Sallie Mae

Fueling Sham Trade Schools

Stephen Burd — Thu, 01 May 2008 06:20:00 -0400

We have written a lot recently about Silver State Helicopters, a Nevada-based company that left the 2,500 students who attended its flight academies in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation.

As we noted yesterday, Silver States' entire existence depended on the willingness of loan companies -- in this case, the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA) through its national brand American Education Services -- to make and service high-cost private loans to help students cover the $70,000 cost that they were required to pay up front to attend the unlicensed and unaccredited flight schools. Unfortunately, Silver State students are now stuck repaying these private loans for training they did not ultimately receive.

Silver State is hardly an isolated case.

There has been in recent years a proliferation of unlicensed and unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. Their growth has been fueled by lenders that have willingly and irresponsibly "partnered" with these institutions to provide expensive private loans to the at-risk students these schools tend to attract. The lenders have then turned around and, like subprime mortgage lenders, securitized the loans, shifting the risk of the loans onto unsuspecting investors.

Reviving Trade School Scams

These practices first came to light several years ago when dozens of unaccredited computer training schools unexpectedly shut down, leaving their students without training and with heavy private loan debt. Just like Silver State, these schools (owned by now-defunct chains such as Ameritrain, Solid Computer Decisions, and The Academy Schools, among others) had forged sweetheart deals with the loan giants Sallie Mae and Key Bank to provide their students with tens of thousands of dollars of private loans to cover the full cost of tuition upfront before any classes were provided.

Consumer lawyer Tom Domonoske exposed these deals in an article entitled "The Finance Industry Fuels Revival of Trade School Scams," which ran in late 2003 in the trade journal The Consumer Advocate but received little attention at the time. In the article, Domonoske explained how the easy availability of private loans helped disreputable schools thrive by allowing them to attract students without having to worry about being regulated by the federal government.

In the late 1980's and the early 1990's, the federal government was forced to take emergency actions to crack down on an explosion of fly-by-night trade schools set up solely for the purpose of reaping profits from the federal student aid programs. To avoid another student loan-proprietary school debacle, policymakers began requiring schools that participate in the federal student loan program to demonstrate, among other things, that they are financially stable. The schools must show that they do not pose a danger of closing precipitously.

But disreputable trade school owners found a way to around these rules -- by staying out of the federal aid programs and pushing private loans to their students. Meanwhile, lenders, Domonoske wrote, have proved more than willing to provide "liquidity" to these sham schools. "[T]he current problem of school closures in the computer training field would not exist if entities like Sallie Mae and Key Bank were applying similar restrictions" to those of the government, Domonoske wrote at the time.

The Loan Industry's Complicity

Under pressure from consumer advocates, Sallie Mae eventually agreed to stop serving unlicensed schools. But Key Bank apparently continues to do so. And, in light of the Silver State Helicopters case, other lenders, like Student Loan Xpress and the non-profit state agency, PHEAA, appear to have picked up the slack.

Why would lenders ever agree to make such risky loans in the first place? Don't loan providers pay a price for making loans to students attending sham schools? Not if they securitize the loans and get them off their books. As Domonoske puts it:

"Key Bank's willingness to fund bad loans seems at first glance to be counterproductive for its own bottom line. However, Key Bank does not intend to hold all the loans during their repayment period; instead it pools and sells the loans to investors. Through a process called "asset-backed securitization," Key Bank obtains full value for the loans by selling them to an investment trust. It sells the loans as if they were honest and legitimate transactions solicited by schools that were acting properly...Consequently, the investors pay full value without a disclosure of the inherent defects in the loan."

In other words, by providing huge private loans to students attending unlicensed, unaccredited schools and then securitizing the debt, the lenders have not only caused great harm to students but have also deliberately misled investors.

As policymakers consider a bail out the student loan industry from the credit crunch beyond legislation passed in the Senate yesterday, they need to remember that lenders have brought a good part of these problems onto themselves. Lenders have dumped lots of bad private student loans onto the marketplace, knowing full well that much of this debt was likely to go into default. Is it any wonder that investors are now wary of student loans?

Predatory Lending Biting Back

Stephen Burd — Wed, 30 Apr 2008 14:52:00 -0400

With calls from student loan providers for a bailout growing louder every day, it's worth remembering that the lenders have brought a good part of these problems onto themselves. Investors are wary of purchasing student loan asset back securities, and, and least when it comes to those made up of private loans, they have good reason. Lenders have dumped lots of bad loans made to subprime borrowers going to dubious schools onto the marketplace, knowing full well that much of this debt was likely to go into default.

Case in point: as we noted last week, there has been in recent years a proliferation of unlicensed, unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. The growth of these schools of dubious quality has been fueled by student loan companies that have willingly and irresponsibly "partnered" with these institutions to provide high-cost private loans to often at-risk students that these schools tend to attract. The lenders have then turned around and, like subprime mortgage lenders, securitized the loans, shifting the risk of the loans onto unsuspecting investors.

