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Getting to Know Guaranty Agencies: Federal Subsidies and Payments

[In recent months we have cast a critical eye on federal student loan guaranty agencies by taking a closer look at a few specific agencies to show how concerns about conflicts of interests and misaligned financial incentives operate in practice. Previous entries can be found here, here, here, here, and here. Today, our series continues with a look at the actual amount of subsidies and payments provided to these agencies.]

Guaranty agencies are paid to perform three basic functions within the Federal Family Education Loan (FFEL) Program: provide default insurance for lenders; work with delinquent borrowers to help them avoid default; and collect on or rehabilitate defaulted student loans. Though each individual purpose is important; entrusting a single agency to carry out all of these functions creates opportunities for conflicts of interest. Even worse, the financial payment structure provides guaranty agencies with the greatest compensation for letting a student loan default -- the worst possible outcome for borrowers and taxpayers.

According to the U.S. Department of Education, guaranty agencies received $1.57 billion from the federal government in fiscal year 2008 for dealing with defaulted student loans and working with borrowers. Guaranty agencies also ended the 2008 fiscal year with an additional $1.63 billion worth of federal assets held in trust to reimburse lenders for losses on defaulted loans.

A breakdown of the distribution of federal payments to guaranty agencies reveals why taxpayers and policymakers should be concerned about these companies' financial incentives. As the table below shows, 60.5 percent, or $948.8 million, of the federal payments guaranty agencies received in the 2008 fiscal year were for the collection and rehabilitation of defaulted student loans. (The Department of Education does not separate these payments out so we don't know how much agencies got for each function.) By contrast, they received only $177.3 million for helping keep borrowers out of default. In addition, guaranty agencies received $203.9 million to cover the cost of processing and issuing the initial default guarantee on new loans and another $237.9 million for maintaining existing loan accounts.


For some guaranty agencies, collection revenue represents an even greater share of its federal payments. At six of the 35 agencies, collection income represented more than 70 percent of federal payments. Collection payments, for example, comprised over 82 percent of federal income at the Florida guaranty agency, 79 percent at the Educational Credit Management Corporation, and 73 percent at the Connecticut Student Loan Foundation. At the other extreme, the North Carolina guaranty agency received just 20 percent of its federal payments from collecting on defaulted loans.

Guarantors are rewarded for keeping borrowers out of default, but the payments they receive for doing so are much smaller than those they obtain for collecting on and rehabilitating defaulted loans.

When borrowers fall behind on their payments, lenders are obligated to request default aversion assistance from the guaranty agencies in charge of the default insurance on the loans. These agencies then work with borrowers to keep them in repayment. In exchange, the guaranty agency receives an amount equal to 1 percent of the loan's outstanding balance. If the loan defaults, the agency must return 1 percent of the loan's balance at the time of default.

By contrast, when a guaranty agency rehabilitates a defaulted student loan, it receives 18.5 percent of the loan's value at the time of default, plus any interest that has accrued since then (usually around 1.5 percent).[i] In addition, it keeps another 18.5 percent of the loan in the form of collection costs that have been added to the borrower's balance owed. Rehabilitating a loan thus yields the guaranty agency as much as 38.5 percent of the loan's balance.

Similarly, payments for default aversion pale in comparison to those for collection efforts. A guaranty agency receives 16 percent of any amount it collects. In addition, there is no strict cap on collection costs, meaning it could charge borrowers as much as 25 percent for trying to recover missed payments. With payments this high, a guaranty agency has to collect only a small amount of a loan's balance in order to earn more through this activity than what it gets for default prevention.

The significant discrepancy between payments for rehabilitation/collection and default aversion means that the most profitable action for guaranty agencies -- letting a loan default -- is the worst possible outcome for borrowers, taxpayers, and even lenders. The guaranty agency may receive a hefty payday from this action, but the federal government is on the hook for at least 97 percent of the loan's value, while student loan companies suffer the other 3 percent loss. Meanwhile, defaulted borrowers are left with a tarnished credit record, and face wage garnishment, and other types of aggressive collection activities.

Many guaranty agencies portray themselves as advocates for borrowers, working with individuals as they struggle to manage their loans. While we don't doubt that some agencies are sincere in these efforts, the financial figures and compensation structure clearly show why those guarantors are few and far between.


[i] In the past, loan rehabilitation required the guaranty agency to get borrowers to make nine out of 10 payments on a revised payment plan. Once that occurred, the loan was rehabilitated when the guaranty agency sold the loan to an eligible lender. Due to disruptions in the credit markets, however, guaranty agencies were unable to find willing purchasers of rehabilitated loans. As a result, Congress recently granted the Secretary of Education the authority to rehabilitate loans by purchasing them from a guaranty agency. In this situation, the guaranty agency's only compensation is the 18.5 percent of the loan's balance that it charges the borrower for collection costs.


Excellent Piece

Thanks to NAF for at LONG last describing this hidden, predatory network that has benefited tremendously from the misfortune of students, while claiming to be serving their interests. This is probably the most blatant and harmful elements of the student loan industry.

This problem was clear to all who simply looked for a few seconds at it (and those ensnared by it obviously) but it has gone totally unaddressed for too long, and huge numbers of people have been not simply harmed by this government sanctioned theft, but financially destroyed by these entities. I only hope that others dig deeper in future pieces, and expose at least a few examples of the corrupt, conflicted, misleading, and ultimately, hugely damaging behavior that many if not most of these entities engaged in.

If the motivations of the various elements of the Higher Education Finance system were properly directed, these guarantors (if they existed) would be serving in an oversight role over the universities, and the lenders, and would push hard to make sure the students got a quality, low priced education. This would be on behalf of the true guarantor of these loans, the federal government. These entities would be compensated ONLY by the federal government, and only for activities that truly were aimed at Higher quality, lower cost, and less time in school.

Of course, the Federal government would only do this if it had skin in the game in the case of student loan defaults. Currently, it does not...According to the Wall Street Journal in 2004, the Department predicated that it would recover every dollar of principal on defaulted loans, plus about 20% in interest, fees, etc. So at the very least, the Department of Ed is breaking even on defaulted loans, and may be realizing net gains...something that only happens because nearly every standard consumer protection has been stripped from student loans, and only from student loans.

Only by returning at least nominal protections like standard bankruptcy protections to student loans, and ending predatory (and shameful) collection practices such as confiscating the social security and disability income of senior citizens (which usualy doesn't even cover a fraction of the penalties), will the possibility exist for this system to, once again, be oriented where it should have been all along.

If you have any doubts about the economic destruction this predatory creation has wraught in the lives of millions of decent citizens, consider that the true default rate for undergraduate students is probably 30%, perhaps higher. Also, come to studentloanjustice.org, and pick a couple of random borrower submissions to see for yourself the magnitude and scale of the wealth extraction that has gone on.

Stories of wooo...

I know there are people that will say, in hindsight, with 20/20 retro-vision, I could have done this, and I could have done that. I agree, but know that in the story that follows, I could not see the future, and everyone, but EVERYONE, from friends and relatives, to school counselors, thought my choice to seek a private law school education was the RIGHT thing to do, I went in in a boom lawyer market and was going to a good school. But then what happened is what I call my pathetic story....

I am the first in my family to graduate with a four year college degree. Not only did I finish my first four year degree, I went on to one of the nations top law schools and now I am working on a Masters in Health Administration. It would look like this is cause for celebration, another American success study, lower middle class citizen rises through the social and economic fabric through the boundless opportunities provided in America. You would think that I should be a truly accomplished individual with a great job and incredible prospects. That is at least what this type of education was supposed to bring when I started my adventure in education in 1983.
When I graduated with my four year degree, there was not a lot of opportunity in Hawaii, and I thought I was smart and I was definitely ambitious. So I took the MCAT (medical school admissions test). I matriculated into medical school. It was a small relatively inexpensive state school. However, I was not real good at biology, and I struggled for three years. In addition in 1986 everyone was saying that we do not need more physicians and that managed care would make everyone a salaried employee. So I tried taking the LSAT and did phenomenally well.
I was accepted into two of the top 15 law schools in the country. For a lower middle class/middle class person like me these acceptances seemed to be truly great opportunities. I read all their recruiting brochures, and it seemed anyone graduating with a decent GPA would easily get a job in a large or medium firm, or even some corporations and earn $70,000 to $80,000 a year which was good in early 1990’s. The promise seemed to justify the marginal appearing risk. I graduated with a B average, but had no job waiting for me. You see we were in another recession and all the corporate merger and acquisition craze had just ended. The big firms did not need lawyers and the corporations were cutting back. Only the very cream of the top made it into the lucrative job market and the rest of us were left hanging.
What I did have was a total of 80,000 in Stafford, private and school loans. So I stalled, I got into a post graduate law program for six months, which increased my student loan balance, but put off payments. Back then I was looking at a monthly payment of 700 to 800, and no job in the offing, I took my in-laws advice and with their help opened up my very own law practice. I was able to find a way to make payments on the loans for several years (though only a year of profit in my practice). Then my in laws got sick, my mother in law and primary supporter of my practice died unexpectedly in 1997, my father in law, a renowned local dentist developed Parkinson’s and lost all his money to a scam artist; the housing market burst, and my wife left with everything of value in her mother’s estate.

