Private Loans

Guest Post: No Relief in Sight for Private Loan Borrowers

Ed Policy — Thu, 04 Sep 2008 16:57:00 -0400

[Editor's note: At a time when loan industry advocates and the news media are raising alarms about private student loan providers tightening their lending standards, we at Higher Ed Watch believe it's important to remind readers about the dangers these high interest loans pose for financially-needy students. In this post, consumer advocate Deanne Loonin warns that these loans are particularly damaging because of the way they have been financed. In the weeks ahead, we will take a closer look at the tactics that some loan companies have used to erode key consumer protections for private loan borrowers.]

By Deanne Loonin

In my experience representing borrowers through the Student Loan Borrower Assistance Project, I have found that a great many borrowers who are in financial distress could get back into repayment if only lenders would work with them to modify loan terms or offer flexible repayment options. At the same time, I have also found private student loan providers to be universally inflexible in granting long-term repayment relief for borrowers. Even in the most severe cases, the creditors I have contacted have offered no more than short-term interest-only repayment plans or forbearances, during which interest on the loans continues to accrue. This experience holds true for both for-profit and non-profit lenders.

Lenders who refuse to offer help often say that they are acting in the best interests of borrowers, who will be harmed, they claim, if they make payments so low that they do not reduce principal. This is a good principle in theory, but not particularly practical for borrowers in severe financial distress, especially those facing long-term problems such as disabilities. Unfortunately, these borrowers have reached a point where they will not be able to repay their loan balances without substantial help and flexibility from their lenders.

Isn't it in the loan providers' interest to provide a helping hand? Don't they benefit if they can ease borrowers, who otherwise will default on their loans, back into repayment?

For the most part, no. And the reason why not is largely because of the way these private loans are financed.

Securitization, the process by which lenders aggregate a large number of notes or other assets and then sell securities backed by those assets, has fueled the explosive growth in private student lending. To get the capital to make the loans, lenders must continually feed investors with new loans. As a result, private student lending has become very much a push market, where products are offered not only in response to consumer need, but also to fulfill investor demand. Loan products are developed for the repackaging rather than to provide the most affordable and sustainable products for borrowers.

The key component in the success of a securitization is the legal separation of the loans in a pool from the entity that originated the loans. The loans are isolated in a trust under the tight management of a trustee, who acts as a fiduciary for the investors in the trust. Servicers are restricted by the terms of the initial pooling and securitization agreements (PSAs) that create the pools and document the powers and duties of the servicers, as well as the limits of the servicers' discretion. A common PSA, for example, gives some discretion in granting loan modifications, but requires the servicer to act in the best interests of investors.

As a result, securitization makes it difficult for financially distressed borrowers to get relief. Lenders don't offer the types of flexible repayment options that are available in the federal loan programs because they appear to believe that doing so will affect their ability to sell their loan packages to investors. And for the most part, the servicers working for the trusts don't have the flexibility, or the willingness to use the discretion they do have, to modify the loan terms or reach reasonable settlements with borrowers.

Securitization is part of an overall "atomization" of the lending process, where so many different parties are involved in origination and servicing that each party along the chain can deny responsibility. As the number of entities holding the loan grows, it becomes increasingly difficult for borrowers to know where to turn for relief.

Other factors compound this problem. Seeking to act in the best interests of investors and keeping a tight bottom line, many servicers avoid high quality problem resolution services because such services are expensive. Instead, servicers tend to use the popular and cheaper call centers and automated phone systems. It is very difficult for a borrower to get timely and accurate information through these systems. In many cases, it is impossible to even figure out who owns the loan and who has the authority to make decisions.

Expecting student lenders to step up and voluntarily resolve these problems won't work. It hasn't worked on the mortgage side either. Congress should act to curb the most damaging aspects of the securitization process and stop servicer abuses.

Kurt Eggert, a law professor at Chapman University and an expert on securitization, has offered solutions worth considering such as eliminating barriers that slow or reduce modifications, pressuring investors into agreeing to changes in PSAs that allow modifications, and inserting these types of clauses in future agreements. Other recommendations include mandating borrower access to a decision maker, requiring information and dispute resolution prior to default, and curbing servicer abuses.

Private loans are costly enough without making it impossible for borrowers to get relief when they need it. Some borrowers need a helping hand. We should not refuse to give it to them.

Deanne Loonin is a staff attorney with the National Consumer Law Center and the director of the center's Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including "Paying the Price: the High Cost of Private Student Loans and the Dangers for Student Borrowers."