Low-income and working class students who enroll in these schools have paid a high price for these policies.

Take Silver State Helicopters for instance. On Super Bowl Sunday, the Nevada-based company, which owned unaccredited flight academies across the country, shut its doors without warning and filed for bankruptcy liquidation. As recounted by The San Diego Union-Tribune, the 2,500 students enrolled in the flight academies were "left in the lurch." Because the schools did not have the proper accreditation to qualify to participate in the federal student aid programs, the company directed students to take out expensive private loans to cover the $70,000 tuition that they were required to pay up front. Unfortunately, Silver State students are now stuck repaying these loans for training they did not ultimately receive.

But Silver States' entire existence depended on the willingness of loan companies -- in this case, the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA) through its national brand American Education Services -- to make and service private loans to students lured into unlicensed, unaccredited, and ultimately "fly-by-night" schools (forgive the pun). In fact, the company appears to have gone immediately belly up the minute the lenders revealed that they would no longer provide private loans to its students because the lenders would not be able to securitize them as a result of the credit crunch.

The student loan industry is desperately seeking a bailout and offering neither borrowers nor taxpayers anything in return. Don't Silver States' students deserve a bailout too? Don't taxpayers deserve protection against another student loan - proprietary school debacle, as we had in the late 1980s and early 1990s? We at Higher Ed Watch think both student borrowers and taxpayers deserve better.

Missing Those Sweetheart Deals

Stephen Burd — Thu, 10 Apr 2008 15:34:00 -0400

At Higher Ed Watch, we have focused recently on deals that chains of publicly-traded, for-profit trade schools have made with loan providers like Sallie Mae that have allowed them to push low- and moderate-income students to take out high cost, subprime private loans. But for-profit colleges are not the only higher-education institutions that have forged these kinds of arrangements and put students in harm's way. Many expensive non-profit private colleges have come to rely on these arrangements as essential tools in carrying out their enrollment management plans.

And now with the credit crunch, as well as a federal crackdown on sweetheart deals between lenders and colleges, many private college leaders are anxious that the easy access they've had to the private loan market is starting to dry up.

That much is clear from the results of a recent survey conducted by he National Association of Independent Colleges and Universities (NAICU), which lobbies on behalf of private nonprofit colleges, to determine the effect that the credit crunch is having at its member institutions. Despite some alarmist rhetoric in the news release accompanying the report "about reductions in student loan availability," the survey confirms what we've been saying -- that there is absolutely no federal student loan crisis. Of the 315 private colleges that responded to the survey, not a single school reported having any trouble obtaining federal loans for their students.

The colleges' chief concern, in fact, revolves around lenders "imposing stricter credit requirements on students" seeking private student loans to attend their institutions. Nearly half of the colleges that responded to the survey complained that lenders have been "increasing the qualifying credit scores" for private loans, and requiring students with less-than-stellar credit to have their parents co-sign the loans.

These sound like pretty reasonable changes at a time when loan providers are experiencing a rapid rise in the default and delinquency rates on the subprime private loans they've lent, many of which arguably should never have been made.

And these moves by lenders will actually protect financially needy students. Let's not forget that we're talking about high-interest private loans with variable rates, which are not capped, and that lack many of the repayment protections built into federal loans. In addition, unlike virtually all other forms of financial aid, students with the greatest financial need get stuck paying the highest rates and fees on their private student loan debt.

But that's not how most private college officials who responded to the survey seem to see it. Instead, they are wringing their hands over these developments. "In the past, students had access to a credit-ready private loan program (no cosigner required, zero credit is considered good credit)," one private college official was quoted in the report as saying. "Knowing the number of students who utilize this loan, we think that may create an access problem with the possible elimination of this private loan program."

Another college official's response was terser. "Required FICO score has been increased," that official stated. "Fewer loans to at-risk clients will be made."

The truth is that many private colleges, through their cozy relationships with lenders, have made it too easy for "at-risk students" with "zero credit" or even bad credit to take on expensive private loans. In fact, many of the institutions have included the loans in the financial-aid packages they offer to students to meet their financial need. As we have said before, this is a worrisome practice because it gives students the misleading impression that they are obligated to take out these loans. It also gives them the impression that these loans have the colleges' imprimatur -- and therefore must have pretty reasonable terms, which they seldom do. Worse yet, some lenders have encouraged colleges to brand the loans with their institutions' names -- which only adds to the confusion.

But why is packaging private loans so important to these schools? Just ask their enrollment managers. In the ultra-competitive world of college admissions, high-priced schools believe that it is absolutely essential for them to show students and their parents that they will be able to afford to attend. This is not much of a problem for elite colleges that are wealthy enough to meet the full financial need of their students. But less affluent private colleges, with smaller financial aid budgets, have turned to private loans to fill the financing gap. "It has become a necessity for private colleges and some pricier publics to have some kind of private loan available," Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, told The Chronicle of Higher Education in 2006. "If they don't have something handy, they will find themselves at a significant disadvantage."