With no source of client referrals and without a continuing equity increase in the family real estate to create cash flow, my fledgling law practice crashed and burned in 1998 and 1999. No surprise I suffered depression and dropped off the grid for a couple of months, well maybe it was more like a year to eighteen months, working as a tour guide, car salesman, insurance adjuster and other such odd jobs. My entire life, family and support structure that I had relied on for ten years had disintegrated. In 2000 I got help at my church in the form of counseling, then saw a physician/pastor and began treating my depression. In 2001, with the help of a well meaning attorney who was older and beginning to loss his competence, I filed bankruptcy. Too bad my attorney did not see the legislation change coming down in 1998, he might have been able to help me file much earlier and avoid the mess I am now in. By then of course Student loans had become non-dischargeable (except in cases of extreme physical disability or death). I remained under or un-employed for years, though I was seeking employment everywhere I could think (literally thousands of job applications and recruiters contacted). In the beginning of 2005 I finally landed a job with a struggling insurance carrier, which lead to my current position with a much more stable company.
So this is how it is today.

I remarried in 2005 to a beautiful woman, and have a beautiful son, I have no MD degree as I left that program early, I have no usable JD degree (with the financial collapse and resulting disarray of my office came disbarment (but first my “discipline” was buried for seven years)), surprise the law school I went to has been no help to me.

I was allowed to consolidate my student federal Stafford loans with the Department of Education to avoid default status in 2003. So now I have a consolidated federal student loan of $250,000 +, also there is a $30,000 private loan and there is $18,000 to the school. The big one is all Stafford with a fixed 9% rate, and thus the interest is $18,000 a year on the federal loan alone. Right now I have a deferment in place, meaning I do not have to make payments, but I still do pay something every month to all three loans separately. What started out as a $65,000 to $75,000 principal is now almost $300,000, despite thousands paid on the loans. I have a good stable job, but not six figures or anything, but it still has potential to grow. Even with this job, my prospects are limited by age and likely work life. Further the current economic climate has greatly lowered the likelihood that senior staff will retire and open up potential advancement opportunities. So still you can imagine that with my wife and two year old son to support, even though I have a salary, there is no way I will ever be able to meet the interest payments each year, much less affect the principal balances. So the loans keep growing and growing and growing.

This is the absolute definition of indentured servitude. I recall reading history books of poor people in Europe being given passage to the US with the promise of a new life, only to find when they get here that the interest on their passage is so high that they are forever forced to work it off, and really only one in 20 get that new life.

The conservatives that allowed for the elimination of bankruptcy protections to consumers must have thought that the businesses would be reasonable in their approach. But they were not. Big business, which I am a part of only responses to profit incentive. With the huge disproprotionate insentive to default loans, it is no wonder, that so many of us that ran into difficulties after school, now find ourselves hopelessly buried in debt.

Without the protection of bankruptcy for consumers, which forces the lenders to control their lending practices or risk getting nothing, they unlock the bank vaults and encourage those of us who just want a small piece of the American dream to accept their products and the opportunity it represents, but also all the risk it represents.

The end result is total and complete financial disaster for both parties (lenders really have little more chance of collecting than with bankruptcy, and the consumer is forever locked out of a decent chance at bettering their economic situation) which leads to chronic social ills. I have seen and heard of people turning to illicit means to find ways of servicing their debt. For example drug dealing, smuggling and the like are just a couple of illicit and undesirable methods some might try to turn to in order to cover their crushing debt problems. I have heard we have lost talent from people that have been forced to flee to other countries due to crushing student debt and no possible salvation. The middle and lower middle class can not absorb this level of personal risk individually.

I now live in constant fear that the government or the private loan company will eventually just destroy my marriage and take every thing away I have worked to build these past five years. It sucks. How am I going to retire (I am in my fifties now), how am I going to provide for my son’s education? I never want him to borrow for his education.
How is this American, or fair?

And what if this job I have disappeared in this economy or because of some ill conceived legislation reform ...

What I am asking for is that you support a return of basic consumer protections, not just for student loan borrowers but for all borrowers. The truth is that consumers need the stick of bankruptcy to protect themselves from predatory practices of different industries. When they are taken away, the securities market goes out of control, and all sorts of vested interests develop that cause the system to feed on itself and for it to spiral in growth until it collapses on its own weight.

The IBR does not help me at all. I am 53 with a two year old. Given that Congress stole bankruptcy protections, how are they going to tinker with the IBR over time. Plus, get this, the loan grows to what, 500,000 then when I am 78 I get a bill from the IRS for taxes on the 500,000 that is discharged?

I am in a very similar

I am in a very similar predicament. I thankfully have no young children to raise but I understand. My educational nightmare started in 1989. I have one 4 year degree that is impractical according to today's society. Its ok. I wanted to teach. I was persuing a history degree with a minor in interdisciplinary Studies(Sociolgy, Anthropology, Psychology, & Law(Criminology). It destroyed my marriage because my husband at the time and I were both in school. He is legally disabled so he gets many advantages. I didn't get to graduate because we got divorced. I was younger and went back to work but couldn't afford childcare(so we formed a mother's co-op to watch the kids when we worked). In the meantime, life went on. I met another man married and we raised 5 kids together. I went back to school and became a medical assistant. I graduated with an AAS in Medical Assisting in 2007 unable to find a job. My health is in terrible condition at this time. I'm physically unable to perform the work I was doing. In short, my school was not doing their part when it came to financial aid from 2005 to 2007. My financial aid should not have been allowed to continue and the federal govt jumped on and off the fence about it but I continued to receive aid. I now have a student loan debt of $94000. How are people supposed to survive without a job or some other form of sustenance? I think the greed is way out of control and its about time people put a stop to it. Student loans are the worst of the bunch, but look around. The greed is everywhere.

Thank you for exposing the horrific nightmare of these companies

Thank you Ben Miller, for exposing what those companies are really about. And how their ability to charge insane collections fees, help to deter people from trying to get their loans out of default.

Yes, this is just another example of government picking up the tab for rich corporate elites like SLM's CEO Al Lord.

 You know of course Ben, that none of this would be happening, if Congress had not removed the consumer protections on student loans, that exist for any other kind of bank loan. Without those protections, (and it has been documented), the guaranty agencys have been caught putting people into default status without even trying to contact them. And such actions are plainly explained, as you said above; they make more from a defaulted loan than a current paying loan.

 Its all about greed and who has to take the risks. Well I think the students took more risk. They don't have limited Liablity, like the corporations do. A student loses everything.

Insanity Exposed

I am disabled so my student loan of $5000 Junior college 2 years was medically discharged 5 years ago by my physician. The company National Student Loan Program has subjected me, my 80 year old parents and my doctor with blatant non compliance of even their own policy. Each time the form is received it is sent back it has been initialed so many times now my physician is through with it and me its been 5 years,
I do not blame him.
I have written 2 senators, been referred to an Ombudsman who put me into the same loop filling out the same form, no help there.
Now the loan has ballooned with interest to $30,000,
They take $220 a month out of my SSI along with every stimulus check every penny. Now that they have the upper hand I never see a receipt for all the money they have stolen and live almost in my car.
I volunteer at a cancer center going on 4 years now but it's getting difficult to get there.
I do not hear freedom ringing in my ears this 4th of July.

there is help

There is a new program called the Income Based Repayment program. you make payments based on your income if you are on SSI chances are your  payment will be zero (and the government will pay the interest on the subsidized portion of your loans for three years) Now because your in default you first have to get out of default before your eligible. You can consolidate your loan with the Direct loan program which will remove it from default status. Call 1 800 433 3243 (1 800 4 fed aid) and tell them you have a defaulted loan that you want to consolidate.  Any problems drop me a line.  

IBR is not for those over 30 years old

No one over 30 should involve themselves with this program because the contract lasts for 25 years before the balance (that inflates for those 25 years) is forgiven. Not only that, what happens to the interest and principle that gets forgiven? The taxpayer has to pay it!