Congress Falls Short In Effort to Curb Sweetheart Deals

Stephen Burd — Tue, 05 Aug 2008 16:49:00 -0400

Last week, we identified our favorite and least favorite provisions in the mammoth Higher Education Act reauthorization legislation that Congress overwhelmingly approved on Thursday. Neither list, however, included sections of the bill that target the types of "pay for play" conflicts of interest in the student loan programs that Higher Ed Watch helped expose last year. That's because, frankly, we had mixed feelings about the provisions.

The legislation certainly takes some positive steps to safeguard students. It, for example, bars colleges from entering into revenue-sharing arrangements, in which colleges get a cut of each loan their students take out. Colleges are also forbidden from entering into "opportunity loan" deals with lenders -- arrangements in which loan companies waive or loosen credit requirements on private student loans in exchange for becoming the exclusive provider of Federal Family Education Loans (FFEL) on a campus.

The legislation also prohibits colleges from allowing lenders to staff their financial aid offices or to run the call centers that students depend upon to answer their questions about student aid. And it forbids schools from assigning first-time borrowers' federal loans to a particular lender through award packaging or other methods. This should put a stop to some colleges' particularly deceptive practice of providing pre-filled out master promissory notes to incoming students in order to shepherd them toward favored lenders.

In addition, the legislation requires colleges to include at least three unaffiliated lenders on their FFEL preferred lender lists, and two unaffiliated loan providers on their preferred lender lists for private loans. This provision will hopefully give students at least a modicum of choice in picking loan companies from which to borrow.

The bill's authors obviously made a good-faith effort to root out the worst abuses that are occurring. Unfortunately, they did not go far enough. The legislation leaves some extremely questionable practices in place and introduces significant new loopholes that lenders will undoubtedly try to exploit.

For example, the bill bans lenders from giving gifts to financial aid administrators that are worth more than a "de minimus amount." It continues, however, to allow loan providers to make philanthropic contributions to colleges, as long as the donations are not made in exchange for "any advantage related to education loans." While this exemption from the gift ban may seem reasonable, it puts federal regulators in the difficult position of having to assess lenders' motives in making gifts to schools.

In other words, the legislation continues to require the Department of Education to prove that there is a "quid pro quo relationship" between lenders' philanthropic contributions and the loans the schools' students obtain. This is not an easy standard of guilt to prove, and agency officials in recent years have been reluctant to pursue these types of cases without first being handed rock-solid evidence that wrongdoing has occurred.

We have previously argued for a full-fledged gift ban that would bar colleges from receiving any gifts or payments from lenders they recommend to their students or that make or hold a significant share of loans on their campuses. Colleges may not like the solution, but it seems a reasonable price to pay if they want to continue to be in the business of recommending lenders. And loan companies that wish to continue engaging in philanthropy can show their true altruistic spirit by contributing to schools where they don't have any business. Most importantly, establishing such a clear-cut standard would no longer allow the Department of Education to fall back on the claim that these cases are not worth pursuing because they are too hard to prove.

The reauthorization bill also restricts financial aid administrators from acting as consultants for loan companies. It does, however, allow other college officials to perform "paid or unpaid service on a board of directors of a lender, guarantor, or servicer of education loans." Making this distinction treats financial aid administrators as if they act in a vacuum, impervious to the influence of their superiors in deciding which lenders to recommend. This is certainly not the case. In fact, we have heard of plenty of cases in which college presidents and university chancellors have pressured aid officials to do business with lenders with whom they have ties.

Finally, the bill inexplicably weakens Department of Education restrictions that went into effect a month ago on the relationships between colleges and lenders. The Department's regulations prohibited colleges from allowing lenders to participate in the exit counseling sessions schools are required to conduct with college seniors. The legislation allows loan providers to continue to take part as long as college officials are in charge of the sessions and lenders don't use them to try and market their products and services. Similarly, while the Department banned aid administrators from serving on lender advisory boards, the bill allows them to continue to serve on these boards and be reimbursed by lenders for "reasonable expenses."

We are disappointed by the changes because we believe that the Department was on the right track. Bright-line standards are needed to help the agency ensure that financial aid administrators are fulfilling their core obligation to provide impartial advice to students. Without clear-cut prohibitions, federal officials will have great difficulty ensuring that lenders and colleges are complying with the law. For example, will they have to monitor individual exit counseling sessions to ensure that lenders are sticking to the rules? Or will they continue to take it on faith, as they have done for way too long?