The tricky part for colleges has been that many financially needy students wouldn't ordinarily qualify for private loans because they have no credit histories or have bad credit. So to assure that students obtain the financing, colleges have entered into deals with lenders in which the loan providers have agreed to waive or at least loosen their credit criteria in return for becoming a major lender, or even the exclusive lender, of federal and private loans on their campuses. The pay off has been that colleges have been able to include the loans in students' aid packages, without having to worry whether the students' loan applications would be rejected.

The sad thing is that private colleges have become so reliant on these arrangements, that they now seem, with the demise of these deals, to be at a loss as to how to help their students. According to the NAICU survey, nearly half of respondents had "no plan" in place to help financially-needy students if private loans become unavailable.

At Higher Ed Watch, we have some ideas. As we have previously suggested, instead of pushing students to take out private loans, colleges should encourage them to have their parents apply for a federally guaranteed PLUS Loans. PLUS loans are available in amounts up to the total cost of attendance for a student. Moreover, interest rates on these loans are fixed at 7.9 percent for the parents of students at colleges in the Direct Loan program, and 8.5 percent for those in the Federal Family Education Loan (FFEL) program. These rates are better than most offered on private loans. And for those students whose parents get turned down for a PLUS loan because of bad credit, loan limits on federal student loans double to $46,000 in the aggregate.

Private colleges could also consider shifting money they currently spend on merit aid to need-based financial aid so that the students who truly need the help get it. And colleges could make a real effort to curb their tuition increases -- or, gasp, even reduce their prices -- so that students have less need to take out private loans in the first place.

These all sound like good ideas to us. But of course, we do not have to answer to enrollment managers.

Blind-Sided at Sallie Mae?

Stephen Burd — Tue, 25 Mar 2008 13:00:00 -0400

Last week, we wrote that Sallie Mae and its promoters on Wall Street claim the company was "blind-sided" by the rising default and delinquency rates on subprime private loans it made to low-income and working class students at poor performing higher education trade schools. It's a convenient argument considering that the loan giant is facing at least one, and possibly several, class action lawsuits by angry shareholders who accuse the company of deliberately misleading them about the amount of risk it was assuming. But the argument is disingenuous at best.

Financial analysts have long raised red flags about Sallie Mae's private lending practices. During earnings calls and at shareholder meetings and investment conferences, analysts regularly peppered Sallie Mae officials with questions about whether the company, which is used to having government backing on its loans, had the expertise needed to assess the risks associated with lending unsecured, private loan debt to financially-needy students.

Of particular concern to these analysts have been the sweetheart deals that Sallie Mae forged with some of the most scandal-ridden chains of for-profit colleges, such as Career Education Corporation and Corinthian Colleges. Under these Orwellian-sounding "opportunity pool" or "recourse loan" arrangements, Sallie Mae agreed to provide funds for private student loans, with interest rates and fees totaling more than 20 percent per year, to financially-needy students who normally wouldn't qualify for them because of their subprime credit scores. Sallie Mae apparently viewed these loans as "loss leaders," meaning that the company was willing to make these loans, many of which were likely to go into default, in exchange for becoming the exclusive provider of federal and private loans for the tens of thousands of subprime and non-subprime students these huge chains serve.

In 2005, Fortune Magazine brought attention to the analysts' worries in an article entitled, "When Sallie Met Wall Street." That piece specifically raised concerns about the loan company's dealings with schools owned by Career Education Corporation, which it noted had had been accused "in multiple lawsuits in several states of using hard-sell tactics to recruit students, promising them high-paying jobs that don't materialize and leaving them with mountains of debt that they can't pay off."

The article's author -- Bethany McLean (who, by the way, helped break the Enron scandal) -- proved prescient in predicting the predicament in which Sallie Mae now finds itself. McLean wrote:

[A] big question looms in Sallie Mae's private credit business: How many students who take out these high-interest loans will end up defaulting? After all, private credits are basically unsecured loans to people without jobs. Sallie argues that there won't be a problem. Each quarter it books a reserve for potential losses; at this time its loss on private credit loans in repayment are running at only 2.4%. Plus, Sallie says, almost half its private credit loans are guaranteed by a parent.

But because private credit is a new business and because students are taking on unprecedented levels of debt, there are no historical measurements by which to gauge potential defaults. As Sallie's financials note, "the provision for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes." And the current low delinquency rate may be misleading, because as of the end of 2004 nearly half the students to whom Sallie has lent private money hadn't left school yet.

The Fortune article also raised a question that is central to the class action lawsuit filed by shareholders in the Federal District Court in Southern New York: Was Sallie Mae deliberately not putting enough money in reserve to cover anticipated losses on "uncollectible loans" so that it could artificially boost its earnings?

