If JPMorgan is getting out of private student loan biz, why is State of RI still in it?

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Last week, GoLocalProv.com’s Russell Moore had an interesting column “Are Student Loans the New Indentured Servitude?”  The piece was particularly worthwhile because it mentioned the Rhode Island Student Loan Authority (RISLA), a quasi-state agency which has managed to avoid the scrutiny it so richly deserves.  While many media outlets are content to run stories about the growing burden of student loan debt and its broader economic impact, there hasn’t been much attention paid to the fact that a state agency is contributing to the problem.

In July of 2012, the Providence Journal ran a story about a report issued by the federal Consumer Financial Protect Bureau (CFPB) which Moore mentioned in his column.  It was a hard-hitting look at the private student loan market and the CFPB pulled no punches, characterizing the private student loans offered by banks and a small group of so called “non-profit state-affiliated lenders” as subprime-style loans.  Unfortunately, the ProJo story was cribbed from the national Associated Press, so it didn’t mention that Rhode Island was one of a handful of states that had a “non-profit state-affiliated lender”.  As a result, people were told of an important national problem–students being saddled with questionable private loans–without the crucial context of knowing that our very own state was engaged in peddling those loans.

So with that in mind, I was curious to see the news last Thursday that JPMorgan Chase has decided to get out of the student loan business.  Already facing a ton of scrutiny from regulators related to the “London Whale” derivatives scandal, JPMorgan probably has no inclination to cope with regulatory oversight in a student loan market which accounts for such a small piece of their overall book of business.

Which begs the question I posed in the headline, doesn’t it?  RISLA and the other non-profit state-affliated lenders engage in behaviors which the CFPB noted in its report, especially the sale of loans which “mimic key product features” of federal loans.  Why do that?  To generate consumer confusion and try to make your private loan product look just like the more consumer-friendly federal loans.

Financial institutions like JPMorgan Chase aren’t positioned to make themselves look like something they aren’t.  They are a financial institution offering a private student loan.  But visit the RISLA website and you won’t see the phrase “private student loan” anywhere.  Because RISLA is content to trade on their connection to the state and tout their “state-based education loans.”

RISLA loans aren’t approved by the Governor or the General Assembly.  No one in the State House is setting the interest rates or evaluating the collections practices.  And no one is asking this particular non-profit lender why they’ve been carrying $100M reserves for the last three years and not giving the money back to students in the form of reduced loan rates.

And THAT may be the answer to the question.  Heck, as long as nobody is making noise about the fact that you are selling what the CFPB called “subprime-style loans”, why not stay in business?  And if no one is going to raise conflict of interest concerns about having a private lender run a supposedly impartial College Planning Center where students and families turn for information on applying to college and the financial aid process, why not use that operation to market your private loans?

Once upon a time, back in the spring of 2007, the Providence Journal‘s Jennifer Jordan did raise the issue of the clear conflict inherent in having a private lender run the College Planning Center.  And the RISLA board, at the urging of former General Treasurer Frank Caprio, voted to isolate the CPC from the private lending operation, which RISLA had sold to a large national lender called NelNet.  Today, NelNet is no longer in the picture, but RISLA is what NelNet was back then–a private student lender running a program that could push people into private loans they don’t want or need.  It was a problem back in 2007 and the RISLA board addressed it.  But once changes to the federal loan program in 2010 left RISLA solely in the business of selling private student loans, the conflict concerns reared their ugly head again.  Unfortunately, no one seems to be paying attention now and the ProJo has one reporter covering the entire K-adult learner beat.  So it’s anything goes and Rhode Island consumers are in the unfortunate position of being right in the middle of what has been called the “Wild, Wild West” of the private student loan marketplace.

Maybe we can wait for the federal cavalry to come in and save the day, hoping the CFPB will take aim at the questionable practices of non-profit state-affiliated lenders.  Then again, we could always try to govern ourselves like a mature, functioning democratic state and address the fundamental issue of whether a quasi-state agency should be pushing private student loans in place of more beneficial, consumer-friendly federal loans.

Call me an optimist, but I’d like to think we’re still capable of the latter.

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