So while the bill takes some positive steps to address the loan scandals, ultimately we believe it does not come close to achieving its goals. We hope that Congress will be willing to take more aggressive action if the sweetheart deals persist and students continue to be harmed by these practices.

A Few of Our Favorite Things (From Final Higher Ed Bill)

Ed Policy — Wed, 30 Jul 2008 17:27:00 -0400

By Ben Miller, Stephen Burd, and Sara Mead

A decade after its last reauthorization and five years since an updated version was due, a new version of the Higher Education Act is finally ready for Congressional passage. With both chambers set to vote on the bill this week, Higher Ed Watch will take a closer look at various parts of the legislation over the next two days. Today, we praise lawmakers for doing the following:

Putting Teeth Into Loan Auctions

Last year, Congress created a groundbreaking pilot auction program that uses market forces to set student loan subsidy rates for lenders making federal PLUS loans to parents and graduate students. With about a year left to enact the pilot project, lawmakers have added penalties for lenders who win an auction and then back out. The bill allows the Education Secretary to punish lenders that violate the terms of the auction agreement by one of the following methods: fining the lender for any additional costs needed to find and subsidize a replacement PLUS loan lender; banning the offending lender from future auctions; or, kicking them out of the Federal Family Education Loan (FFEL) program entirely. We particularly like the fact that the Secretary can retrieve the fine by reducing subsidies paid to the lenders on other FFEL loans or having another federal agency garnish other subsidies the lender might receive. While we have some complaints about the language (it doesn't, for example, address the PLUS loan auction bidding cap, which needs to be more flexible to encourage robust bidding in a range of financial market conditions), overall, we believe that this provision is an important step forward in getting this pilot program off the ground.

Adding Key Protections for Private Loan Borrowers

The reauthorization legislation takes a stab at addressing concerns that students borrowing high-cost private loans frequently don’t understand the terms and conditions of these loans before taking them out. Under the bill, lenders would be required to provide clearer information about the interest rates and fees they charge and to inform potential applicants about the availability of cheaper, safer federal loans. Borrowers would have up to 30 days, after a private loan offer is made, to decide whether or not they want to take out the loan, and another three days, after the loan is consummated, to cancel it. In addition, the measure would ban lenders from branding private loan products with a college’s name or logo in a way that implies the school has endorsed the loan. The measure would also bar lenders from penalizing borrowers who pay off their private loans early. These are all good provisions. The bill, however, does not goes far enough in addressing the fact that large numbers of students take out private loans without exhausting their federal student loan eligibility first. We also are extremely disappointed that the measure doesn’t do anything to help financially-distressed borrowers carrying unmanageable levels of private loan debt. Still, this legislation makes a good-faith effort to confront this problem. And that’s a start.

Banning Opportunity Loan Deals

The legislation would forbid colleges from entering into sweetheart deals with lenders in which loan companies agree to waive or loosen credit requirements on private student loans in exchange for becoming the school's exclusive federal student loan provider. These types of harmful "opportunity loan" arrangements give lenders a major incentive to provide subprime private loans to high-risk borrowers. The damage has been particularly grave at some of the most scandal-ridden chains of for-profit colleges, where disadvantaged students with poor credit ratings have been stuck with loans with interest rates and fees exceeding 20 percent. Now many of these borrowers are in default and wishing they had never pursued a post-secondary education in the first place. While this legislation won't do anything for those borrowers, it will hopefully prevent students from being victimized by such predatory lending practices in the future.

Maintaining a Watchful Eye on College Costs

The legislation has two tactics for targeting the rising cost of college: penalizing states that don't live up to their end of the bargain and shaming colleges that raise their prices too high. The bill holds states accountable through a "maintenance of effort" (MOE) provision, which withholds funds from states that fail to maintain their levels of spending on higher education. States in violation of MOE would be ineligible for College Access Challenge Grants, a new $66 million program included in the College Cost Reduction and Access Act that is only funded through fiscal year 2009. With falling state support a major driver of massive tuition hikes and questionable revenue deals, the MOE provision, albeit an extremely weak one, should provide at least a small incentive for states to avoid slashing higher education funding.

