Last week, Student Loan Xpress, a company at the forefront of the federal student loan scandals in 2007, announced that it would forgive $112.8 million worth of private student loans it made for students to attend an unaccredited flight training school based in Nevada. The school, which charged $70,000 a year for tuition, shut down without warning in February of 2008, leaving borrowers with mountains of debt and no obvious source of recourse.

As an insightful piece by my former colleague Stephen Burd lays out in the latest issue of Washington Monthly, private loan borrowers at Silver State and elsewhere found themselves in such a bind because this debt lacks the many of the basic consumer protections that federal borrowers are afforded.

With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. Also, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping.

Even worse, as the piece outlines, the proliferation of these loans to lower-income students at for-profit institutions of dubious quality is no accident. Instead, it was the result of a win-win deal for lenders and schools, in which both would profit by indebting students.

Previously, this kind of loan had gone exclusively to graduate and professional students pursuing careers in high-paying fields like law and medicine. The financially needy students who attend for-profit institutions couldn’t qualify for them because of their less-than-stellar credit records, their lousy graduation rates, and their spotty record of finding work in their field. But this began to change around 2000. At the time, college tuition was skyrocketing—a trend that has only accelerated—and federal grants and loans weren’t keeping pace. To fill the gap, financial aid officers started cutting deals with lenders to bring in private loan money. In the case of proprietary colleges, most of the large publicly traded chains forged arrangements with Sallie Mae, the nation’s largest student loan company. (Once a quasi-government agency like Fannie Mae, it became entirely private in 2004.) In exchange for pots of private student loan funds that they could dole out at will—meaning without regard for students’ ability to repay the debt—the schools gave Sallie Mae the right to be the exclusive provider of federal student loans on their campuses. Lenders vie fiercely for this privilege because federal loans are guaranteed by the government, meaning the Treasury pays back nearly all the money if the borrower defaults. Thus lenders get to pocket generous fees and interest and bear almost no risk.

And:

From the schools’ perspective, it didn’t much matter whether students would be able to pay off their debt any more than it mattered if they stuck with the program or graduated with the skills they needed. As long as students were enrolled long enough to be considered a “start,” meaning that they attended classes for a week or two, the schools got to keep some of the money, and they got to include students in their official enrollment tally, which gave Wall Street the impression they were expanding. Having a cache of private loan funds to dole out also allowed the schools to clinch the deal right away—no need to grind through a stack of forms or wait for a third party to approve the loan application. Thus recruiters could lock students in before they experienced buyer’s remorse.

The whole thing is really worth a read.