Some worry that Sallie may already be struggling to deliver on its promises to Wall Street. The company encourages investors to look at a measure it calls "core cash" earnings, which, among other adjustments, strips out the gain Sallie books when it sells loans to an off-balance-sheet trust and replaces it with Sallie's estimate of the spread those loans are earning. In other words, Sallie's "core cash" results are affected by the reserve it books on those off-balance-sheet loans. Over the past year the company has reduced its reserves, thereby boosting the earnings measure that it encourages investors to watch. Currently, Sallie's allowance for losses on the private credit loans that are in repayment is 3.9%, down from 6.2% a year ago. Sallie attributes the reduction to an improvement in its portfolio's credit quality and says that the idea that reducing reserves helps earnings is wrong.

How did Sallie Mae officials react to the story? Did they reexamine their business practices? No, they lashed out at the magazine. "In short, your article was a baseless attack on a company that has helped million of Americans who, without our financing tools, may not have had an alternative to attend college and improve their lives," Tim Fitzpatrick, the company's then-CEO, wrote in a letter to the editor.

Sallie Mae officials were warned of the dangers ahead and chose to ignore the warnings. The truth is company officials took a huge gamble. They believed that that all the new business they would get from forging deals with these gigantic for-profit school chains would more than make up for the losses they would endure from making available high-cost private student loans for high-risk borrowers. They were wrong.

The people actually blind-sided were students pressured by aggressive recruiters at dubious for-profit trade schools to take out high-cost loans to pursue an expensive, high-risk program with dubious graduation and job placement track records.

As we have noted, serious questions have been raised about whether some of these companies such as Career Education Corporation have duped disadvantaged students into taking on private loan debt without making them aware of their cheaper loan options first.

Perhaps Sallie Mae's shareholders were duped as well. They may at least get their day in court to air their grievances. Company officials will argue that they never could have anticipated the dangers of providing high-cost loans to subprime borrowers. Don't believe them.

Class Action Lawsuit Challenges Sallie Mae’s Subprime Lending Practices

Stephen Burd — Thu, 20 Mar 2008 18:48:00 -0400

Sallie Mae is facing a potential series of class action lawsuits from angry investors who believe the student loan giant misled them about the amount of risk the company was taking on in pushing high-cost private loans on subprime borrowers attending poor-performing trade schools.

Sallie Mae is already facing at least one class action lawsuit filed by shareholders in the Federal District Court in Southern New York, and company officials have alerted the Securities & Exchange Commission that they expect "similar actions" to be filed elsewhere shortly. The pending New York lawsuit accuses Sallie Mae of failing to "engage in proper due diligence" before providing private loans to high-risk students at for-profit, trade schools; of deliberately not putting enough money in reserve to cover anticipated losses on "uncollectible loans" in order to artificially boost earnings; and of making "false and misleading statements" to shareholders about the overall quality of its private loan portfolio to keep its stock price high.

Officials at Sallie Mae have not yet filed a formal response to these claims. But actions that the loan giant has taken recently appear to boost the shareholders' case. In January, the company, reeling from the news that it was spending hundreds of millions of dollars to cover losses on bad loans, announced that it would no longer engage in subprime lending at trade schools. "Sallie Mae has lent too much money to students who have gone to schools without very good graduation rates," Al Lord, the company's Chief Executive Officer, said at the time. In court, that's called a statement against interest.

And just this month, the loan giant created a new position at the company of chief credit officer and hired a banking industry veteran to fill it. With this hire, Sallie Mae, apparently for the first time, will have a top level executive in charge of of overseeing "the company's private student loan underwriting policies" and of managing its exposure to credit risk. Better late than never, right?

Still, Sallie Mae won't overtly admit fault and poor management. Instead, the company and its promoters on Wall Street have been testing another explanation for its difficulties. An analyst with CreditSights Inc., in New York, recently tried it out when he told Bloomberg.com that the loan giant had been "blind-sided" by the rising default and delinquency rates on the subprime private loans it had made to low-income and working-class students attending trade school of dubious quality.

We find the blind-sided explanation hard to believe. But in Tuesday's post, we'll assess the explanation in full. Stay tuned.

A Silver Lining from the Credit Crunch

Stephen Burd — Wed, 05 Mar 2008 03:27:00 -0500

The Los Angeles Times recently provided a disturbing example of how some for-profit trade schools like Corinthian Colleges have been pushing subprime, high-risk students to assume heavy levels of debt that they may never be able to repay. In an article on the credit crunch, the LA Times quoted a 20 year old student, with a 10 month old baby, who is taking classes at Everest College in West Los Angeles to become a medical assistant. To pay for an eight week course at the Corinthian-owned school, this student has had to take out an $8,000 private loan with an 8 percent interest rate. The student, and several friends with similar loans, told the newspaper "that they knew that repayment would be difficult on the $9 an hour or so they expected to earn if they got jobs." The course, they said, gave them "75% to 90% of what they need to get and keep a job."