What happens to you after the balance is forgiven in 25 years? You have to pay taxes on it with your retirement income. Alternative: get herded into the low paying public service sector for 10 years (as if they have that many job offers available). Ten years is longer than the original indentured servitude contracts made centuries ago. And what is the likelihood that you will miss payments during those 10 years while you have those low paying jobs? Your car, washing machine and computer could break down all at the same time and need to be replaced.

There is an alternative to herding the educated into low paying public service jobs AND THEN forgiving the debt. The government could forgive the debt FIRST. Then, if the borrower fails to complete the program, restore the debt plus interest, with a statute of limitations and bankruptcy protection.

Best and second-best

Someone who is against IBR is really against paying back their education loan debt at all. If you can pay off your debt in five years, fine, do so. If you can pay it off in 10 years, then do so. If you can't, then paying it off in 15, 20 or 30 years is definitely much, much better than the personal, financial, career-licensing, and legal impacts of simply defaulting. If you are a new lawyer or architect with a large debt relative to income, then ibr or icr may be your only way to service the debt for a while. Default is not a good option, unless you want to "move off the grid," which doesn't work for someone whose career requires a credential and which they already sacrificed years of their life to receive.

20 or 30 years of interest is not nearly as bad as it sounds. A dollar of accrued interest in 2035 is much, much less than a dollar of accrued interest in 2009, due to the time value of money and net present value. A would you pay the same now for the right to get a dollar in 2035 as you would for the right to get a dollar next week? Of course not. A dollar in 2035 is worth much less. And that doesn't even count the impact of inflation, which some pundits project to be enormous over the next several decades due.

Belinda sounds like someone who works for a bank, saying "The taxpayer has to pay it." This was one of the bogus arguments that destroyed the income contingent repayment plan. Groups representing lenders deluged financial aid offices and newspapers with misinformation about the interest that would need to be paid and the costs. http://www.hofstra.edu/pdf/law_lawrev_schrag.pdf

The truth is that financial institutions would rather have a repayment plan which is the same every month, whether 10 years or 40 years. They can then sell it, repackage it, and tout the future repayment stream. On the other hand, supposedly a repayment plan based on income does not appeal to the wall street financiers and re-packagers of debt. The future repayment stream is obviously potentially more variable, because it is based on income, which tends to vary. At a relatively-low income, such as $60k, income contingent repayment quickly required a higher monthly payment than the standard 10-yr amortization. Of course, financial institutions dislike prepayment even more than variability . . .

Can't forgive the debt first, it would cost way too much. The whole point that politicians love to enact loan forgiveness is the low, low cost. The cost is very far in the future, so even if a lot of people qualify, it is cheap. A dollar spent in 2021 is much cheaper than a dollar spent today to write off a debt, even if you think you might restore most of the debt in 2021. Someone arguing for a "forgive the debt first" approach is, again, someone who actually wants the USA to simply shift to a zero-tuition model for postsecondary education. Even most socialist nations are moving quickly away from that model.

Best & 2nd Best??? Get Real!!! Wake up and SMELL the coffee!!

You come off like someone who works for the Ombudsman office. Oh wait, they just recently found out there was a COI with the lender and how they were sharing data between each of their agencies. Kind of negates the whole premise of helping the borrower.

But, besides that. I don't know Belinda and I'm not defending her- however it's pretty obvious that you don't have a clue what you are talking about.

Did mommy and daddy pay for your education? You come off as a self-righteous individual who has led a very sheltered life. Perhaps you have always had someone or family in the wing when things got rough. So, sure it's easy to say what you do.

We are simply tired of being raped with the exhorbanant interest and penalties with no consumer protection. There is no opportunity to dispute their charges or claims because the government says it's not required. What other kind of debt in the country can get away with this? NONE- in case you didn't know.

Where are our rights to defend ourself. Not everything is as black and white as you seem to think.


I read somewhere that if you've defaulted, you are not eligible for this new program "july 1st" you just mentioned. I defaulted years ago. Can someone source this?


"except for a defaulted loan"

34 CFR 685.221(a)(2) Eligible loan means any outstanding loan made to a borrower under the FFEL or Direct Loan programs except for a defaulted loan, a FFEL or Direct PLUS Loan made to a parent borrower, or a FFEL or Direct Consolidation Loan that repaid a FFEL or Direct PLUS Loan made to a parent borrower.

This is nothing new. A defaulted borrower is not eligible for any repayment plan (standard, graduated, extended, ICR, etc.), not just IBR, until making at least three satisfactory payments. "Defaulted," by definition, means your entire balance is due that minute; it says so in the promissory note. This is not unique to student loans; it is in all defaulted debts and is called "acceleration."

In most cases if you have a defaulted Stafford loan you can consolidate it into direct loan. Then you are eligible for IBR (unless you default again).

Re: Income Based Repayment Program

Dear Eddiemeboy,

On the surface, the income based program may sound like a wonderful concession to the plight of millions of us who have defaulted on our student loans; however, after paying regularly on ibp for six years I am in no better position while the lender that I am paying on a regular basis has a consistent cash flow with no end in sight.

-Because of the addition of unbelievable usury penalties and interest to my loans during one year of default, a whooping 48% increase to my loan, I have been unable to catch up.

-Five years ago when I asked the lender to refinance and bring my 8% loan down to the going rate of around 3%, they laughed at my request. The interest is overwhelming. My loans which started as 21k are now 32K, and I have paid over 32k over the last 11-12 years.

-I am 66 years old and unable to retire because of this damn loan. Oh well, based on the 25 year forgivement program, if I just hang in there another 19 years until I am eighty-five, they will "forgive" me and allow me to pay taxes on the entire inflated amount.

-Would you sign a contract with invisible ink? The terms of these loans were changed in favor of the lenders after borrowers took out the loans.

-Sadly, the many attempts over the years made to Senators and Representives of our Government have been a joke. In most cases, they have not responded, and in three responses the representatives did not even read my letter, but directed me to the very people who laughed at my attempts to straighten out this mess.

-Future students, be careful. You believe you always will be able to pay your debts. You don't know the problems the future will bring.
You don't know which of your "rights" can be stripped from you, and how you can be trapped in a situation that will ruin your life.

J Hinds

The Return of Feudalism

Thank you for exposing the perverse incentives that currently dominate the student loan industry and higher education in general. However, what exactly will the difference be if Obama's plan goes through and the origination of student loans is basically nationalized? Instead of becoming a debt slave to a private corporation, the student will be a debt slave to the federal government? That's some cold comfort! Only returning standard consumer protections to student loans, most importantly the right to get a bankruptcy discharge, can bring the necessary reforms needed in higher education. By giving the players a stake in how much debt students accumulate, bankruptcy protections will force the government and lenders to make prudent lending decisions, which will clamp down on the explosion of debt and force schools to bring their costs in line. We need people out there making this argument.

Love the title

Love it. Indentured servants were able to run away, but we are screwed because we were born to parents who couldn't pay our education up front. I feel really upset for my dad, who worked as a construction worker as hard as he could to get us into the good suburb school so we would have a chance to get into a college only to see 3 of his children now strapped down in student loan debt while he had 2 hip replacements and neck surges at 50. All he worked hard for is gone. Well there are only three ways out of serfdom. Marry a noblewoman (I'll go hit on some ivy league undergrads), join the militia (yea I'll be on the front line but i can eventually work my way up to a respectful knight - but my private loans will still haunt me like witchcrafe), sneak off the land to never return (yea i will be screwing my family over but it is the most liable way out is to live illegally in another country). Let's set up a refugee camp somewhere!

Great article

While I do have some problems with the practices of the Federal loan programs, the private student lending industry is my real concern.

They are getting away with robbery and intimidation. It is so far beyond selling people loans the industry already knows they can't afford. It's just one scam after another against students, families, and taxpayers.

It really goes to show you that Americans are not paying attention to what goes on right under their noses. We have completely lost track of what is right and proper with respect to providing the basics to our people (education being one of them).

I think I'm going to finish my nursing certificate and take my desperately needed skills to another country where this kind of garbage is not tolerated.

There is no more American Dream.

We Pay Tuition Up Front, Yet They Withhold Transcripts...

Without exception, we always -- ALWAYS -- have to pay ALL tuition up front before we can even register for courses. That's universal.

We borrow student money because we must cover this brutal tuition expense in full, in cash, every semester. If you're not paid up in full, you can't register. Period.

So then, if you tumble into default, why do universities withhold for life our transcripts? We paid them their tuition in full, didn't we? Every time. Yet they claim we have a life-long "university debt", therefore, until every penny is paid back, no transcripts are to be had?

But I ask: to whom is this money owed? Who designed such an economically guaranteed-to-fail system?

When they lock up our earning-a-living credentials and then throw away the key, that only makes it a certainty that the person so treated has no tangible means of making a living with a regular job in his or her profession, thereby eliminating precisely the possibility to make regular payments back.