The bill also tackles college costs by requiring the Education Department to publish an annual list of the top 5 percent of colleges with the highest tuition and fees and net price, along with those with the largest percentage change in tuition and fees and net price over the preceding three years. Lists would be disaggregated by type of institution, though not by region. Colleges with the highest percentage increases would have to provide the Education Secretary with a report explaining factors behind those price increases, and steps they plan to take to limit them in the future . These lists would provide students with an idea of which schools are likely to hike tuition, but also make colleges think twice before jacking up their prices. The provision is more thoughtful than previous efforts because it would not penalize state colleges that don't have any control over setting their tuition rates.

Curbing Textbook Prices

At an average annual cost of $900, textbooks are a major expense for students who are already struggling to keep up with ever-rising college prices. This legislation aims to drive down textbook prices by helping colleges and students make better-informed decisions. The bill would require publishers to disclose any major revisions in new editions of textbooks to individuals making purchasing decisions. This should help colleges decide whether it makes sense to order the latest editions, which are more expensive and less likely to be available used. Publishers would also be required to sell supplementary materials and textbooks separately. Separating out bundled materials should decrease student costs by allowing individuals to purchase a book without having to also pay for expensive companion items. The bill also requires colleges to tell students the name and cost of textbooks used in a given course by posting such information on online course schedules. Providing this information before classes start gives students time to look for copies of the books online, where they can often be purchased for less. We are hopeful that these changes will bring some relief to students.

Making Teacher Preparation Programs More Accountable

When Congress passed the Higher Education Amendments Act of 1998, it took unprecedented steps to improve the quality of teacher preparation programs operated by institutions of higher education. This included providing funding for teacher quality enhancement and requiring teacher preparation programs to report annual pass rates for their students on state teacher licensure exams. Unfortunately, the law's accountability provisions, as implemented, contain an enormous loophole that allows many institutions of higher education to report pass rates of 100 percent by only counting students who have already passed the tests as "program completers." The proposed legislation takes steps to close that loophole, by requiring teacher preparation programs to report on "the percentage of students who have completed 100 percent of the nonclinical coursework and taken the assessment who passed such assessment," and "the percentage of all students who passed such assessment." The legislation would also require teacher preparation programs to report on the average scale score their students obtain on teacher licensure exams. Because teacher licensure exams are not especially rigorous, these are modest steps to improve accountability for teacher preparation programs, but they are steps in the right direction. As the only federal policy that seeks to measure the educational outcomes of higher education programs, it provides a potential foot in the door for broader accountability in the future.

Preventing Rip-Offs by the Department of Education

The legislation would require the U.S. Department of Justice to review any settlements made by the Education Secretary that exceed $1 million. This provision, which was first introduced as an amendment to the House of Representatives version of the legislation by Rep. Tom Petri (R-Wisc.), is meant to help prevent the kind of abuse of taxpayer funds that occurred last year when Education Secretary Margaret Spellings allowed the loan company Nelnet to keep $278 million in subsidy payments that it had illegally billed the agency as part of the 9.5 percent student loan scam. Such a provision would also have been helpful back in 2004 when the Education Department gave the University of Phoenix a slap on the wrist, even though it found the for-profit higher education giant guilty of violating a law prohibiting colleges from giving "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments." We applaud Congress for trying to inject some accountability back into the Education Department.

So what did Congress get wrong with the bill? Tune in tomorrow to find out.

Obama's Disappointing Omission

Stephen Burd — Wed, 09 Jul 2008 21:59:00 -0400

Yesterday, Sen. Barack Obama (D-Ill.) unveiled plans to rewrite federal bankruptcy laws to make it easier for financially-strapped senior citizens, military families, and individuals suffering medical emergencies to get relief from debilitating debts. While we are pleased that the presumptive Democratic presidential nominee is proposing to overhaul the 2005 bankruptcy bill, which was a glaring example of politicians putting corporate interests over regular people, we urge him not to forget another group who desperately needs help -- borrowers who have taken on unmanageable levels of private student debt and now find themselves in severe financial distress.

As we have noted previously, Congress tucked a provision into that bankruptcy bill making it extremely difficult for borrowers to discharge private student loans. That special provision was added in a secret conference committee, without any public debate or notice.

For most unsecured debt, a borrower who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of various loans. But there is a short list of debts that the law subjects to a different status, allowing discharge in only the most extreme circumstances. The government, for example, makes it nearly impossible for people to escape child support responsibilities, overdue taxes, and criminal fines.

Federal student loans also can't be discharged. There's at least some justification for providing federal loans that status since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death, and disability. But there is no good reason for private loans to be accorded the harshest bankruptcy status.