[slideshow] The students say the loans were worth taking because they gave them an opportunity to attend the school. But they probably won't be so happy when they go into repayment, particularly if those jobs don't materialize. They may be even more disappointed when they discover that they could have gotten the same training for a fraction of the cost at the nearby Pasadena City Colleges, which according to the LA Times, "charges $628 annually in tuition and fees to in-state residents."

If there is a silver lining to the credit crunch, it is that for-profit colleges and loan companies, like Sallie Mae, are being forced to think twice before pushing high-risk borrowers to take on expensive private loan debt that they have little hope of ever paying back.

Of course, this is not the story that the mainstream press is telling. Instead, they are focusing on the sensational story that student loan funds are drying up. That story, which is creating a panic, is misleading at best.

Despite the hysteria, we have not heard of a single case in which a student has been unable to obtain a federally guaranteed student loan as a result of the credit crunch. As we have said repeatedly, students are in absolutely no danger of losing access to federal Stafford loans.

As of now, the borrowers who mainly appear to be in danger of losing access to high-cost private student loans are those with poor credit records attending for-profit trade schools of dubious quality. (Note: we're not saying all trade schools are of dubious quality, but many are.)

Even within the for-profit higher education sector, the impact of the credit crunch has been limited so far. In recent weeks, some trade-school chains, such as Capella University, Devry Inc., Strayer College, and the University of Phoenix, have gone out of their way to assure nervous investors that the credit crunch has had little to no impact on students attending their institutions. "We are really not seeing any impact on our business," Stephen Shank, Capella's chief executive officer, recently told The New York Times.

The companies that are feeling the pinch are those that have aggressively steered financially-needy students to take out high-interest private loans, such as Career Education Corporation, Corinthian Colleges, and ITT Educational Services Inc. According to company disclosures, private loans make up 30 percent of the revenue at ITT, 18 percent at Career Education, and 13 percent at Corinthian. Corinthian has revealed that 75 percent of its private loans go to subprime borrowers.

In contrast, private loans make up just about 4 percent of the revenue of Apollo Group, which is the parent corporation of the University of Phoenix, 3 percent at Strayer, and 1 percent at Capella. A recent report from Investor's Business Daily reveals that only one quarter of one percent of private loans at Strayer go to subprime borrowers.

Of course, some advocates for trade schools argue that cutting off private loans to subprime borrowers attending these institutions will lead to a severe access crisis. But their argument fails to recognize just how dangerous it is to rely on private loans as a college access tool. Because private loan providers price their loans based on students' credit scores, those with the greatest financial need are almost guaranteed to get loans with the highest interest rates, the highest up front fees, and worst conditions. These lenders have proved to be notoriously unwilling to help struggling borrowers find ways to make repayment easier. And the government has made it extremely difficult for borrowers in dire straits to discharge their private loans in bankruptcy.

Our colleague, Erin Dillon at Education Sector, wrote yesterday that pushing a high-interest private loan on "a student with a low chance of graduating or getting a job is more a recipe for life-long indebtedness and a destroyed credit history than it is an educational opportunity."

Erin is right. As a country, we are doing no favors to the most financially needy students by pushing them to take on such expensive debt to attend schools of dubious quality. Perhaps the credit crunch will force policy makers to realize that.

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An Unsettling Settlement in Pennsylvania

Stephen Burd — Thu, 28 Feb 2008 14:29:00 -0500

Pennsylvania Attorney General Tom Corbett's decision last week to reach a $200,000 settlement agreement with the for-profit trade school chain Career Education Corporation over allegations that one of its schools had duped students into taking high-cost private student loans has come under withering criticism. At Higher Ed Watch, we believe that criticism is well deserved, as the settlement provides no relief for the former students who appear to have been misled into taking out expensive private student loans, and will do nothing to protect students at the scandal-ridden chain's other colleges who may be falling victim to similar deceptive practices.

We might not be so concerned if this were the first time we heard such allegations against Career Education Corporation, which owns more than 80 campuses in the U.S. and serves over 95,000 students worldwide. But over the last several years, Career Education Corporation has come under scrutiny from federal and state regulators and faced numerous class action lawsuits by former employees, shareholders, and students over allegations that its schools engage in aggressive and misleading admissions tactics to inflate their enrollment numbers.

The charges made by former students at Lehigh Valley College are disturbingly similar to ones that have been made by students at other Career Education Corporation colleges: that the school deceived students about its job placement rates and about the transferability of its credits to other colleges, and that it rushed them through the financial aid process without accurately disclosing the terms of the private student loans they were being assigned. A 2005 class-action lawsuit filed by former Lehigh Valley College students accused the school of misleading them into thinking that the loans they were receiving "were low-interest, government-guaranteed student loans, when in reality the loans were not government-backed loans and included interest rates in excess of 15%."

