I recently published a book: "The Student Loan Scam: The most oppressive debt in U.S. History, and how we can fight back" (Beacon Press), and it turns out my timing was excellent. While President Obama's new plan claims to cut out the middlemen banks, they are still wedged firmly in between.
What is most important, however is the continued, astonishing lack of consumer protections that gone unaddressed, will continue to enable massive tuition inflation, and a rapidly growing number of citizens for whom, due to student loan debt, going to college was the worst decision they have ever made. Please come to StudentLoanJustice.Org to find out more.
The federally student loan system has become fundamentally predatory due to the Congressional removal of standard consumer protections, combined with congressionally sanctioned collection powers that are stronger than those associated with all other loan instruments in our nation’s history. These actions by Congress have, predictably, created an inherently predatory, state-sponsored lending and collection system where the motivations of the various functional elements of the system are fatally misdirected. The system that has resulted promotes inefficiency in administration, unchecked inflation, bureaucratic malaise and conflicted oversight. Moreover, the resulting system promotes needless and expensive complexity and redundancies, fails to encourage academic excellence, and ultimately, promotes delinquency and default.
While this system has been extremely lucrative for a few individuals, it causes massive harm not only to borrowers and their families, but also to non-borrowing students and their families, due to the dramatic inflation that the system promotes. The nation suffers a massive cost due to the large amount of wealth trapped in this system, the quality of the education received by the citizens, and the public’s opportunity cost associated with the materialistic career paths that citizens are forced into at the expense of public interest work, and entrepreneurship.
Importantly: this problem exists across both Direct Loan (DL), and Federal Family Education Loan (FFEL) Programs. In the public interest, the consumer protections that were removed by Congress must be restored by Congress at the earliest opportunity. By returning these consumer protections, the motivations of the system’s functional elements will be reoriented such that most, if not all of the deficiencies mentioned above will go away over time.
The Proof:
Congress removed bankruptcy protections, refinancing rights, statutes of limitations, truth in lending requirements, fair debt collection practice requirements (for state agencies) and even removed state usury laws from applicability to federally guaranteed student loans.
Congress also gave unprecedented powers of collection to the industry, including wage, tax return, Social Security, and Disability income garnishment, suspension of state issued professional licenses, termination from public employment, and other unprecedented collection tools that are used against borrowers for the purpose of collecting defaulted student loan debt. Concurrently, Congress established a fee system for defaulted loans that allows the holders of defaulted loans to keep 20% of all payments from borrowers before any portion of the payment is applied to principal and interest on the loan.
While this fee system has provided a massive revenue stream for a shadowy, nationwide network of politically connected guarantors, servicers, and collection companies who have greatly enriched themselves at the expense of misfortunate borrowers, it has caused immeasurable damage to millions of borrowers and their families, who see what started as an unmanageable debt become a financial cataclysm- that debilitates, marginalizes, and ultimately relegates them to a lifetime of financial servitude and despondency in many cases.
Analysis of IRS 990 filings of federal student loan guarantors proves without doubt that the income derived through this fee system is vast, as evidenced by not only the income of the guaranty agencies, but also by the salaries, bonuses, and perks taken by the executives who run them. This fee system is, indeed, the lifeblood of these organizations, who derive at least 60% of their operating income through this legalized wealth extraction mechanism. Clearly, it is in the guarantors financial interest that students default on their loans. If there were no student loan defaults, the guarantors would barely exist.
Additionally, it is often in the financial interest of the lenders that students default. Large lenders, most notably Sallie Mae, derive income from not only lending and servicing operations, but also from guaranty, and collection assets owned by the company. This leads to the common situation where a defaulted loan is paid in full to the lender, becomes vastly inflated with collection costs, and then becomes a revenue stream for the guarantor and collection company...all owned by the very same lender! A defaulted loan clearly can produce far more revenue for the system. It is obvious that this structure gives the lender/guarantor/ collector entities a perverse incentive to default loans rather than providing customer service aimed at helping the borrower avoid default.