Result: lenders don't get paid back, and the student doesn't get a life again, no license in his or her profession. Nothing. That professional study was the very reason for which one went into student debt to begin with.

I went to a first-rate, world-class college in another country, and I borrowed for each and every semester for all four years. And I paid it all back in full in a few years. But it was altogether a smaller set of figures to begin with, and the fiancing terms were reasonable.

I thought I would repeat the same successful experience here in the US, with a professional degree. That was almost thirty years ago. Neeldss to say, I sure regret ever making that choice.

Were I to get my transcript back now, it's too little too late. I've been barred from my social work profession for the better part of twenty years. I am fluent in three useful languages, but no matter. Next year I'll be 60. That matters. The university has refused absolutely to issue even one transcript in fifteen years, although when put under some pressure of possible publicity, they produced a letter stating written lies, claiming a transcript was issued as little as ten years ago. That was false.

I have paid thousands of dollars back, yet I see no receipts. They take tax refunds, stimulus checks, they even garnished my academic stipend s while in school full time. They even did a bank account seizure which, as it turned out, was squarely illegal. When I wrote them back about this, with the proper legal reference, they unfroze those funds ($1,200) but then immediately tacked a "poundage" charge of $5000 against me. So now my original debt of $40,000 has ballooned to more than $200,000. I net between $10K and $15K a year in freelance language work.

I considered consolidation until the process stopped me short on my tracks: they demanded I pre-sign (under oath and notary), a set of blank repayment agreement forms which THEN, with my signature on them, and with the notary public stamp on them, would be sent to the creditors to fill at their leisure!

No way I could sign that. I have already seen what those people do to money figures on paper. I'm not signing any such blind contract, that's insane. I ask myself, where am I living that this can the officially sanctioned "law" of the land?

This insidious and shameful dark corner in the American legislative system remains in the dark. And students in debt are stigmatized with a vengeance. And they have no consumer protections whatsoever, the way all other debtors have them. Most of us have de facto achieved bankruptcy already, so why not get it legally recognized?

What punitive ideology is behind this barbaric situation that students should never get a second chance? Big banks, big firms not only get several "second" chances, they get outright bailouts --repeatedly -- and their CEO's get bonuses worth millions.

This is wrong. America is becoming less well educated, as it seriously dis-invests in its human capital. Long-term, I think this is a tragic mistake.

Oscar Zambrano.

If there is any way you can

If there is any way you can get this message to Oscar, it would be greatly appreciated. I have been trying to locate him for years. Don't have an address or email. He and my husband were best friends in medical school. He would love to find him. Thank you. Marybeth

false reasoning and misunderstood criticism

1) Guarantors are REQUIRED BY LAW to perform these activities. You said that but you seemed to forget that part during the rest of your blog.


3) The FEE STRUCTURES themselves DICTATE most of THE PROPORTION of the fee income that is reported in your chart.

4) You fail to mention that tax payers DO WANT defaulted loans to be collected.

5) If you think this set of circumstances is perverse, then go bark up the right tree and for ONCE, pay attention to what many of the guarantors have been saying about the need to invest more in default prevention. They can't do it for free though - just as you don't do your blog for free.

To Alan C

I am curious; do you have a middle ground? It seems fairly obvious that the government is not going to allow the complete discharge of debts owed to it. Have you considered trying for a compromise? something that would allow those that make the rule the ability to say "okay we are protecting the taxpayers and helping those in need of a fresh start" How about allowing those that declare bankruptcy the ability to repay just the principle amount over time. That would seem fair and more likely to be accepted.

Middle Ground

To eddiemeboy,I like your sugjestion on middle ground and agree the government will never let anyone discharge all the money owed, but what if you have already paid more than the principle owed? I understand everyone wants to turn a profit (normally one times the original amount)but what if youv'e already payed the amount plus one time, do you considered the debt paid in full?

what if

I would say if the principle was already paid when you filed then you would be done.

Middle Ground

Returning full bankruptcy protections for student loans IS the middle ground. In fact, It is the bare minimum required to begin to return some semblance of functionality to the predatory, corrupted, and inflationary system whose elements have been so wrongly motivated for so long. Please see our argument on this: http://www.studentloanjustice.org/argument.htm

Since there is a clear public benefit that results from an educated citizenry, federally guaranteed student loans (given that they should exist at all) should have every consumer protection that every other loan (federally guaranteed or not) has, and in fact, more.

Anyone familiar with our argument knows that while explicitly, we call for the return of standard consumer protections, we are really appealing for improved government by extension...government that is motivated to compel schools to keep their quality high, their costs low, and the time of attendance to a minimum. I challenge anyone to present an alternative for achieving adequate government such as this, and I predict we will be looking at a taxpayer boondoggle that simply wastes money, grows bureacracy, and ultimately grows the problem instead of solving it.

Regarding Bankruptcy: It is no longer a "walk away" deal for most, and the laws have been strengthened significantly to prevent fraud and abuse (although this was never a significant issue in the first place for student loans, if anyone cares to know). Anyone making a decent living will end up paying back a significant amount- likely what was borrowed or more, depending on the determination of judges trusted by the public on all other matters of debt.

Given that about 1 in 3 undergrads wind up in default on their loans (an astonishingly high figure based on a 2003 IG estimate), the fact that tuition/borrowing is increasing at an alarming rate (not decreasing like every other type of credit), the recent 40% jump in the cohort rate, I think anyone would agree that this system is in serious danger of losing credibility on a large scale, and no repayment program can address the underlying systemic flaws that brought us to where we are now.

Already, there are dozens of groups popping up calling for total loan forgiveness, and at least one of these has more than 200,000 members- and in this period of bailouts and stimulus, their argument actually has at least some merit (compared to the distribution methods we have seen to date).

You attempt to portray our argument as radical, fringe, and unreasonable, and our position as aggressive, stubborn, and uncompromising. I believe that this tactic is no longer effective. By contrast, I believe that upon reflection, most will acknowledge that having to argue, struggle, and even beg for the ability to commit such a humiliating, desperate, and socially reprehensible act as filing for bankruptcy is what is truly extreme and shocking in this discussion (in addition to the academic, corporate, and bureaucratic greed, arrogance, laziness, disdain for students, obstinance, and sometimes, corruption that is betrayed by the schools, lenders, and governmental entities involved).

Even without using emotionally driven arguments appealing to the human suffering that this problem has caused (which can be done quite easily and effectively), I think our position will inevitably be recognized as fair, reasoned, and in the highest and best interests by all who examine the debate honestly.

I am not trying to portray

I am not trying to portray you as "fringe" or "Radical" I am simply pointing out that what you propose has slim to none chance of ever being accepted by those in charge. Actually I agree with you on several points. I believe education is the key and want every person that wants to go to college to be able to. I think the recent bankruptcy changes are obscene and fly in the face of the idea of a "fresh start” that bankruptcy was originally designed to allow. That said I think you put yourself in a poor position by your continual insistence on "returning standard consumer protections”. First of all student loans are not standard consumer products. they are not credit based and as such are available to anyone that shows need.  they are guaranteed by the Federal government to assure that lenders will embrace the program.(although that may change soon)to think that the feds will allow the loans either insured or originated by it to be dismissed in bankruptcy is not fringe or radical just unrealistic. Why not look for some compromise, right now you have the moral high ground but what is it getting you or your followers? yes maybe one day you will be vindicated but if it is taking Obama this long to push his changes through that he wants, how long do you think it will be before your changes that at best are viewed as impractical are made by Congress?

Private Student Loans ARE credit based

To eddiemeboy...student loans are not credit based? I beg to differ. Sallie Mae private student loans ARE credit based, and the lower your FICO, the higher the interest rate and up-front points. If the primary borrower is not considered "creditworthy", Sallie Mae requires a co-signor with a high credit score. And if a co-signor IS required, they make the loan, but saddle the borrower with the highest interest rate anyway.

Why is this not a standard consumer product that deserves standard consumer protections? Because Sallie Mae paid John Boehner to make it so.

private student loans

I was referring to the FFEL and direct loan program. but  you raise a good point the private student loans have been the beneficiary of some bad language choices in the bankruptcy statute  and it should be fixed. at the time the statute was  amended to exclude "educational loans" there were no private loan programs or if there were they were way off the radar. I think it is an easier argument to make that these loans should not be exempted by the bankruptcy statute. By the way I think the exemption predates any private loan offerings by SLMMA or others.

My reply

Who are "Those in charge" that you speak of? The army of lobbyists paid by the student loan industry? The student loan executives that have had a hotline to the Whitehouse in recent years? As the truth about what has been done to students as a result of this astonishing lack of consumer protections, these people, despite their money, will have less and less influence over ethical law.makers.