Attorney General Corbett's announcement of the settlement agreement provides at least the appearance that his office has taken these allegations seriously and will lead to changes that will help students. "The consumer settlement," the news release states, "will ensure that students receive accurate information and full disclosure about financial aid, the ability to transfer credits to other schools, and the likelihood of finding work following graduation -- all key issues to a student's selection of a school." Under the settlement, Lehigh Valley College has agreed to abide by a Code of Conduct that prohibits the institution from making "false and misleading statements" to students about their future employment opportunities, ability to transfer credits, and the terms and conditions of their student loans.

It's pretty questionable, however, about how much affect the code will have on Lehigh Valley College, as the school is no longer enrolling new students. In fact, Career Education plans to close down the school entirely by the end of next year. The company had tried to sell the school, but there were no takers.

And, to the frustration of some Pennsylvania state and federal lawmakers, the agreement the Attorney General struck with the for-profit higher education company clearly states that "none of its terms apply to any other school owned or controlled by Career Education." U.S. Rep. Patrick Murphy (D-PA) has written a letter to Career Education's chief executive officer, asking "as a gesture of good faith," to have all its Pennsylvania schools "at the very least, voluntarily abide by the code." He also outlined additional steps he believes that all Career Education schools should take "to partially restore the trust lost by your corporation's actions at Lehigh Valley College." Among other things, he proposed having the company's schools disclose to applicants the lifetime default rates of their former students.

Corbett has also taken a lot of heat for settling for $200,000 and not compensating the former students who were the victims of the schools' deception. Perhaps he honestly believes that given the facts of the case, this was the best he could do. But The Morning Call, the Allentown newspaper that first reported on the school's practices, has raised some concerns about the conduct of the investigation. The newspaper questioned why the attorney general's office had never contacted several former Lehigh Valley college officials and teachers who had gone public "with damning accounts of the school's tactics" -- including a former admissions officer who had told the newspaper that he had been under orders to deliberately withhold information from students about the terms of their private loans for fear of discouraging them from attending.

So what should be done? For starters, the U.S. Department of Education or Department of Justice should investigate whether the corporation as a whole has been encouraging its schools to mislead students about the terms of their loans. These allegations are extremely serious. It's bad enough that some financially needy students have no choice but to take out private loans to pay for college. But it's unconscionable and bad business for schools to saddle students with private loan debt without making them aware of their lower-cost, federal loan options first.

Second, we would embrace the proposals that Representative Murphy included in his letter to Career Education and extend some of them to all colleges nationwide, be they for-profit or nonprofit. For example, we believe that Congress should require all colleges to report their lifetime default rates to prospective students -- so that students can make an informed decision about the risks they're willing to take before they fall for a recruiter's sweet pitch.

A False Alarm

Ed Policy — Thu, 14 Feb 2008 00:00:00 -0500

Over the last several months, the student loan industry and its allies on Capitol Hill have led a campaign to persuade the news media and policymakers that Congress went too far last year when it cut taxpayer subsidies to lenders that participate in the Federal Family Education Loan (FFEL) program. The lenders and their friends argue that the subsidy cuts and tightening credit markets now are leaving students in jeopardy of losing access to federally guaranteed student loans. Don't believe it.

[slideshow] During debate last week on legislation to renew the Higher Education Act, for example, Congressman Howard (Buck) McKeon (R-CA), a friend of Sallie Mae and the student loan industry, sounded an alarm. “The impact of these cuts have yet to be fully realized, but already borrower benefits have been curtailed, lenders have left the program, and workers have lost their jobs,” he said. “The consequences of program cuts are being exacerbated by a crunch in our financial markets that has produced a loss of liquidity, an increase in financing costs, and uncertainty about the future viability of the federal loan program.”

McKeon didn't mention that JP Morgan Chase bank, for example, is making so much on federal and private student loans even after Congressional action to redirect excess taxpayer subsidies from banks to increased financial aid for students that Chase is voluntarily cutting interest rates and fees on federally-backed student loans and private student loans. He also didn't mention that any curtailed benefits charitably supplied by banks in the past have been redirected by Congress into massively larger Pell Grants and reduced undergraduate Stafford loan interest rates. And he didn't mention, that there is zero risk of federal student loans not being available to any student at any accreditated institution of higher education.

But McKeon we understand. He's got a political job to do. Respected media outlets like The Wall Street Journal that fall for this scare tactic we can't excuse. In a news article last week, The Wall Street Journal speculated that students with less-than-stellar credit “will likely have a harder time getting a government backed federal loan, as lenders tighten their standards and pare back their offerings in response to the credit crunch and recent legislation.”

The fact such a distinguished newspaper as The Wall Street Journal would perpetuate such patently false claims about federal student loans caught our attention and convinced us we need to address head on the lenders’ arguments.

(1) Are Students with Poor Credit in Danger of Losing Access to Federal Loans?

Absolutely Not. Federal Stafford student loans are universally available to students, no matter what their credit scores. In fact, banks are forbidden from denying federal loans to students because of their credit records. Some lenders, like Sallie Mae, have said that they plan to stop offering subprime private, non-federal college loans to students at trade schools. But as we’ve said before, this is actually good news, as disadvantaged students with poor credit ratings should never have been stuck with high-cost private student loans to begin with.