Indeed, Sallie Mae’s own annual reports provide compelling evidence of dramatic profiteering from defaulted loans: In the 2003 annual report, Sallie Mae CEO Albert Lord brags to shareholders in his opening remarks that the comany’s record earnings that year were attributable to collections on defaulted loans. The company’s "fee income" increased by 228% between 2000-2005, while their managed loan portfolio grew by only 87% during the same time period. Further there is clear evidence that Sallie Mae, and other loan companies actually defaulted student loans without even attempting to collect on the debt! In fact, Sallie Mae paid $3.4 million in fines as a result of the U.S. Attorney’s office discovering that the company was invoicing for defaulted loans where the borrower was never contacted. Rather, records were fabricated to indicate that the borrower had been contacted. Similar cases were settled with Corus bank and Cybernetic Systems.
Taken together, these cases show irrefutably that there is indeed an interest to default student loans. Further, an employee of the Kentucky Higher Education Assistance Authority, KHEAA, came forward to StudentLoanJustice in 2007, and submitted that the agency managers had purposely marketed loans to poor, disadvantaged communities in the expectation that these citizens would default on their loans, thus be "on the hook" for the fees and penalties that would result-extractable through garnishment of the income sources mentioned previously. The harm this predatory activity has caused borrowers is severe, extreme, and widespread. citizens with defaulted loans have been documented fleeing the country solely as a result of their student loan debt. Others (many others) have been forced "off the grid". Some have even taken their own lives.
There is $40 billion in outstanding student loan debt in the U.S. covering upwards of 5 million loans. Finally, and most importantly, it was reported in January 2004 by John Hechinger (WSJ) that for every dollar paid out in default claims, the Department of Education would recover every dollar in principal, plus almost 20% in interest and fees. Whether this net positive collection rate can be counted as "profit" by the federal government is subject to debate, but at the minimum, it can be said that the federal government is breaking even, overall, on its defaulted student loan portfolio.
Therefore, all entities involved: The lenders, the guarantors, the collection companies, and even the Department of Education, have a perverse incentive for student loans to go into default- solely due to the fact that the borrower has none of the standard consumer protections available to him that exist for all other types of loans in the country.
The result of this wrongly motivated system: despite repeated claims by the Department of Education, the student lending industry (andtheir army of lobbyists), and the universities that defaulted loans rates are at record lows, a 2003 IG report estimated that between 19% and 31% of 1st and 2nd year students would be put into default during the life of their loans. For community colleges, the range was between 30% and 42%, and for for-profit schools, was between 38% and 51%
This is a default rate that far exceeds that of any other type of loan. It is perhaps a conservative statement to say that ultimately, About 1 In 3 undergraduate student loan borrowers will default on their loans. This is an extremely high rate that the Department of Education, lenders, and universities are loathe to acknowledge.
With regards to bankruptcy: There was no basis for removing Bankruptcy protections from student loans in the first place. In fact, it was found that when student loans were treated the same as all other loans with regards to bankruptcy discharge, far less than 1% of federal loans were discharged this way. According to one congressman at the time, the widely advertised accounts of students filing for bankruptcy promptly after graduation was a crisis that existed "only in the imagination". Congress created this artificial, structurally predatory, cruel and unusual lending and collection system. Congress, must therefore assume the the immediate responsibility of fixing it by returning the standard consumer protections that should have never been taken away in the first place. Insodoing, The federal government will, once again, have a financial interest that student loans not default.
This will compel the government to use its considerable influence to compel the universities- in a serious and meaningful way- to both provide a quality education that gives the student the best chance for success, and also to do this at a reasonable cost. Certainly, new methods for encouraging students will result. This will also compel the government to take seriously its oversight role over private lenders (assuming that private lenders will participate in federal student loan programs in the future). While this "good government" model may be frowned upon by current staff at the Offices of Federal Student Aid who have grown comfortable with their conflicted, bureaucratic roles, this is only clear evidence that these individuals are ill-suited for the new model of operations. It is likely that there is an abundance of properly motivated people willing to take over in this case, and at long last, provide inspired service that will ensure the success of the model.
— Alan Collinge
