of millions of 2005 loans by the National Community Investment Coalition, 54.5 percent of all loans made to African Americans were high-cost loans, compared to 23.3 percent of loans made to whites. Likewise, 44.8 percent of the loans made to low and moderate-income borrowers were high-cost, compared to 24.4 percent of the loans made to upper-income borrowers.

Perhaps it is time for an all-new credit reporting system. We could take advantage of the information age and make the reporting system friendlier to people of all socioeconomic backgrounds by including more types of information, such as payment history on rent, utility bills and cell phones. These companies and landlords can pull your credit report to deny you services, so why shouldn't they supply good information as well? Groups like Maryland-based PRBC and First American Credco have developed their own alternative credit scoring systems along these guidelines, which are especially helpful for those with little credit or previous delinquencies. A more perfect credit report system would be transparent, responsive, and fair to people of all walks of life -- the one we have now earns a failing grade.


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