[Excerpted from http://www.studentloanjustice.org/argument.htm]-
Congress has removed bankruptcy protections, refinancing rights, statutes
of limitations, truth in lending requirements, fair debt collection
practice requirements (for state agencies) and removed state usury
laws from applicability to federally guaranteed student loans. Is the risk of higher default the problem? Even if there was a higher risk with regular consumer protection laws in place, is that bad? Why would we want to discriminate against our best and brightest?
also gave unprecedented powers of collection to the industry, including
wage, tax return, Social Security, and Disability income garnishment,
suspension of state issued professional licenses, termination from
public employment, and other unprecedented collection tools that are
used against borrowers for the purpose of collecting defaulted student
loan debt. Punitive measures that make no sense and work against the very purpose of higher education it seems, even were it not for a poor job market created by sagging hiring quotas and flooding many professional manpower pools with liberally issued green cards.?
Concurrently, Congress established a fee system for
defaulted loans that allows the holders of defaulted loans to keep 20%
of all payments from borrowers before any portion of the payment is
applied to principal and interest on the loan--in some economic models that is called skimming off the top.
In the absence of
fundamental consumer protections the borrower's only
available recourse is to submit to a hugely expensive "loan
process whereby they are forced to make extended payments (which are
almost never applied to the principal or interest on the loan), and
then sign for a new loan to which additional fees are attached.
This effectively obligates the borrower to a much larger debt
than when the loan defaulted, often double, triple, or even more than
the original loan amount, which seems insane...punishing our young men and women for getting an education because they are told by the college & our government that the job market will be there for them.
This fee system and associated rehabilitation schemes have
provided a massive revenue stream for a
nationwide network of guarantors,
servicers, and collection companies who have greatly enriched
themselves at the expense of borrowers often creating unmanageable debt that debilitates, marginalizes, and ultimately relegates them to a
lifetime of financial
servitude and despondency in many cases, so it seems economic fuedalism is the grand plan of the banks and our government?
Analysis of IRS 990 filings of federal student loan guarantors proves
without doubt that the income derived through this fee system is vast,
as evidenced by not only the income of the guaranty agencies, but also
by the salaries,
bonuses, and perks taken by the executives who run
them. This fee system is, indeed, the lifeblood of these organizations,
who derive about 60% (on average) of their income through this
legalized wealth extraction mechanism. Clearly, it is in the guarantors
financial interest that students default on their loans. In fact, were
there no student loan defaults, the guarantors would barely exist, so its' like the government has distorted the student loan law to create another type of long term bank bailout program?
Additionally, it is often in the financial interest of the lenders that
students default. Large lenders derive income
from not only lending and servicing operations, but also from
collection assets (and even guarantor assets in the case of Sallie Mae)
owned or controlled by the company. This leads to
situation where a loan is defaulted by a lender, becomes
vastly inflated with unverified and unchecked collection costs, and
then becomes a revenue
stream for the guarantor and collection company...all potentially owned
controlled) by the very
same lender! A defaulted loan clearly can produce far more revenue for
the system. It is obvious that this structure gives the
lender/guarantor/ collector entities a perverse incentive to default
loans rather than providing customer service aimed at helping the
borrower avoid default.
Indeed, Sallie Mae's own annual reports provide compelling evidence of
dramatic profiteering from defaulted loans: In the 2003
The Sallie Mae CEO brags to shareholders in the opening remarks
that the company's record earnings that year were attributable to
collections on defaulted loans. The company's "fee income" increased by
228% between 2000-2005, while their managed loan portfolio grew by only
87% during the same time period.
It is a matter of record that lenders actually defaulted student
loans without even attempting to
collect on the debt! In 2000, Sallie Mae paid $3.4
million in fines as
a result of the U.S. Attorney's office discovering that the company was
invoicing for defaulted loans where the borrower was never contacted.
Rather, records were fabricated to indicate that the borrower had been
contacted. Similar cases were settled with Corus bank and Cybernetic
There is also some evidence that suggest this tendency to default
borrowers is by design rather than a mere result of circumstance.