To be clear, we're not advocating allowing borrowers to claim bankruptcy willy nilly in order to avoid student loan repayment. Our view is that private student loans should not be treated any differently than other forms of consumer debt when it comes to bankruptcy. Individuals who borrow private loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.

Shielding private loans from bankruptcy in most circumstances means that repayment demands extend essentially forever, leaving even the most destitute borrowers with no way out. Bankruptcy exemption also makes private student loan providers less cautious about peddling high cost loans to low-income and working-class students who may never be able to repay them. In other words, it promotes the kind of predatory lending that Sallie Mae and some other loan companies have been engaged in at scandal-ridden, for-profit trade schools. Treating private loans like other forms of unsecured debt would at least cause lenders to think twice before providing high-interest loans to people who can ill-afford to take on this debt.

Speaking on Tuesday at a high school in Powder Springs, Ga., Obama attacked his presumptive Republican opponent Sen. John McCain (R-Ariz.) for supporting the 2005 bankruptcy bill. "Sen. McCain does not believe the government has a real role to play in protecting Americans from unscrupulous lending practices," Obama said. "He would continue to allow the banks and credit card companies to tilt the playing field in their favor, at the expense of hardworking Americans."

If Obama is serious about protecting people from "unscrupulous lending practices," he should come to the aid of financially-distressed private student loan borrowers. For that matter, if McCain wants to prove Obama wrong and show that he is not beholden to the lending industry, he should offer a helping hand to these borrowers as well.

So far, neither Democrats nor Republicans in Congress have shown that they have the guts to stand up to the student loan industry and do what is right. Such change may only be possible with presidential leadership. Obama and McCain, are you up for it?

A "Key" Development in the Case of Silver State Helicopters

Stephen Burd — Tue, 17 Jun 2008 19:15:00 -0400

For a long time we have known that KeyBank has played a leading role in aiding and abetting the efforts of sham for-profit trade schools to scam vulnerable students. What we didn't realize, however, was the integral role that KeyBank played in fueling the growth of Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight-school chain that left its 2,500 students in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation. Most of these students are now stuck having to repay nearly $70,000 in high-cost private loan debt for training they did not receive.

Thanks to a class-action lawsuit filed by several former Silver State students in California, we recently learned that KeyBank was Silver State's exclusive private student loan provider from 2002 to 2005, a time when the flight-school chain grew by "an astounding 2,786 percent." KeyBank appears to have severed its ties to Silver State in 2005, forcing the flight-school chain to find other lenders to provide private loan funds to its students. As we previously reported, Silver State then forged an exclusive arrangement with the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA), to make and service the loans.

Key Bank's involvement with Silver State is far from the first time the Cleveland, Ohio-based national lender has assisted the efforts of sham trade schools to scam students.

These practices first came to light several years ago when dozens of unaccredited computer training schools unexpectedly shut down, leaving their students 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 KeyBank and the student loan giant Sallie Mae to provide their students with tens of thousands of dollars of private loans to cover the full cost of tuition before any classes were provided.

In a 2003 article in the trade journal The Consumer Advocate, the consumer lawyer Tom Domonoske explained how the easy availability of private loans helped disreputable schools thrive by allowing them to attract students without having to worry about enrolling in the federal student loan programs and the government regulation such participation entails.

Under pressure from consumer advocates and some state regulators, Sallie Mae eventually agreed to provide some repayment relief to the students left in the lurch after these computer schools unexpectedly shut down. KeyBank, on the other hand, has vigorously (and often successfully) resisted shafted students' demands for debt forgiveness for classes they never attended. In doing so, the corporation has systematically denied borrowers basic protections that are in federal law to safeguard consumers from the most predatory practices of lenders.

Now it turns out that KeyBank's focus has not just been on providing liquidity to unlicensed and unaccredited computer schools but also to unregulated flight schools as well. Silver State appears to be only the tip of the iceberg. According to the class-action lawsuit, KeyBank provided private loans to students attending the Makarion Institute of Aeronautics, as well as the Sierra Academy of Aeronautics and Airman Flight School in Norman, Okla. -- all of which shut down unexpectedly, leaving students with a heavy debt load and without the training needed to become certified pilots.

As part of the class-action lawsuit, lawyers for the Silver State students accuse KeyBank of violating the federal Racketeer Influenced and Corrupt Organizations (RICO) Act by using the "U.S. mail and wires" to engage "in a deliberate pattern and practice of aiding and abetting fraudulent vocational schools that aggressively induce students into obtaining loans with KeyBank."

