Reduce Debt Burdens by Fighting Abusive Lending
Reform the Financial Services Industry
Rising debt is the overlooked crisis of the American family. Household debt has now reached a record high 121 percent of disposable income. The average family with a credit card carries an astonishing $9,300 in debt, and the average student borrower now graduates with $27,600 of debt, almost three-and-a-half times as much as a decade ago. These huge debt burdens mean that one pink slip or medical bill can drive a family into bankruptcy. Between 2001 and 2010, 4.4 million low- and moderate-income academically qualified students will opt not to enroll in a four-year university, and 2 million of them will forgo college entirely. Huge debt burdens undermine family economic security and the nation’s productivity.
One source of America’s debt problem is the power of lenders that can engage in unfair practices that Congress fails to stop, or claim public funds that should be available to ordinary Americans. In the world of credit cards, penalty fees and interest now cost average credit card-holding households more than $800 each year or over $90 billion annually. For a single missed payment, fees can include a $39 penalty and a 24.99 percent penalty interest rate. Cardholders who never miss a payment can be hit with penalty rates because of credit score changes. Yet the risk of these fees and charges is often disclosed in largely incomprehensible small print.
At a time when student aid is declining in real terms and the cost of college has risen by 30 percent over the last decade, the federal government continues to spend billions of dollars each year subsidizing banks making student loans. The largest lender in the business is among the most profitable corporations in America, with a CEO who made over $40 million in 2004. Both the credit card industry and the student loan industry are ready for reform.
The Plan:
1. Reform Credit Card Industry Practices:
• Ground rules that serve credit card customers, not companies. When signing up for a card, companies should be required to have a policy of linking their customers’ credit cards to their checking accounts. Those accounts would be set up to make automatic regular payments, significantly reducing late fees and interest charges. And companies should no longer be permitted, without getting cardholders’ specific permission, to impose retroactive rate increases or over-the-limit charges when credit is extended.
• Improved consumer access to information. Companies should be required to provide information about cardholders’ borrowing habits and informed predictions to consumers about the costs of their future borrowing. And there should be a new rating system that helps consumers to judge the risks associated with different cards.
2. Eliminate the student loan industry subsidies. The federal student loan volume should be shifted entirely from the Federal Family Educational Loan (FFEL) Program to the direct loan program, for a savings of $7 billion annually. A March 2004 GAO report on loan consolidations found that the Direct Loan program brought a “net gain” of more than $1 billion to taxpayers while the FFEL program cost taxpayers $2.7 billion in 2002-03. These savings can be used to bring down debt by reinvesting them in the Pell Grant program with students pursuing math, science, or engineering eligible for additional funds.
For more information: Christian Weller, “Cash or Credit?” ; Robert Gordon & Derek Douglas, “Taking Charge”; Getting Smarter, Becoming Fairer: A Progressive Education Agenda for a Stronger Nation
The Experts: Derek Douglas, Robert Gordon
To contact one of our experts please call/e-mail Sean Gibbons, director of media strategy, at 202-481-8228
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