Let's not forget whose really in charge- the citizens! At the risk of repeating myself: there are alot of people out there calling for far, far more than the return of standard consumer protections to student loans. I believe there is at least on post on this board calling for the complete forgiveness of all student loans. While I'm not willing to go that far, I think it's clear that the people are beginning to wake up to the realities of this issue, and ultimately, if "those in charge" fail to wake up to those realities as well, and act accordingly, they are in for an extremely rude awakening.

Also: attempting to portray student loans as somehow different from other types of loans, thus immunizing them from standard consumer protections is not justified: The federal government guarantees all manner of loans to all manner of citizens and businesses, large, and small. From SBA Loans, to FEMA Loans, to Farm Loans...even loans given to student loan companies! However, none of these, NOT ONE enjoys any sort of special exemption from bankruptcy protections, and other standard consumer protections.

What's more: When student loans were indistinguishable from other loans, it was found that FAR LESS THAN 1% were discharged in bankruptcy.

Hillary Clinton got it. Within one month of a 60 Minutes episode on this injustice was aired in May 2006, She had drafted and introduced the Student Borrower Bill of Rights, which would have not only returned bankruptcy protections, but also implemented repayment caps, refinancing rights in free marketplace, and other elements that any rational person would agree should have been there all along.

While she is now at State, there are many others who will undoubtedly recognize what needs to be done, and act accordingly.

I think you may be surprised at how quickly the tides may turn on this issue, despite the desires of "those in charge".

My question to you: Why do you claim to know the sentiments of "Those in charge"? Our group has been approached repeatedly by anonymous posters-= some very polite and well spoken as you are- who use similar tactics in what appears to be an attempt to gain legitimacy, but can never demonstrate that they are anything but another industry hack attempting to distract, demoralize, and discourage us. Your agreeing that bankruptcy protections should be restored out of one side of your mouth, and then attacking the basis for such a protection betrays you, and I don't appreciate the duplicity.

To Actyourwage:

Attempting to dumb-down this argument by calling us deadbeats didn't work well three years ago. Today, I doubt anyone is fooled by this tactic. Personal responsibility has been used as a cheap cover for corporate (and even governmental) irresponsibility for far, far, far too long, and the results of this are now becoming obvious for all to see, as was predicted.

Come to this board when you would like to engage in debate based upon facts, not misplaced emotional charges.

Really Alan

Wow Allen …Industry Hack ? Duplicity?  Where do I start ? I guess the beginning would be a good place . Every one of the loan programs you mention has much more onerous eligibility standards then simply showing you need it and that you’re a citizen.  

I agree the citizens are ultimately in charge but do you really think that an electorate that barely brings 50 percent of its’ eligible voters to the polls is “in charge”. I like many others that pay attention ascertain the priorities of Congress based on where the money is being spent and what is being talked about I go to conferences that deal with student loans and speak directly to policy makers and get their input on what is being done. in short, I pay attention ask questions and listen carefully to the answers. A far cry from your position of  name calling and whining that the world is unfair.

As for my duplicity I would suggest that your inability to see that there is more to the issue of bankruptcy reform then simply student loan protection says more about your limitations then to my duplicity. As for me being an anonymous poster sadly that is something I must do as an “industry hack”.   because  my opinions can not be associated with my company. We have very strict rules about publicly speaking and indentifying with the company (I will tell you it is not SLMA) so my opinion must be my own and never affiliated with those I work for. So in order to keep that separation I post with a “user name” I always post with the same one so you will see me around.

Finally I am not so sure that because prior to 1998 student loan discharges were less then 1 percent that that would still hold true in today’s climate. Student are borrowing much, much more then they were 10 years ago creating a much larger pool of potential discharges. add to that the worsening economy and there is certainly cause for concern about what the actual cost that allowing discharges would be.    Bankruptcy does not carry the social stigma that it once did and its’ effect on ones credit is limited to 7-10 years and in actuality its affect begins to fade after 3 years. My point is that for many that are going to school and borrowing way beyond their ability to repay  bankruptcy would became part of the plan. As a citizen I would have some reservation about  allowing the full discharge of these loans that are guaranteed with my taxes.  Again this is my opinion and has nothing to do with who I work for.  

Middle Ground

I would proudly repay the principle of my student loan debt and had every intention of doing so after I graduated. As a single mom, however, I had to choose deferments in order to provide food and clothing for my kids. My degree meant nothing in terms of earning a living wage, I received no child support, blah, blah, blah, (I'm sure you've all heard it all before, besides, I'm not comfortable with the confessional genre, nor am I asking for anyone's sympathy). My life was what it was and I had to fight every step of the way to change it...and for one golden year, it changed. I had enough money to pay bills, rent a decent place to live, eat, heat my abode and buy an occasional pizza on the weekend-- I thought I was in heaven.

After years of scraping together $7 - $10 per hour jobs and raising two kids, I finally worked my way up to a whopping $29 or 30k per year and began paying back the loan. Shortly thereafter, the company I worked for closed, Sallie Mae dumped my loan, and I was selling plasma for food money, again.

A year and a half later and finally re-employed but at a lower wage is when the abusive, constant, illegal phone calls began, at work and at home. Six to seven calls per day to me, to my family, my employer, my friends, etc. (If you have a defaulted student loan, you're probably already intimately familiar with Multi Millionaire, and government contract holder, Mr. Michael J. Barrist and the illustrious NCO Group).

I was astounded to learn My 27k loan which had already ballooned to 40k during the deferment stage, had now balloned in 1 1/2 years of unemployment and default to 70k.
And then the garnishment began. I never received a single written piece of paper, no court order, nothing...I just began losing 15% of my income.

My money is sent now, to the black hole which is NCO Group and I've never received a single acknowledgement or receipt of these garnishments. I can only hope Mr. Barrist is buying lots of rich puddings with the money and develops colon cancer as a result.

Frankly, I don't give a damn about anything, anymore. Often times, these days, I simply have to go without eating in order to make rent. So, I've decided I would rather die than let the Shylock's steal any more of my money.

Since, obviously, my life is of no value other than the campaign contributions and favors it provides my elected officials by offering me/us up as sacrafices to the gods of greed, I have decided to embark on a hunger strike.

I do this not just for myself-- ("not just for myself" is a concept you may have to look up if you are unsure of it's meaning. It is a phrase rarely used American society except, as it's misapplied to the notion that imposing one's religious beliefs on the rest of society is in some way, an humanitarian act.) --

I do this for all of the poor sods like me, those who's futures have been stolen, or worse yet, who's social security and disability checks are being stolen.

A hunger strike won't be much of a stretch for me as I'm already quite used to the feeling...

As I understand it, they cannot continue to steal from me once I'm dead and at least there will be some honor, some dignity, in not going quietly.

An act of passive aggression, if you will, an homage to Bartelby the Scrivener, which if nothing else, will be the one time I actually use something I learned in college...

Obviously, I'd prefer to blow up the corporate headquarters where these pathetic crime bosses hide behind expensive lawyers and other friends in high places, or at the very least, I'd like to take a dump in the front seat of each CEO's Lexus. But, of course, this would only attract the wrong type of attention and land me in jail... where I could watch the interest on my loan exponentially increase until my release when the garnishments would begin, again.

And don't blame all this "No discharge through bankruptcy, gutting of fair consumer debt practices" on the poor downtrodden Republicans, as they're quite capable of downtrodding themselves.

Those who must be held accountable are individuals like Joe Biden...just check his voting record on S256 from 2005 and then take a look at a corporate HQ map from the State of Delaware. Once you've done that, you may want to join me in my hunger strike.

I'm all for fairness and have offered on a number of occasions to work out some type of payments in exchange for some forgiveness of the interest but was literally laughed at by the Great Lakes Higher Education "customer service representative."

I did refuse to speak to any of the barely literate children who called me from NCO group, to threaten me with a personal "con-foh-tation" at my place of employment. Talking with them hardly seemed in my best interest. I rather pitied these poor exploited children, no doubt chained to their call center cubicle until they met their quotas by any means neccessary. Capitalism at its finest, to be sure.

As long as it's legal to rob us, rob us they will, I'm afraid.

Our government legislated us into cannon fodder, but I'm not going to allow them the bang from my bucks. It's just too heartbreaking to watch every thing I worked so hard for, be stolen from me just because there are those among us who's greed knows no bounds.

Lest you doubt the seriousness of my hunger strike, I now blow you a kiss made of the acids from a stomach devouring itself. It is a terrible smell. Remember it and ask yourselves...Mr. Barrist, Mr. Keleghan, Great Lakes, Sallie Mae...Do you believe in ghosts?

If you don't now, I promise, you will.