We do not know if this line of argument will prevail. But at Higher Ed Watch, we firmly believe that federal and state regulators, as well as policymakers, need to understand the essential role KeyBank played in the proliferation of sham schools, and the harm that the bank, in providing liquidity to these disreputable schools, has done to countless low-income and working-class students who were just trying to better their lives.

In future posts, we will take a closer look at the tactics that KeyBank and other private-loan providers have used to erode key consumer protections for borrowers. Stay tuned.

Mailbag: Private Loan Borrowers in Distress

Ed Policy — Thu, 05 Jun 2008 15:45:00 -0400

At Higher Ed Watch, we hear regularly from financially-distressed borrowers with private student loans who believe they have been victimized by lenders' predatory practices. Much of that feedback comes in the way comments we continue to receive on blog posts that ran more than a year ago.

At a time when the federal government is providing a major bailout of the student loan industry, we think it is important to highlight the experiences of borrowers who are struggling with unmanageable levels of high-cost, private student loan debt. Surely borrowers such as these could use a helping hand too.

Many of our readers have shared stories with us about the seemingly inescapable burden these loans have had on their lives. Here are a few examples:

"I have borrowed about $50,000 in private loans. My estimated monthly payment for both loans is right around $800 and I earn around $1200 monthly. You guys do the math. I know I have a responsibility, but all I wanted was an education, not a $375,000 debt that i'm gonna carry all the way to my grave...At 18, I had no idea what I was doing to myself!!" (I have borrowed, May 7, 2008)

"My husband and I have over $200,000 in private student loans and over $150,000 in federal student loans. I am currently not working and my husband is a teacher. When our loans enter repayment, the monthly payment will be about $3,000! My husband doesn't even make that much per month and my degree (HISTORY-Lib. Arts) will not land me a high-paying job...We are currently driving one car that is 13 years old and we have two children in elementary school. HELP!" (Massive Debt, April 10, 2008)

"I'm a single mother that is not receiving child support. I have $39,000 of private loans and $17,000 in federal loans. I'm in default with my private student loans based on them not working out a payment plan with me. I have to pay $717 a month on my private loans -- mind you this does not include my federal loans. After taxes, I make about $1,700. This makes me hate the fact I even went to school and received an education." (Private Student Loans, May 8, 2008)

"I took out my loans two or more years ago. Part of that time I was working on my master's degree, but then put it on hold when I had my son in March of 2007. Since then I have been harassed, threatened, and basically called a liar and scam artist by Sallie Mae, when I was unable to start payment of the private loans. They want over $1000 a month and have now bullied me into putting my loans in forbearance twice, which they were kind enough to waive the $100 forbearance fee, but tacked on nearly $5000 each time for the forbearance itself. I am drowning in all this debt, I am disabled and my disability got worse after I gave birth and has been on a downward spiral ever since. I live on $600 a month from disability, so obviously I can not pay over $1000 a month to Sallie." (Disabled and Desperate, May 7, 2008)

Some of our readers say they fell victim to aggressive direct-to-consumer loan companies that never made them aware of their lower-cost federal loan options. Many of them acknowledge that they made bad decisions, but also believe that the loan companies took advantage of them:

"I am a victim of these financial institutions that are targeting college students with good credit. I was able to get $52,000 worth of loans over the internet never speaking to anyone. The terms were very unclear. I had no one to explain to me the devastating impact this would have on my life. By the time that these loans went into repayment status, I owed about $73,000. WOW!!! That is $20,000 worth of interest that they have racked up! My payment which I thought would be around $350 per month is over $700. There was no one to guide me and to explain what a libor rate is. I thought that my interest rate would be 4% and calculated like a regular federal student loan. I was so wrong and now my family is suffering because of this poor stupid choice that I made...I was only 22 years old and had no idea what a life changing event this would be." (Private Student Loans, April 12, 2008)

Others blame the colleges they attended for encouraging them to take on heavy loads of private loan debt with their favored lenders:

"I used Sallie Mae because the school I went to spoke of them like a god company. I borrowed $66,000 from them unfortunately, and now the payback amount is $266,000. (And they get away with it, April 23, 2008)

"I came to America to chase a dream and become a better person in this competitive world. I enrolled in the California School of Culinary Arts and being naive they recommended Sallie Mae to me. I wish I knew better. I was excited since I had no co- signer or good credit and I had the opportunity to get money for school. I jumped onto the train. I was told my payments would be about $200 dollars. Well, I am now looking at $500 dollar bills from Sallie Mae. I earn $2000 dollars a month. I can't even afford to send my people back in Africa some form of help because I basically have nothing left after I pay my bills. " (Sallie Mae worse than Enron, May 9, 2008)

And most cannot understand why the federal government treats private student loans differently than other forms of consumer debt by making it so difficult for financially-distressed borrowers to be able to discharge these loans in bankruptcy.