In 2007, an employee of the Kentucky
Higher Education Assistance Authority, KHEAA, contacted
StudentLoanJustice.Org by email, and submitted that the agency managers
loans to poor, disadvantaged communities
expectation that these citizens would default on their loans, thus be
"on the hook" for the fees and penalties that would result-extractable
through garnishment of the income sources mentioned previously.
This raises serious
concerns, as it clearly implicates KHEAA in engaging in predatory
lending. The text of these communications was forwarded to the
Department of Education, and it is unknown what, if anything, resulted).
Obviously, collection companies prefer that loans default.
Guarantors clearly share this preference. That lenders and
collection companies also share this financial motivation is
sufficient, to characterize the lending
system as predatory, since the lending system clearly has both motive
and means to act in such a way as to encourage default, rather than
being motivated to act in a way that avoids default.
An unbiased observer should rightly object here, and
point out that there is governmental oversight that should prevent this
sort of activity. After all, at the end of the day, these
defaults must certainly be a drain on the taxpayer...right?
was reported in January 2004 by John
Hechinger (WSJ) that for every
dollar paid out in default claims, the Department of Education would
recover every dollar in principal, plus almost 20% in interest and
supplemental materials in the president's 2010 budget show a
rate for defaulted FFELP loans of about 122 %. This is the amount
recovered compared to the amount of the loan at the time of default. Compare
this recovery rate to
that for defaulted credit cards, which is usually about 25 cents on the
dollar, and one can see that defaulted loans are clearly not costing
the Department of Education money. In fact, simple, comparative
clearly that the
reverse is indeed the case. In other words: The Department of
Education is making more money on defaulted loans than loans which
remain in good stead.
Therefore, all entities involved: The lenders, the guarantors, the
collection companies, and even the Department of Education
and its agents have a financial incentive for student
loans to default...and this all
is a direct result of the lack of consumer protections and the
draconian collection powers that exists uniquely for federal student
loans as described above.
reasonable objection, here : The student loan default rate,
advertised by the schools, lenders, and even the Department of
Education are not inordinately high...they have stayed well
within reasonable levels, at between 4% and 7%...so there must be
something keeping the system well behaved, right?
repeated claims by the Department of Education, the student lending
industry (andtheir army of lobbyists), and the universities that
default rates are relatively low (ie 4%-7%), is a default rate that
almost has no equal. A 2003
IG report estimated
that between 19% and 31% of 1st and 2nd year students would be put into
default during the life of their loans. For community colleges, the
range was between 30% and 42%, and for for-profit schools, was between
38% and 51% . Simple averaging gives a default rate of more than
1-in-three. Completely ignoring for-profit schools gives a 4-year
university/ community college average of about 30%...These are perhaps
high estimates, given the IG's predilection towards conservative
estimates for budgeting purposes, but if even close (ie within 10
percent), paint a far different picture than what has been portrayed.
More recently, the
Chronicle of Higher Education reported that of borrowers leaving
school in 1995, fully 20% had defaulted on their loans as of 2010.
This guarantees a "lifetime" (i.e. 20 year) default rate of
something higher than that, and this is for borrowers who left school
with a far smaller debt load, adjusting for inflation, and also
describes borrowers entering the workforce during a far better economy.
Therefore, to say that the true, lifetime default rate is
currently 25% is almost certainly a significant understatement.
In fact, given these data, one could argue with justification that
perhaps 1 In 3 undergraduate student loan borrowers leaving school in
recent years will default, or have defaulted on their loans. This is an
extremely high rate that the Department of Education, lenders, and
universities are loathe to acknowledge. By way of comparison,
this default rate is higher, likely, than the subprime home mortgage
default rate, and has been for years.