(2) But Haven’t Some Lenders Announced That They Will Stop Offering Federal Loans?

Yes, but only a few and so what? About a half-dozen of the thousands of lenders that participate in the FFEL program have said that they will stop offering federal loans, or limit their participation in the program. The College Loan Corporation, which began as a marketer of consolidation loans, is the biggest lender to drop out so far.

Frankly we don’t find this news to be surprising or alarming. For years, the government, with its overly generous subsidies to lenders, propped up loan companies that did not operate as efficiently as they could have. In the end, this is a business, and lenders should compete to see which companies can deliver government-backed loans at the cheapest cost to taxpayers.

(3) Is it True that Students Don't Have Any Alternative but to Borrow Federal Loans from Commercial Lenders?

No, there is an alternative. Students can obtain federal loans directly from the government through the Direct Loan Program. More than 1,000 colleges currently participate in direct lending, and the program now accounts for about 20 percent of the total student loan volume.

A major advantage of direct lending is that the government does not disciminate between and among borrowers. So if lenders begin to redline -- refusing to provide loans to students at community colleges or trade schools, for example -- colleges can always switch to direct lending to ensure that federal loans remain available to their students.

Another big advantage of direct lending is that the government funds the loans directly from the federal Treasury. As a result, it doesn't sell loans to investors through the securitization market, which is extremely shaky right now, to finance its loans, as do some commercial lenders.

Conclusion

To be perfectly clear, the sky is not falling on federal student loan availability -- no matter what the loan industry and its supporters on Capitol Hill claim. Don't be fooled by attempts to conflate the private student loan and federally-guaranteed student loan marketplace, even if false claims appear as fact in The Wall Street Journal.

In its frenzy to report on the subprime mortgage crisis' impact, old media is getting the student loan issue wrong and alarming parents. Hopefully, other news outlets won't be so easily fooled. Federal student loans are universally available. They will continue to be. And as of this moment, private student loans are widely available well. But the latter could change.

The Career College Association's Misleading Arguments

Stephen Burd — Wed, 06 Feb 2008 00:00:00 -0500

Last week, we argued that Sallie Mae's decision to stop engaging in subprime student lending at some of the most scandal-ridden chains of for-profit colleges is good news for low income and working class students, not bad. Disadvantaged students with poor credit ratings should never have been stuck with high-cost private student loans, particularly ones with interest rates and fees exceeding 20 percent.

[slideshow]The Career College Association, which lobbies on behalf of these proprietary school chains, disagrees with our assessment. The group's leaders say the move by Sallie Mae and some other lenders to stop providing subprime loans to high-risk students at the schools it represents will "foreclose access to higher education for thousands of borrowers."

"Our member institutions tell us that many lenders have stopped subprime student lending and may stop private lending altogether," Harris Miller, the association's president, wrote in a news release. "Their retreat may leave many students unable to finance the balance of their educations."

To avoid a "crisis" that will jeopardize "the last, best chance of many students to earn a college degree," Miller argues that lawmakers should, among other things, consider reversing some of cuts Congress made last fall to the subsidies that lenders receive for participating in the Federal Family Education Loan (FFEL) program. He also calls on legislators to back off their attempts to eliminate the types of sweetheart deals between colleges and FFEL lenders that have caused so much controversy over the last year.

We are confident that Congressional leaders will ignore such misguided advice. But just in case they waver, we'd like to offer our responses to some of the group's most outlandish claims:

Congressional subsidy cuts caused a "crisis"

False. Sallie Mae decided to stop offering subprime private loans to students at poorly performing trade schools because the financially-struggling loan giant has been taking huge losses on those loans. Unlike the case in FFEL, the federal government does not insure private loans, nor guarantee their profitability. Sallie Mae is on the hook when borrowers default on these loans. And by all accounts, defaults on subprime loans are growing alarmingly.

Truth be told, Sallie Mae took a huge gamble in making these risky loans in the first place. The company appears to have viewed these loans as a "loss leader," meaning that it was willing to have a large number of private loans go into default in exchange for becoming the exclusive provider of federal and private loans for the tens of thousands of financially-needy students that these huge chains of for-profit trade schools serve. Now Sallie Mae is paying the price for its gamble and predatory practices -- spending hundreds of millions of dollars to cover losses on bad loans should never have made and have burdened many, many borrowers.

Student loans are drying up at for-profit colleges

Mostly false. Students who attend for-profit trade schools that participate in the federal financial aid programs are in absolutely no danger of losing access to government-backed student loans. As of now, Sallie Mae has said that it will stop providing subprime private loans to students at trade schools. But even if Sallie Mae and every other FFEL lender refuse to serve these students, nothing is stopping these schools from entering the federal Direct Loan program. One of the major advantages of direct lending, which is run by the Department of Education, is that it does not engage in redlining.