"Students should be able to discharge their student loans in bankruptcy as they can other non secured debt. Everyone knows there is risk involved with student loans and everyone should play by the rules that any other entity is forced to when it comes to loans. Sallie Mae is a company. A non government entity that is in the business of making money. The sooner people start realizing what is happening to the people of this country, the sooner things may turn around." (Will It Ever End?, December 11, 2007)

We appreciate all of the comments we have received on private loans and other items. Please keep them coming.

More Silver Lining from the Credit Crunch

Stephen Burd — Wed, 04 Jun 2008 15:50:00 -0400

The Career College Association continues to breathlessly proclaim that the decision by some major lenders to stop providing subprime private loans to students attending for-profit trade schools of dubious quality is leading to a major college access crisis.

"In career colleges across the country, college plans are coming unraveled," Harris Miller, the association's president wrote in a recent column in the newspaper Politico. "The academic equivalent of foreclose signs are going up across the land."

Sounds scary. But if you listen to what the leaders of some of the largest chains of for-profit higher education companies are telling investors, you get an entirely different story.

For months, some trade school chains, such as Capella University, Devry Inc., Strayer College, and the University of Phoenix, have been going out of their way to assure Wall Street that the credit crunch has had little to no effect on students attending their institutions. "We are really not seeing any impact on our business," Stephen Shank, Capella's chief executive officer, told The New York Times in February.

But even those companies that are feeling the pinch -- because they have been aggressively steering financially-needy students to take out high-interest private loans -- are telling investors that they are not panicked. In fact, some are even acknowledging that the credit crunch is forcing them to act more responsibly.

Take Career Education Corporation, for example. During a recent earnings call with financial analysts, Gary McCullough, the company's relatively new president, said, "We continue to believe that our company can emerge from this period stronger and better positioned for the future."

How does the company plan to become stronger? First, McCullough said, by becoming more discerning about the students they enroll -- making sure, for example, that they have the desire "to be successful in their academic pursuits." And second, by taking steps to ensure that students fully understand their repayment obligations. For the first time, the company is requiring private loan borrowers to seek out co-borrowers [In the past, the company has encouraged lenders to waive that requirement apparently to speed up the enrollment process].

Why the changes? Because now Career Ed has more of its own skin in the game.

In January, Sallie Mae announced that it was terminating a long-term deal it had with Career Ed to provide high-cost private student loans with interest rates and fees of more than 20 percent to low income and working class students who normally wouldn't qualify for them because of their subprime credit scores. Sallie Mae officials said the student loan giant was abandoning the recourse loan arrangement -- and others it had forged with similarly questionable for-profit trade schools -- because the lender had been taking huge losses on those loans. In fact, nearly half of students at Career Ed who borrowed these loans are expected to default on them. And there have been serious allegations that recruiters at the school chain had duped disadvantaged students into taking on subprime private loans without adequately explaining to these students what their repayment obligations would be.

To make up for the loss of Sallie Mae, Career Ed announced that it will make private loans to subprime borrowers itself. The company can do this, McCullough stated, because "we have a strong balance sheet." But now that the company will be entirely on the hook for these loans, it will be more careful about who it lends to. "These students will be at higher FICO bands than those who traditionally have received loans through the recourse program," he said.

So by tightening its lending standards is Career Ed contributing to an impending access crisis? That's not how McCullough sees it. "It's in everyone's best interest," he said, "that we focus on students that have both the desire, the financial capability, and who are prepared to be successful with their academic pursuits."

In other words, it doesn't make sense to push high-cost private loans on the most disadvantaged students who are at an extreme risk of dropping out and of being unable to repay their loans. As we at Higher Ed Watch have said before, the highest risk students would be much better off starting out at lower cost schools, like community colleges, that wouldn't require them to take out private loans to attend.

Promoting access by condemning students to a lifetime of private loan debt they will never be able to repay is a foolhardy exercise. Hopefully, Career Ed will not forget this lesson when the loan market improves and private loan providers come calling again.

Photo used under a Creative Commons license by flickr user MattyP

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.

