Elephant in the room: rising, unpayable student debt

For nitty gritty stories about the soul-burdening student debt that cripples the future of an entire generation, see alternet.org: $1 Trillion in Loans? How Student Debt is Killing the Economy and Punishing an Entire Generation. See also this.

Here’s a detailed, enlightening, and quite technical Special Report from solari.com.

A Review of The Student Loan Scam: The Most Oppressive Debt in U.S. History – and How We Can Fight Back by Alan Michael Collinge

By Carolyn Betts and Catherine Austin Fitts

July 11, 2011

The Preface begins:

“The truth is that I never considered student loans to be an especially interesting topic. College debt, I believed, was a necessary evil – to be repaid expeditiously and then forgotten even more quickly. However, what I once thought of as an uninteresting issue has come to dominate my life.”

This highly informative book was written by a 1998 graduate of Cal Tech with three degrees in aerospace engineering who, after a student loan nightmare that took him from an original relatively modest $38,000 Sallie Mae loan to an obligation of $80,000 by 2002 and $103,000 by mid 2005. At that point he started the websitewww.studentloanjustice.org in an effort to hook up with others in similar straits, share stories and become politically active in restoring consumer protections for student loans.

In The Student Loan Scam, we read blood-curdling personal stories from Collinge’s website that should make any parent of a college-bound student re-think any plans to saddle a loved-one with student loan obligations under current law. In the event the typical graduate with student loans does not get a $100,000 a year job right out of school and remain gainfully employed at an increasing salary for the next decade or more, student loan debts could result in financial ruin, loss of professional credentials and security clearances and, in some cases, suicide and debilitating depression.

We find out that the current student loan system is nothing like the one in place when the baby boomers were in college, when Sallie Mae was a quasi-governmental entity with its activities limited by its federal statutory charter. Those loans were made at favorable interest rates and had interest that started accruing only after graduation. Post-graduation, they were serviced in accordance with consumer-friendly servicing standards.

In 1972, the Student Loan Marketing Association (“Sallie Mae”) was formed, with a government charter, as a government sponsored entity (commonly known as a “GSE”). Its purpose, under its federal charter, was to enhance public access to higher education by serving as a secondary market maker, and warehousing entity, for student loans made by private lenders.

Starting in 1996 with the adoption by Congress of the SLMA Privatization Act, Sallie Mae re-organized under a holding company charter with a GSE and non-GSE subsidiaries. The GSE activities were limited and terminated on December 29, 2004. Although, Sallie Mae had been publically traded as a GSE since 1983, subject to the same short-term pressures as any other publicly-traded private company, particularly ones with large trading and derivative operations, privatization released the company from strategic responsibility for the best interests of the students and public good that was implicit in the GSE status. It also started making direct private student loans and acquiring loan servicing companies.

Over the years, the original student loan product gradually morphed into something worse than the worst kind of credit card debt, except that it was even worse than that as the result of the following developments:

(1) Starting in 1978, government-issued or -guaranteed loans and some private student loans became exempt from bankruptcy protection. Later legislation gradually whittled away the types of educational loans that could be discharged in bankruptcy and lengthened the minimum age of student loan that could be discharged. Ultimately, the death knell for student loan dischargeability occurred in 1998, when virtually all education loans, both federal and private, became exempt from discharge. Incredibly, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress expanded the types of loans that are exempt from bankruptcy protection to include not only what we generally think of as student loans, but also virtually any loans a family might use for educational purpose, and derive tax benefits from, under the Internal Revenue Code, termed “qualified education loans”.

(2) Truth in Lending Act (15 USC §1601), state usury laws (now overridden by federal legislation), statutes of limitations and other standard borrower protections were removed from student loans during the 1990s under various the Higher Education Act amendments and other legislation, and default penalties of up to 25% became legal for student loans. Effective in early 2011, “private education loans” became subject to somewhat-abbreviated Truth in Lending Act disclosure requirements, but borrowers who did not receive such disclosures before the regulations went into effect are stuck with the loans they took out.

(3) Beginning at least as early as 1996, the Department of Education entered into contracts with private collection agencies for the collection of federal student loans. Current Department of Education collection contracts provide for collection incentives of 25% of the amount collected on defaulted loans. Although these agencies are subject to the provisions of the Fair Debt Collection Practices Act, sometimes such agencies misrepresent the borrowers’ federally-protected rights and steer delinquent borrowers into collection options that are more profitable to collectors, at the expense of borrowers.

(4) Delinquent student loan payments for federally guaranteed or issued education loans in default (defined for most loans as failure to make payments for nine months) can be collected by the government (Department of Education) through the following garnishments and offsets, without any court order:
a. from a borrower’s or co-signer’s tax refund (which offset is appealable only to the Department of Education),
b. by garnishment of up to 15% of wages,
c. by offset of social security and certain other federal benefits.

(5) Some 19 states enacted statutes that permit licensing authorities to suspend the licenses of defaulted student loan borrowers, making it even more difficult for borrowers, who often have had employment problems, to earn their way out of debt in their chosen professions (for which they usually had taken out the student loans in the first place!). Reportedly, in some states, public employment may be terminated as the result of student loan delinquencies.