Guarantors want fee reform - but need Congressional support

This article does an excellent job of pointing out that the federal fee structure for guarantors, under the traditional model, are not aligned with what’s in the best interest of borrowers and taxpayers. However, what’s not mentioned is the fact that guarantors themselves have been pushing for a different finance model for years. In fact, back in 2000-2001 a handful of guarantors were able to secure Voluntary Flexible Agreements with the Department of Education to test new financing models. In American Student Assistance’s case, our VFA realigned our federal funding so that we were compensated more for loans kept “well” (in good standing) than for collecting on defaulted loans. Unfortunately all VFAs were unilaterally cancelled in 2008. Now, with student loan reform imminent, the National Association of Student Loan Administrators (NASLA -American Student Assistance, EdFund, Great Lakes and Texas Guaranteed), with support from many others in the guarantor community, is once again pushing to align guarantor federal funding with our public purpose, which is helping borrowers manage the debt and avoid repayment problems. Our current proposal calls for a “borrower advocacy fee” to be paid only so long as borrowers have not defaulted (see borrowersrights.org for more information). It’s inaccurate to paint guarantors with a broad brush and blame them solely for the current compensation structure, when in fact it was members of the guarantor community who realized well over 10 years ago that the financing model was perverse. We began our struggle to change the system long before this latest wave of student loan reform. The current push for change is a unique opportunity to evolve the guarantors into borrower advocates and align our funding accordingly – but we can’t do it without government buy-in.

Why do defaulters never qualify for new programs?

Its seems absurd. It really does. Im sure there are many defaulters who would like to begin anew... but too late for them eh? yea.. thats fair. (in all circumstances surely not)

Guarantors Want Reform?

Having dealt directly with "Great Lakes" I can tell you they had no interest in working out anything that would have prevented my default.
No interest in anything other than turning me and thousands of others into their personal cash cows.

I have judged the argument and find guarantors guilty of the crime of usury.

For this reason, I am no longer willing to work out any kind of arrangement.

Quite simply, I will not pay.

The Student Loan industry has abused and cheated its "customers" and like any other business that provides shoddy, harmful merchandise or services, you can only get away with it for a certain amount of time until you are found out, charged, convicted and required by law to cease.

I will not pay.

So What Should a Slave Do?

Student borrowers are a hybrid of indentured servants and slaves. Indentured servitude involved a contract. Slavery was legislated as "servitude for natural life" aimed at people of African descent around year 1640. Now it is "servitude for natural life" aimed at the educated. Though you enter student loan slavery using a contract, that contract has no defenses (like a Statute of Limitations or bankruptcy protection), so it is for your natural life because of how the courts have interpreted the bankruptcy laws.

Student borrowers are slowly reacting to becoming modern day slaves with utter disbelief. Now we know how the Africans felt centuries ago. They were proud people, too. Everyone seems frozen and not yet ready to accept they are actually slaves (5 stages of grief, I guess). It's going to get worse. One foreign country has recently proposed going after ex-patriots to collect their income from whereever they are living abroad to repay their student loans. The U.S. will do that, too, if the slaves remain frozen with fear and disbelief or if enough of them run.

While you can still move about this country with some level of freedom, you need to march and picket. You need to do something dramatic because so much is going on right now in the news. I understand your fear of being treated like Joe the Plumber--they go through your trash and publicize your personal information. So, grab four friends and get them to grab four friends. Student Loan Slaves have outraged friends in large number, as demonstrated by the Collinge and Applebaum sites for example. The youth who are trying to decide what to do about college tuition are also outraged.

You know from history that you are going to have to fight hard to get out of slavery because it took a mighty power to enslave you. It is going to take the power of your great number to get out of it. At this point, due to the pain and suffering of being made slaves, I believe the slaves should demand total forgiveness. Full bankruptcy protection AND the Statute of Limitations MUST BE RESTORED to overcome the mindset that allowed enslavement of our educated.

Way to go Ben Miller

That was awesome! The guarantor representatives can say what they want. I deal with guarantors and their contracted collection agencies on a daily basis and the majority are definitely not interested in the best interest of the tax payer, especially those that default. Not to worry folks, its only business as usual. They want to follow the Dept. of Education when it is convenient or profitable. The whole system needs to be questioned because there is no debt that I know of where you have so many repayment and postponement options. Then, upon defaulting you are extremely limited when it comes to defenses.

Ms. Saunders, I have spoken to your agency representatives and they inform me that your rehabilitation program has been unattainable due to the credit market. Hopefully, your organizations and the others that have not found a lender will go to the Department of Education now. Also, if your organization was really interested in the saving the taxpayer money and the whole nine yards, then how come you do not waive collection fees upon rehabilitation like the DOE? If the person defaulted with the original balance, taking on an additional 18 or 25% is not exactly helping or encouraging the borrower to payoff the loan.

The FFEL program is older than the Department of Education. Obviously, guarantors had something to do with the current structure as they are one of the few parties involved in this matter and they are receiving the compensation. Even if now you want to change the structure, I highly doubt you want your compensation decreased, which is ultimately taxpayer money. How come the guarantors do not try and do more for the student loan borrower by helping them regain a bankruptcy option?

The Indentured servitude of America's youth.

Thank you so much for exposing this horrible situation. Thousands and thousands of young people who are trying to improve their lives with an education are graduating with six-figure debt into a near economic depression. These private student loans are curiously the only type of debt without any consumer bankruptcy protection. These young graduates may never be able to contribute to our economy by buying a car or a house in their lives, much less begin a family.

It makes sense to restore consumer bankruptcy protection for private student loans, or even to forgive student loans for thiose making less than $100,000 a year as a means to boost our ailing economy. Please call and write your Senators and congressmen/women to make this happen immediately.


There is a wide range of practices by different guaranty agencies despite the existence of the general parameters of law and regulation. Some guarantors focus more on the back end (post-default collections) than others. Some guarantors focus more on the front end (default prevention) than others. Even more damning is that some guarantors have specialized within post-default collections on a very specific type of post-default collections -- consolidating their defaulted loans into Direct Loan. Many would argue that this type of tactic is not a "collection" but rather simply moving one bad debt to another bad debt -- as well as artificially (and conveniently) making a low-default program look like a high-default program! The Calif. state auditor -- not any Washington regulator -- highlighted the unsustainability of this "financing" model.

In addition, the guarantors in most cases played a huge role in writing the laws, regulations and fee structures, so they can't cry innocent. They were regarded as the "experts" and often provided language that was rubber-stamped by Congress and the Educ Dept. In fact, the Higher Education Act since 1993 has actually required groups like guarantors to have a seat at the table in Washington for writing the regulations.

I can’t believe what I am

I can’t believe what I am reading, while I recognize you are in a bad position, these situations are of your own making. I assume most of you who are whining about their loan debt did in fact take out these loans without be forced to do so at gunpoint? And now you want the government to just suck up the debt you made?
I love the terms being bantered about like “slaves” and “sharecroppers” but the bottom line is you borrowed this money and spent it!!!
Is this situation much different from subprime mortgages? Even thought I can’t afford a $500,000 house I should be entitled to live in one, give me a break.

AND what does this have to do with the issue? Government loans will be borrowed and paid back in the same way….with YOU making the decision to borrow.

Student Borrowers Are Gently Forced

These discussions are getting better and better.

Mortgages and student loans are apples and oranges. Our government is begging us to get educated--it's a matter of national defense, both internally and externally. People who are uneducated are less safe. Education is also the glue that holds this nation, made of people from all nations, together. It is also the source of America remaining financially competitive in a global economy. When the youth of tomorrow can't get educated because they can't afford it, what will their idle minds turn to? The illegal drug business? Gangs? More importantly, mortgage loan contracts don't have laws the U.S. Supreme Court described as having a "draconian" effect applied to them retroactively, like student loan contracts do. Mortgage loan contracts have contract defenses; student loan contracts don't have any. But, as student loan payments increase each year due to the steady high rise in tuition, fewer people will be able to afford high mortgage payments. What are we going to do with all those big houses that were built? Their prices will have to come down and thus will eventually reduce the value of your house. It's a vicious cycle of debt.

To all who disbelieve student borrowers deserve relief:
Student loan borrowers WANT to repay their loans. There is a source of pride in being able to meet all your monthly bills. But when we can't pay all our bills, our nation believes in giving people a fresh start. Such relief is in our Constitution because it is so important to us. Harvard alumni have proven that it is a lie to say that student loan borrowers don't want to repay the debt. These alumni have created a micro-loan program for students and have a 98.5% repayment rate. Is it because they don't charge interest or penalties? When you treat people the way our forefathers envisioned, you get a strong nation. When you treat them like slaves, you stoke anger and resentment. That kind of treatment is unsustainable in a nation as unique as ours.

