By Claire Torchiana and Ben Kaufman | October 26, 2021
Sitting in the shadow of the nation’s $1.7 trillion student debt crisis lies a web of other debt and credit that is often overlooked by lawmakers, regulators, and enforcement officials. Used by students and their families to pay for college degrees and professional training, this underworld of debt and credit has largely evaded regulatory and public attention. These products range from exotic private student loans and personal loans, to special credit cards designed to pay for college, income share agreements, and debts owed directly to schools for unpaid tuition bills. These forms of credit—collectively referred to as “shadow” student debt—are often expensive, risky, and misleadingly marketed, and in some cases structured in a deliberate scheme to evade rights guaranteed to student loan borrowers under the law.
Congress has the opportunity to bring this dangerous corner of the education finance market into the regulatory spotlight. Through common-sense amendments to the Truth in Lending Act (TILA) that the House Financial Services Committee is considering tomorrow, lawmakers can ensure that bad actors are held accountable to consumers who end up in debt when paying for college.
Shadow student debt puts borrowers at risk—but policymakers have allowed it to thrive through narrow consumer protections
Shadow student debt comes with extremely high interest rates, risky underwriting, excessive fees, and punitive collection terms. Plus, companies operating in this market have a documented history of abusive and illegal conduct, such as failing to provide crucial consumer disclosures, engaging in potential fair lending violations, unlawfully partnering with schools, and misleading consumers about the nature of their product. Unsurprisingly, the shadow student debt market is used to prop up the predatory for-profit college industry, which has been shown to offer a substandard education at an exorbitant cost and to prey on communities of color and vulnerable consumers.
Shadow student debt has proliferated in part to sidestep the strong protections for private student loan borrowers created by Congress in the wake of the financial crisis as part of an effort to create the first standards for student lending in federal consumer financial law.
Shadow student debt has proliferated in part to sidestep the strong protections for private student loan borrowers created by Congress in the wake of the financial crisis as part of an effort to create the first standards for student lending in federal consumer financial law. TILA protects millions of private student loan borrowers by requiring lenders to be clear up front about the cost and terms of student loans and by banning backroom deals cut between schools and lenders. However, in 2008, in response to pressure from lenders and for-profit colleges, the Federal Reserve Board limited these protections in TILA’s implementing regulation, Regulation Z. At the time, federal rule-writers narrowed the definition of a private student loan to include only those made to students attending so-called institutions of higher education and similar schools– programs that are generally accredited and state-approved. That leaves out the riskiest types of higher education and training, including most short-term, unsanctioned programs. As such, borrowers who take out debt to pursue dubious and unproven credentials are left out in the cold—and these students are far more likely to be low-income, first-generation, and students of color.
A simple fix could help protect borrowers who are most at risk of taking on shadow student debt
Congress can close the loopholes that have empowered predatory actors in the student loan ecosystem to thrive. Congress is currently considering amendments to TILA that would do just that.
Specifically, the Private Student Loan Parity Act makes the following key changes for borrowers:
- Ensures that students who take on debt for short-term, non-accredited higher education programs are just as protected from deceptive industry practices as students who attend traditional higher education programs.
- Bans lenders from falsely representing that a given student loan product isn’t a form of loan or credit, a widespread practice in the industry for income share agreements.
- Creates tools that individual borrowers can use to hold industry accountable instead of leaving consumers to wait for regulators to take action to vindicate their rights.
- Requires the Consumer Financial Protection Bureau to undertake an urgently-needed study on income share agreements to examine how this segment of the student loan industry is impacting borrowers.
It’s time for Congress to act on behalf of ALL student loan borrowers
For too long, predatory actors have targeted the most vulnerable consumers in the student loan market with risky loans and predatory tactics. And they have been able to do so because policymakers turned a blind eye to the variety of loans and credit that people in the real world use to pay for higher education. It’s time for Congress to afford borrowers who take on shadow student debt the same protections as everyone else.
Claire Torchiana is Counsel at the Student Borrower Protection Center. She joined SBPC from an Equal Justice Works fellowship at Housing and Economic and Rights Advocates (HERA), where she represented student loan borrowers in litigation and discharge applications.
Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.