As for maintaining access to private loans, only those chains of for profit schools that routinely pushed high-risk students to take out subprime loans -- such as Career Education Corporation and Corinthian Colleges -- appear to be in trouble. More respectable chains like Devry Inc. pretty much shrugged off the news, because only a small proportion of its students received subprime loans.

Students' access to college is threatened

False. Low-income and high-risk students do not have to rely on private loans to go to college. Between federal student loans, which are universally available, and federal grant aid, over a thousand state and community colleges are within reach. Tightened credit markets will cause some low-income students to reconsider where and how much they'll pay to pursue a postsecondary education but will not in a widespread way impact their decision to pursue a postsecondary education because of the availability of federal aid and of low-cost public colleges.

If low-income, high risk students attend a trade school with the help of an expensive private loan and then drop out, they will be in very, very bad shape -- saddled with debt and with little in the way of a quality post-secondary education. Not all trade schools are of low quality, but students should be especially careful when choosing an institution in this sector and assuming an expensive private student loan in furtherance of their post-secondary education plans.

We cannot emphasize enough that if students have no other choice but to borrow private loans to attend for-profit colleges, then they can and should consider seeking training at more affordable schools, such as community colleges.

Bottom Line:

As policymakers, journalists, and others evaluate the Career College Association's arguments, they should keep in mind that the group's ultimate goal is to protect the profitability of its member institutions, whether or not they are helping or hurting students.

Roundup: Week of January 28 - February 1

Ed Policy — Fri, 01 Feb 2008 00:00:00 -0500

PHEAA May Pay $15 Million For 9.5% Loan Payments

The Department of Education has asked the Pennsylvania Higher Education Assistance Agency (PHEAA), one of the country's largest nonprofit student loan providers, to repay as much as $15 million in federal payments it improperly obtained by exploiting a subsidy program that guaranteed loan providers a 9.5 percent rate of return on government-backed student loans. The request comes two months after an audit by the Department’s own Inspector General found that PHEAA had improperly obtained $34 million in subsidy payments. The Department rejected these findings and suggested the $15 million price tag but is ultimately letting PHEAA decide how much it has to repay. A PHEAA spokesman suggested to The New York Times that the lender may end up with "zero liability." PHEAA is the first party in the 9.5 scandal to be held financialy accountable for its actions. In 2006 another lender, Nelnet, was caught with $278 in improperly obtained Department funds. The Department asked for the money back, but then let Nelnet off without paying anything. In light of Nelnet’s free pass, Rep. George Miller, the California Democrat who is chairman of the House of Representatives Committee on Education and Labor, called the PHEAA request "a step in the right direction."

25 HBCUs Send Letter to House Ed Committee in Favor of Default Rate Change

The presidents and chancellors of 25 historically black public colleges and universities sent a letter on Tuesday to the leaders of the House Education and Labor Committee supporting a provision in a bill reauthorizing the Higher Education Act that would extend the window the federal government uses for measuring student loan defaults from two to three years. By sending the letter, which was also signed by the American Association of State Colleges, the leaders of these colleges sought to undercut arguments being put forward by for-profit college lobbyists -- who are vigorously opposing the amendment -- that historically black colleges would suffer if the provision is enacted. "This amendment will provide more meaningful and accurate information that will help institutions, lenders, and the Department of Education help students avoid student loan default," the black-college leaders wrote. "Default is avoidable, and we know that student borrowers usually default because they are not aware of all the student loan repayment options afforded to them under the law." The House is expected to take up its version of the Higher Education Act legislation next week.

Sallie Mae Settles

Sallie Mae has reached an agreement with its onetime buyers, ending a months-long legal battle and injecting some needed credit into the embattled lender. As a result of the settlement, Sallie Mae dropped a lawsuit it had filed against a consortium of potential buyers — including Bank of America, JP Morgan Chase and the private equity firm J. C. Flowers & Co. — after they backed out of the proposed $25 billion buyout deal in October. As part of the agreement, the consortium will refinance about $30 billion of Sallie Mae’s debt. The settlement is good news for the financially-troubled lender, which posted a $1.6 billion loss for the fourth quarter last year and recently announced it will cut back on its "subprime" student loans.

Asian Americans, Not Whites, Gain When Affirmative Action Axed

Asian-Americans, not whites, gain the most when affirmative action is eliminated from college admissions processes, according to a forthcoming study (summarized in the Chronicle of Higher Education, subscription required). Using enrollment data from 1990 to 2005 at the University of Florida, the University of Texas at Austin and the University of California campuses at Berkeley, Los Angeles, and San Diego, the study found that enrollment of blacks fell by up to 50 percent after the schools eliminated race as a factor in admissions decisions. Asian-Americans, the same data shows, filled four out of every five spots previously held by black students. For example, at UC-Berkeley, enrollment of Asian-Americans rose from 37 percent in 1995, the year before a ban on affirmative action went into effect, to 47 percent in 2005. The study will be published next week in InterActions: UCLA Journal of Education and Information Studies.