The student loan program changed over time and invited corruption that has not ended because the elimination of bankruptcy protection created ongoing perverse incentives. NAF has been writing one blog after another with proof of this. There are many frustrated witnesses to this corruption with documented evidence of it. These witnesses can't get justice because of financial constraints exacerbated by owing student loans. So, stop thinking that because these matters haven't gone to court that there is no evidence or interest. It's being successfully covered up with money.

Stop for a minute and think what trajectory higher education is on. Those with low income and/or with high loan balances are most likely to default. Even though our government knows that, this group is increasing in number of borrowers and amount borrowed. At the same time, tuition is rising. And, it's unrealistic to think we are going to stop educating the vast majority of our youth. It is the nature of Americans to get educated. So, this is a ticking time bomb with many foreseeable undesirable consequences that you naysayers fail to address.

NYS Higher Education and Sallie Mae have back hand deal

I have a current case pending before Federal Court in SOuthern District before Judge Sullivan. The gist of the complaint is two fold- I have paid Sallie Mae per the loan documents a settlement of $65K in one check. The Guaranty agency, who never appeared omn my credit report, who failed to provide accurate accounting is seeking to collect about $108K. The basis of their collection is that Sallie Mae- NYS has a contract with each other whereby, Guarnty agency can assume the role. This implies then, that either Sallie Mae and Guaranty Agency should have disclosed that the "consolidated loans" which went into default was not subject to bifurcated collections. The lenders and the Guaranty agency did not disclose this. In fact, contrary. Sallie Mae used all loan documents as proof to settle and collect the debt that might have abdicated. Contrarily, Guranty agency was given a form transfer records from Sallie mae which took me five years. Their accounting was off by $30K. Guaranty agency used threats to my work and home and tried to garnish without a hearing, which prompted the federal law suit. They tried to use collection methods to get "rehabilitation" which essentially is a direct contract obligation with the Guaranty agency. The gist is, These rehabilitation programs INCREASE the principal by a lot so by the time you pay off the loans, the difference from the original amount with the rehabilitated amount is about 60% increase. Mine would have increased from 15K-25K to $200,000 the life of the loan!!!! helping students, eh?

Federal Judge Sullivan is holding this matter in abeyance until I am able to get proper hearing. The NYS administrative hearing judge Destefano admitted that there were accounting errors and I placed on record that they were not correct. Debtor who paid should not pay twice. However, as usual, ALJ determined and rubber stamped a decision, despite there are obvious errors. As a hired gun for the NYS, he sided with his employer.

I filed an article 78 which is now before Judge Schelensinger in NYS Supreme Court. Attorney General of NY Andrew Cuomo is representing NYS.

Ironically, I filed a complaint with Andrew Cuomo's office that since his website says he is the champion of student loan transparency accountability act, and student loans are consumer protected, he should look into this matter. I filed a one packet with exhibits with synopsis, tabbed and marked. I alleged that either Sallie Mae or NYS was wrong in their process....and if the Andrew Cuomo initiated what is called " SLATE". Student lending accountability transparency enforcement.", his office would be interested. But, his office refused to investigate this matter.

Let's face it, it's political. Andrew Cuomo will do what it takes to get elected but he will not work on correcting the substantive mistakes. The method in which the Guarnaty agency have acted brings lot of cash to the state, so there is no need to act negatively. This applies to NYS, Federal Judges, State Judges and certainly, Administrative Judges.

Only the media can create enough circus for them to listen....

Beware the Cry for Middle Ground

What Sallie Mae and their ilk will consider acceptable middle ground can be determined by taking a look at past and current bankruptcy law. Prior to 1976, all student loans were dischargeable in bankruptcy. From 1976 to 1990, government guaranteed student loans were dischargeable after 5 years in repayment, and private student loans were dischargeable without limitation. From 1990 to 1998, government guaranteed student loans were dischargeable after 7 years, and private student loans were still fully dischargeable without limitation. From 1998 to 2005, government guaranteed student loans were non-dischargeable except for undue hardship; private student loans were still dischargeable except for loans made or insured by a non-profit institution. This was a no-brainer for the lenders, since all they had to do was set up a “non-profit” entity that had even the most obscure and limited involvement in the loan process.

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) making private educational loans nondischargeable, where before it had only applied to governmental loans. Since BAPCPA, both private and government guaranteed student loans are nondischargeable in bankruptcy unless there is a showing of undue hardship. Lenders paid our elected representatives in Washington a lot of money to achieve this extreme pendulum swing, but even they can see the handwriting on the wall. My prediction is that the plea for “middle ground” will consist of agreeing to allow student loans to be dischargeable after having been in repayment for several years.

This middle ground will be a losing proposition for distressed low income borrowers. Bankruptcy judges have a deeply ingrained bias against student loan debtors. Eugene Wedoff called the treatment of student loans in bankruptcy, “punitive…despite the absence of wrongful conduct by the debtor.” Back when student loans were dischargeable after a set number of years in repayment, lenders systematically employed a method of applying retroactive forebearances and deferments for the sole purpose of protecting the loans from discharge. Lenders cried to the Court about how they should not be penalized for "helping" borrowers. Judges agreed, and sided with lenders by adding back in the time these loans had been in forebearance/deferment -- even when forebearances and deferments had not been requested by the borrower! The burden was on the debtor to piece together five (or seven) repayment years -- An almost impossible task when records of legitimate forebearances and deferments had long ago been misplaced or lost, while the more numerous and longer imaginary forebearances and deferments which existed only in the minds and computer printouts of the lender’s were readily available and admitted into the record.
If you think this can’t happen again, consider that lenders have many years worth of experience under the old law of manipulating time periods, dates, and paperwork and computer records. Similar shenanigans continue to this day. Case in point: A former Sallie Mae employee recently filed a whistleblower complaint in the state of Indiana, stating that telephone agents working for Sallie Mae on behalf of USA Funds routinely falsify borrower requests for forbearances, often just dialing a borrower’s telephone number and letting the line sit open for a few minutes while Sallie Mae’s computers record an apparent conversation. The agent then lists the borrower as having approved a forebearance, when no such approval occurred. The law requires the lender to send a written confirmation to the borrower by mail, but it doesn’t require any proof that the letter was received. Sounds like they’re already at it, creating dummy paperwork in anticipation of a revision to the bankruptcy law.
And what about the COST to the debtor of proving that their loan meets all the requirements for discharge? The debtor will be forced to file the dreaded Adversary Petition to determine the dischargeability of their student loans -- “dreaded” because bankruptcy lawyers dread filing them, and usually won't. “Adversary petition” sounds like a simple process, but in actuality it is a formal lawsuit that begins with filing a complaint, demurrers, cross complaints, discovery, depositions, interrogatories, and that’s just PRE-trial, all at a cost of tens of thousands of dollars. With the debtor’s bankruptcy attorney having exited the scene, the debtor is now left to go it alone against an army of experienced student loan industry lawyers. Distressed low income debtors do not have the money or skill to navigate this legal obstacle course, let alone ever being able to meet the time-in-repayment requirements as the judges will interpret them (with a lot of help from the student loan industry).
Take this whole mess and multiply it times the four or five or more student loans that debtors have, each loan with possibly a different lender, each loan with its own separate terms, forbearances, deferments and repayment history. This would be a daunting undertaking for even the most experienced bankruptcy attorney, who of course wouldn’t touch it with a ten foot pole anyway.
Consumer protections must be restored to all student loans. No strings attached. No doors left open for the lenders to exploit, for exploit them they most certainly will. Even advocates who are on the right side of this issue will say that dischargeability of loans that have been in repayment for a number of years is “better than nothing”. I’m here to say that it is NOT better than nothing. IT IS nothing.

Change must occur that is neither fraught with minefields for the debtor, nor full of loopholes that favor lenders.

Suggested reading is this piece by Bankruptcy Judge Eugene Wedoff, posted on the Creditslips blog:

History of student loans in bankruptcy:


Thank you.

The time now is for action.

The time now is for action. We can complain all we want, but it has gotten us nowhere. Please check out a bill we wrote for relief from student loan debt at: cedresq@gmail.com. This bill needs to be read, shared with others, and then presented to legislators to request their support of it. Since legislators only deal with their constituents, we need people from across the nation to help us. I just got back from taking mandatory furlough in my county job and spent my time to work on this bill with Peter, so we are counting on everyone to do their part - PLEASE. Ask for the bill and you'll see it's worth supporting. Thank you, Paula McKibbin, Esq.