Where's the Bail Out for Borrowers?

Ed Policy — Thu, 17 Apr 2008 22:39:00 -0400

After Tuesday's surprisingly one-sided hearing before the Senate Banking Committee on the credit crunch, it's clear that Congress is prepared to take steps to add liquidity to the student loan marketplace. But as lawmakers move forward with plans to bailout student loan giants like Sallie Mae, they shouldn't forget about the financially-distressed borrowers who have been victimized by the lenders' predatory private loan practices. Surely, they deserve a helping hand too.

Over the last two years, we at Higher Ed Watch have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt, often before they have exhausted their lower-cost federal loan eligibility. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loan options.

Lenders will deny responsibility until they're blue in the face, but they're the ones who have been feverishly marketing $30,000, $40,000, or $50,000 a year direct-to-consumer private loans to undergraduates. In pop-up Internet advertisements, youtube videos, and television and radio commercials, the companies tout the convenience of applying for private loans but seem to brush by the fact private loans are more expensive than federal loans and lack important safeguards.

Lobbyists for colleges and financial aid administrators place the blame squarely on direct-to-consumer marketers. But many private colleges and high-priced public universities are also putting students in harm's way by including private loans in the financial aid packages they offer students. Packaging private loans gives students the misleading impression that they have no choice but to take out these loans. It also leaves them with the impression that these loans have the colleges' imprimatur and therefore must have pretty reasonable terms, which they seldom do. Worse, some lenders have encouraged colleges to brand the loans with their institutions' names -- which only adds to the confusion.

Perhaps the students who have been hurt the worst have been the low-income and working-class students who were pushed to take out subprime private loans, with rates and fees totaling more than 20 percent, to attend poor-performing trade schools owned by giant for-profit higher education chains like Career Education Corporation and Corinthian Colleges. By all accounts, defaults on these loans are growing alarmingly. And serious questions have been raised about whether these companies have duped disadvantaged students into taking on private loan debt without making them aware of their cheaper loan options first.

Now don't get us wrong. Congress is preparing to take steps that will make private loan borrowing somewhat safer for future students. Lawmakers are finalizing legislation to renew the Higher Education Act that would, for example, ban lenders from co-branding private loan products with a college’s name or logo. The legislation also includes provisions that aim to discourage lenders from making subprime private loans and that would make it easier for colleges to counsel students against taking on private loans prior to exhausting their federal student loan eligibility.

These provisions are all good, but they won't provide any relief to borrowers who have already fallen victim to lenders' predatory private student loan practices. The House had a chance to start to make things right for these students in February but punted. Under pressure from the loan industry, the House defeated a measure that would have allowed borrowers in severe financial distress to discharge their private loans in bankruptcy.

But now that Congress is considering bailing out lenders for past risky financing decisions, we believe that lawmakers have an even stronger obligation to revisit the bankruptcy issue. Private student loans should not be treated any differently from other forms of consumer debt when it comes to bankruptcy. Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.

We also believe that policy makers need to consider efforts to help borrowers who took on private loan debt before exhausting their federal student loan eligibility. They can do this by authorizing the Department of Education to offer a debt swap to these borrowers. Under this proposal, which we floated last month, the federal government could make new unsubsidized federal Stafford loans available for all borrowers (out-of-school or in-school) with private loan debt and untapped federal loan eligibility. These newly borrowed funds would have to be used to pay off existing private student loan debt. Presumably, a debt swap policy would ease the financial burden of private loan borrowers and infuse liquidity into the private student loan market.

These proposals -- for revising the bankruptcy law and authorizing a debt swap -- are reasonable steps that Congress can take to help out private loan borrowers in dire straits. Borrowers with unmanageable debt loads may not be able to hire high-priced lobbyists or lavish lawmakers with generous PAC contributions, but that doesn't mean that they should be left out of the discussions. Because really, if we're talking about a bailout, who's more deserving?

This post was prepared by Stephen Burd and Michael Dannenberg.

Private Loans

Guest Post: No Relief in Sight for Private Loan Borrowers

Congress Falls Short In Effort to Curb Sweetheart Deals

A Few of Our Favorite Things (From Final Higher Ed Bill)

Putting Teeth Into Loan Auctions

Adding Key Protections for Private Loan Borrowers

Banning Opportunity Loan Deals

Maintaining a Watchful Eye on College Costs

Curbing Textbook Prices

Making Teacher Preparation Programs More Accountable

Preventing Rip-Offs by the Department of Education