That the Department of Education, the Schools, and the lenders all failed
to inform the general public about the actual default rate for
federal student loans is troubling, and provides further evidence that
it was not in any of these entities interests to disclose this
information, although at least for the Department of Education, there
is a clear public benefit mission that should compel the loud, and
unambiguous disclosure of this information. That the public was
not warned of the true likelihood of default for these loans cries out
for explanation. In the absence of any explanation from the
Department for this omission, and in view of the financial return on
these loans, one can make a compelling case that this information
was concealed from the public due to Institutional concerns that
trumped the public interest...and one can only imagine the harm this
caused unwitting borrowers and their families who made very significant
borrowing decisions unaware of the true risks they were entering into.
lack of consumer protections causes inflation
There are too
many bad outcomes that result from the Department of Education having
their financial motivations misdirected to describe here, but one very
significant result is that during the legislative process, when the
schools, lenders, and their lobbyists pressure Congress to raise the
allowable loan limits, the Department of Education is the only entity
able, and obligated to act in the interest of the students by voicing
objection to raising these limits based on defaults, indebtedness, and
other feedback from borrowers that only they have access to, and
Instead of voicing concern, much less objection to such
the Department of Education instead remains largely silent, despite
their knowledge about the true default rates, etc. This, again,
is a key failure in oversight that effectively causes Congress to make
decisions without the interests of the borrowers being represented (Of
course the lenders and schools claim to have the interests of the
students at heart, but their obvious financial motivations obviously
discount their credibility on this claim). Therefore, Congress
continues to rubberstamp these legislative efforts, and the schools
quickly raise their tuitions to reach the new lending ceilings.
If the Department of Education were seeing a material, financial loss
with loan defaults, they likely would be far more assertive about the
reasons NOT to raise the loan limits...and this would provide a
critical check on the process. But they have been largely absent
from these debates, and their misaligned interest is
certainly the reason why.
So it must be agreed that lack of Department oversight contributes
directly to Congress' repeated decisions to raise the loan limits,
and we've already established the link between this poor oversight, and
the removal of consumer protections. So undoubtedley, the removal of
standard consumer protections has effectively allowed the schools and
lenders to have their way with Congress on this issue.
Critics could argue that the established student advocacy groups should
have stepped in to fill this role...and this is obviously a true
statement...but the advocates will argue (disingenously, but
nonetheless) that they did not know that defaults were
as high as they were, therefore any objections from them (assuming they
did object) were not strong. And in fact the advocates have, as
a matter of record, supported raises in the loan limits, repeatedly,
citing the spectre of predatory, private loans as a reason.
Of course, the loud debate on the cost issue results in fingerpointing
in all directions..."like a scarecrow in the wind" between lenders,
schools, the Department of Education, the student advocates, and
Congress. But of these five entities, four were behaving as
expected (i,e, schools pushing for raising the limits, advocates
wringing their hands in the absence of defensible proof that things
were going awry, lenders playing their part as the selfish, amoral
entities they are understood to be, Congress debating what they are
told, and ultimately voting based upon this debate).
The Department of Education, however, failed to fullfil its role, and
did not disclose to the group the true magnitude of the default
problem, as one would expect it to both during the legislative process
and to the public generally. Therefore they are clearly
the party whose behavior can ultimately be questioned with strong
justification. Of course citizens have every right to be
seethingly resentful and angered by the collective failure to point
out that the students were being saddled with outrageous
increases in student loan debt, but strictly speaking, the Department's
failure is the only one with zero defense.
This is a
critical, unambiguous link that is never pointed out, but which is key-
probablythe key- to explaining the rampant
inflation we have seen in academia over the years.
There are related failures in oversight at the Department of
Education, as well, that collectively indicate that the Federal
student Aid office is for all intents a captured agency..
the immediate responsibility of fixing this systemically
predatory system by returning the
consumer protections that should have never been taken away in the
first place & making the government the loan issuers and managers. Insodoing, The federal government will, once again,
financial interest that student loans not default.
This environment will, ultimately compel the government to use its
considerable influence to
encourage the universities- in a serious and meaningful way- to both
provide a quality education that gives the student the best chance for
success, and also to do this at a reasonable cost. Instead of
looking the other way as Congress deliberates on whether to raise the
loan limits yet again, the Department of Education will be compelled to
object. The Department will certainly discover the creativity to
come up with meaningful tools for ensuring academic excellence, low
cost, and ultimately, student success,..and these tools will work
because the Department will want them to work., and
employ its soft and hard resources to that end.
What say you??