People Who Attack Bankruptcy Have No Creditbility

It seems half of you who object to returning bankruptcy protections to student loans, aren't objecting to the specific treatment of student loans but to the entire concept of bankruptcy ITSELF. This sentiment has no credibility at all. You like to hide behind moralistic garbage about personal responsibility and blame us for own situation. That's fine, but when the economy comes crashing down around you (wait that already happened) think about the role your retrograde mentalities had in bringing that about.

Why the removal of consumer protections are a root cause

Some people on this board seem to be completely blinded (by their financial interests) to the fact that the lack of standard consumer protections is the root cause of a federal student loan system that fails the students in nearly every way that is measurable. It is a root cause, but their return is also a root solution.

Attacking my listening skills gains you no ground, because I do listen (and look) very carefully and closely. On one hand, I hear and see decent citizens who pursued higher education in good faith and with noble aspirations. They have come to realize, however, that the financing mechanism that they were compelled to accept for this endeavor now all but guarantees their aspirations will never come to fruition. The irony of this (probably amusing to the people making a fortune from their misfortune) pushes many into despair, turning good will into bad, and reverberates in very dark ways through all aspects of their lives.

On the other hand, I hear the shameless (but effective) rhetoric of industry executives, college, and Department of Education executives...all very cleverly worded such that it keeps the student loan "money bus" rolling over the borrowers, and also makes them look like dedicated, ethical, upstanding professional who are only trying to serve the students.

The bankruptcy argument is unassailable logically, as far as I have been able to determine, but I doubt many on the other side have actually considered it (I will paste it below). Instead of challenging this argument, some would rather resort to the same fear-talk that was used to take bankruptcy protections away 3 decades ago!! Unfortunately for you, We won't be starting over from there again, friend, much as you would like to.

Like in the 70's, Bankruptcy still carries all the stigma with it that it ever did. You are just older and more cynical...younger people- particularly college grads- are as concerned with their reputations, creditworthiness, etc as they always were. If you believe that they will conspire to commit such a reprehensible, shameful, and embarrassing act, then that is more a reflection of your own instinct, not theirs. And the historical data we do have to consider this all says that it is not likely.

Also: Bankruptcy is no longer a "walk away" deal, as we all know. Anyone making any kind of a living will be on the hook...probably for the amount originally borrowed, if not some interest.

In dollars and sense: There is $40 billion in defaulted federal loans on the books. More than half of this is likely fees, costs, and compounded interest. Even in the worst case, if EVERY defaulted borrower rushed to court, and EVERY defaulted loan was wiped completely clean, the actual cost would be $20 billion or so. However, much of this would never have been collected in any case, so whether written off sooner or later is simply a matter of accounting.

Of course there will be a spike in filings initially. Given the astonishing unprecedented, and prolonged absence of this right( and the financial pressure this has forced so many to live under for so many years), one should expect that 20% of the defaulted borrowers (largely older folks whose lives have been irreversibly damaged) will file immediately, causing a discharge of something like $3-$7 billion initially. Put this in perspective, however: Consider the tens of billions in unearned wealth that has been ripped from this pool of debtors, over and above principal and interest, in the past 20 years. I am sure the latter will far, far outweigh the former.

Clearly, the nation's economy won't collapse by returning this standard, fundamental (and even civil) right to the citizens and long last.

Finally: The cost of NOT returning bankruptcy protections has been incalculably large, and will increase with time. Already we have heard of bank robberies, prostitution, even murders that were attributed to student loan debt.

As promised, here is the formal argument for bankruptcy.

The federal student loan system has become fundamentally predatory due to the Congressional removal of standard consumer protections, combined with congressionally sanctioned collection powers that are stronger than those associated with all other loan instruments in our nation's history. These actions by Congress have, predictably, created an inherently predatory, state-sponsored lending and collection system where the motivations of the various functional elements of the system are fatally misdirected. The system that has resulted promotes inefficiency in administration, unchecked inflation, bureaucratic malaise and conflicted oversight. Moreover, the resulting system promotes needless and expensive complexity and redundancies, fails to encourage academic excellence, and ultimately, promotes delinquency and default.

While this system has been extremely lucrative for a few individuals, it causes massive harm not only to borrowers and their families, but also to non-borrowing students and their families, due to the dramatic inflation that the system promotes. The nation suffers a massive cost due to the large amount of wealth trapped in this system, the quality of the education received by the citizens, and the public's opportunity cost associated with the materialistic career paths that citizens are forced into at the expense of public interest work, and entrepreneurship.

Importantly: this problem exists across both Direct Loan (DL), and Federal Family Education Loan (FFEL) Programs. In the public interest, the consumer protections that were removed by Congress must be restored by Congress at the earliest opportunity. By returning these consumer protections, the motivations of the system's functional elements will be reoriented such that most, if not all of the deficiencies mentioned above will go away over time.

The Proof:

Congress removed bankruptcy protections, refinancing rights, statutes of limitations, truth in lending requirements, fair debt collection practice requirements (for state agencies) and even removed state usury laws from applicability to federally guaranteed student loans.
Congress 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. 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.

While this fee system has provided a massive revenue stream for a shadowy, nationwide network of politically connected guarantors, services, and collection companies who have greatly enriched themselves at the expense of misfortunate borrowers, it has caused immeasurable damage to millions of borrowers and their families, who see what started as an unmanageable debt become a financial cataclysm- that debilitates, marginalizes, and ultimately relegates them to a lifetime of financial servitude and despondency in many cases.

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 at least 60% of their operating income through this legalized wealth extraction mechanism. Clearly, it is in the guarantors financial interest that students default on their loans. If there were no student loan defaults, the guarantors would barely exist.

Additionally, it is often in the financial interest of the lenders that students default. Large lenders, most notably Sallie Mae, derive income from not only lending and servicing operations, but also from guaranty, and collection assets owned by the company. This leads to the common situation where a defaulted loan is paid in full to the lender, becomes vastly inflated with collection costs, and then becomes a revenue stream for the guarantor and collection company...all owned 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 annual report, Sallie Mae CEO Albert Lord brags to shareholders in his 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. Further there is clear evidence that Sallie Mae, and other loan companies actually defaulted student loans without even attempting to collect on the debt! In fact, 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 Systems.

Taken together, these cases show irrefutably that there is indeed an interest to default student loans. Further, an employee of the Kentucky Higher Education Assistance Authority, KHEAA, came forward to StudentLoanJustice in 2007, and submitted that the agency managers had purposely marketed loans to poor, disadvantaged communities in the 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. The harm this predatory activity has caused borrowers is severe, extreme, and widespread. citizens with defaulted loans have been documented fleeing the country solely as a result of their student loan debt. Others (many others) have been forced "off the grid". Some have even taken their own lives.

There is $40 billion in outstanding student loan debt in the U.S. covering upwards of 5 million loans. Finally, and most importantly, it 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 fees. Whether this net positive collection rate can be counted as "profit" by the federal government is subject to debate, but at the minimum, it can be said that the federal government is breaking even, overall, on its defaulted student loan portfolio.

Therefore, all entities involved: The lenders, the guarantors, the collection companies, and even the Department of Education, have a perverse incentive for student loans to go into default- solely due to the fact that the borrower has none of the standard consumer protections available to him that exist for all other types of loans in the country. The result of this wrongly motivated system: despite repeated claims by the Department of Education, the student lending industry (and their army of lobbyists), and the universities that defaulted loans rates are at record lows, 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%

This is a default rate that far exceeds that of any other type of loan. It is perhaps a conservative statement to say that ultimately, About 1 In 3 undergraduate student loan borrowers will default on their loans. This is an extremely high rate that the Department of Education, lenders, and universities are loathe to acknowledge.

With regards to bankruptcy: There was no basis for removing Bankruptcy protections from student loans in the first place. In fact, it was found that when student loans were treated the same as all other loans with regards to bankruptcy discharge, far less than 1% of federal loans were discharged this way. According to one congressman at the time, the widely advertised accounts of students filing for bankruptcy promptly after graduation was a crisis that existed "only in the imagination". Congress created this artificial, structurally predatory, cruel and unusual lending and collection system. Congress, must therefore assume the immediate responsibility of fixing it by returning the standard consumer protections that should have never been taken away in the first place. Encoding, The federal government will, once again, have a financial interest that student loans not default.

This will compel the government to use its considerable influence to compel 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. Certainly, new methods for encouraging students will result. This will also compel the government to take seriously its oversight role over private lenders (assuming that private lenders will participate in federal student loan programs in the future). While this "good government" model may be frowned upon by current staff at the Offices of Federal Student Aid who have grown comfortable with their conflicted, bureaucratic roles, this is only clear evidence that these individuals are ill-suited for the new model of operations. It is likely that there is an abundance of properly motivated people willing to take over in this case, and at long last, provide inspired service that will ensure the success of the model.