(6) A given student’s federal education loans can be consolidated through refinancing only once (unless additional education loans are taken out, e.g.,for graduate school expenses), so there is no way to lower the interest rate through refinancing in the competitive markets.

Making matters worse, Sallie Mae was allowed to acquire some of the largest student loan collection businesses in the country, making a student loan more profitable in default than when it was paid off according to its terms. As explained by Collinge:

By 1998, there was a perverse financial incentive for the student loan servicing companies to do a horrible job of loan administration. The more ineffective the companies’ customer service was, the more likely it became that students would default – and thus, the more money the student loan companies would ultimately make.

By the end of this distressing and enraging exposé, we hope, at least, that Michael Collinge made enough profit from the book to get Sallie Mae and the other student loan industry thieves out of his life forever. Unfortunately, even after his and others’ appearances on 60 Minutesand attention to the rapidly deepening student loan scam by the likes of Ralph Nader, Michael Moore, The Washington Post, New York Times, NPR and Fox TV, investigations by New York Attorney General and the US Senate Committee on Health, Education, Welfare, Labor and Pensions and a series of unsuccessful legislative proposals (referred to as the “Student Loan Borrower Bill of Rights”) to restore standard protections to student loan borrowers, the public outcry has been insufficient to rescue the thousands of victims who are living lives of quiet desperation as virtual indentured servants to the student loan industry.

Why is that? It would appear that it is the result of:

• lobbying activities by lenders, insurers and executives of Sallie Mae, whose personal incomes and corporate profits have increased by leaps and bounds to unconscionable levels since the pre-privatization “good old days” when student loans actually served some educational purpose;

• Congressional representatives willing to sell their constituents down the river in exchange for campaign contributions by the student loan lobby;

• personal aggrandizement and institutional kickbacks received by educators at even the most prestigious of public and private institutions of higher education (e.g., Georgetown, Johns Hopkins, Rutgers, Wake Forest, University of Washington, University of Nebraska, University of Texas and Florida State); and

• graft on the part of high-level Department of Education employees who have been unwisely entrusted with the job of supporting educational opportunities of our most precious of assets, our children.

This is an all-too-common story of foxes guarding the henhouse at the Department of Education, with political appointees in high-level decision-making, oversight and enforcement positions having incurable conflicts of interest as they pass through the government/private financial industry revolving door. It is the tale of media complicity in the perpetuation of urban legends about thousands of newly-minted doctors who, we are told, promptly upon acquiring their much-coveted medical degrees, skipped out on their moral obligations to repay their student loans by declaring bankruptcy. It is a repetition of the securitization evils wrought by Wall Street whiz kids that brought about the housing crisis, with passive investors owning financial assets that have spun out of control. It is a warning signal about how a government program seeking to expand the unquestionable benefits brought about by the most economically productive and job-stimulating program of all time in the U.S. (i.e. the GI Bill) can become the instrument of evil.

Given what we have learned from this book, topics that deserve to be examined more deeply include:

• some of the history of the now-corrupt student loan industry, from its roots in a government-sponsored entity established for noble purposes;

• the little-understood legal traps that make participation in the student loan program in its current form not only risky but outright foolhardy for any but the most financially sophisticated of borrowers (who probably don’t need this kind of financing anyway, because they have made millions outsmarting the rest of the market);

• specific products that fall under the student loan/assistance umbrella (e.g., Pell grants, Stafford loans, Perkins loans, Direct Loan Program loans, Federal Family Education Loan Program (“FFELP”) loans, Parent Loans for Undergraduate Students (“PLUS”) and Health Education Assistance Loans (“HEAL”) and what to expect if you become subject to the terms of these financing vehicles;

• the market manipulation, crisis-level educational pricing escalation, proliferation of for-profit colleges that prey on the poor and disadvantaged and other adverse results that occur when government guaranties, insider deals and corporate welfare laws come into conflict with free market forces; and

• the backgrounds, personal networks and business interests of industry players, the extent of their unconscionable profiteering at the expense of our nation’s youth, their conflicts of interest and some of the other business ventures they are involved in.

This book inspired us to look more closely at a subject we had taken for granted. We hope that you will vote with your money and feet, protect your loved ones from decision-making based on inaccurate information about the trade-offs in the educational and job markets and have compassion and generosity towards the many people who already have fallen into the student loan and servicing trap.

Links

Inspired by this book, Solari has made a $100 donation to Student Loan Justice. You can also make a donation at their website. Just click here

Sallie Mae website:
www.salliemae.com/

Sallie Mae (SLM Corporation) Wikipedia entry:
en.wikipedia.org/wiki/SLM_Corporation

Higher Education Act Wikipedia entry:
en.wikipedia.org/wiki/Higher_Education_Opportunity_Act_of_2008#2008_reauthorization

Chart SLM Corporation of common stock prices: solari.com/blog/?p=11649

Purchase book on Amazon: www.amazon.com/Student-Loan-Scam-Oppressive-History/dp/0807042293

Deane Loonin, Alys Cohen, National Consumer Law Center, “Paying the Price: The High Cost of Private Student Loans and the Dangers for Student Borrowers” (March 2008): www.studentloanborrowerassistance.org/blogs/wp-content/www.studentloanborrowerassistance.org/uploads/File/Report_PrivateLoans.pdf
Example of a private student loan promissory note (courtesy of National Consumer Loan Center website):www.studentloanborrowerassistance.org/blogs/wp-content/www.studentloanborrowerassistance.org/uploads/File/Doc4_KeybankPromNote.pdf

Collection agencies under contract to the Department of Education for federal education loan collection(courtesy of the National Consumer Law Center website): www2.ed.gov/offices/OSFAP/DCS/collection.agencies.html

RECENT DEVELOPMENTS POST-DATING PUBLISHING ON BOOK:

Institutions and Lender Requirements Relating to Education Loans, Student
Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program; Final Rule (published in Federal Register October 28, 2009, effective July 1, 2010):www.nacua.org/documents/HEOA_DOEProposedRegsRePreferredLenderArrangements_110309.pdf

Proposed legislation, introduced by U.S. Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Al Franken (D-MN) today joined U.S. Representatives Steve Cohen (D-TN), Danny Davis (D-IL), George Miller (D-CA) and John Conyers (D-MI). that would restore bankruptcy protections for private education loans: durbin.senate.gov/public/index.cfm/pressreleases?ID=f7c84e6c-f2ac-4ee5-b466-f461b0f0de8a

Written Testimony of Deanne Loonin, Director of National Consumer Law Center’s Student Loan Borrower Assistance Project in Response to the May 5, 2011 U.S. Department of Education Notice of Establishment of Negotiated Rulemaking Committees and Notice of Public Hearings
submitted: May 20, 2011: www.studentloanborrowerassistance.org/blogs/wp-content/www.studentloanborrowerassistance.org/uploads/2007/03/neg-rulemaking-may2011.pdf

May 20, 2011 Federal Register notice of proposed rulemaking to form negotiated rulemaking committees to propose regulations under the Higher Education Act of 1965: www.ifap.ed.gov/fregisters/FR050511LoanProgramRulemaking.html

Endnotes

i Catherine Austin Fitts served as a member of the board of directors of Sallie Mae before its privatization from November 1991 to March 1994.
ii 2008, Boston:Beacon Press.
iii Sallie Mae’s original legal name was Student Loan Marketing Association. Now, the name of the public holding company is SLM Corporation. According to MoneyZine.com [Link: www.money-zine.com/Financial-Planning/College-Loan/Sallie-Mae-Student-Loan/], SLM Corporation’s subsidiary companies are Academic Management Services Corp., Arrow Financial Services, First Trust Financial, General Revenue Corporation, GRP Financial Services, Nellie Mae, Noel-Levitz [Link: http://www.noellevitz.com], Pioneer Credit Recovery Inc., Sallie Mae Bank, Sallie Mae Home Loans, Sallie Mae Inc., SLM Financial Corporation, Southwest Student Services Corporation, Student Assistance Corporation, Student Loan Finance Association, Student Loan Funding and Upromise.
iv See, Michael J. Lee, “Privatizing a Government Sponsored Enterprise: Lessons from the Sallie Mae Experience” available atfic.wharton.upenn.edu/fic/papers/05/0534.pdf. Note that the conclusions of this paper, written by a consultant involved in the Sallie Mae privatization who, naturally, reports history from the client’s perspective, do not reflect more recent market developments and the authors of this Solari Report do not necessarily agree with his views.
v Sallie Mae now also issues credit cards.
vi The “discharge” of a debt in bankruptcy wipes out the borrower’s obligation and, thus, exemption of a debt (like a student loan) from discharge means that the borrower will continue to be obligated even if he or she is adjudiated a bankrupt.
vii An undue hardship exception exists, but undue hardship is almost impossible to establish in the absence of a physical disability. The exemption from bankruptcy protection is found in the US Code at 11 USC 523(a)(8).

Under Internal Revenue Code §221(d)(1), a qualified education loan is defined as:

“any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses –

(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term ”qualified education loan” shall not include any indebtedness owed to a person who is related …. to the taxpayer or to any person by reason of a loan under any qualified employer plan …. or under any contract [purchased under a qualified employer plan].”

ix Defined as “A loan that is not made, insured, or guaranteed under the title IV of the HEA of 1965 and is extended expressly, in whole or in part, for postsecondary educational expenses to a consumer regardless of whether the loan is provided through the educational institution that the student attends. ” Private education loans do not include education loans made, insured, or guaranteed by the federal government, which are subject to disclosure rules issued by the Department of Education.

x See the Federal Reserve release at www.federalreserve.gov/newsevents/press/bcreg/20090730a.htm and a summary by the Association of Corporate Counsel at www.lexology.com/library/detail.aspx?g=a6840a23-35e2-468e-a8b8-774533354bff

xi See, Don Peterson, “U.S. Department of Education Is Not a Debt Collector,” .
xii Click here for federal benefits excepted from such collection.

xiii See fms.treas.gov/debt/dmexmpt.pdf for a list compiled by the Consumer Law Center list of states that have enacted some type of such legislation. Some of the professions whose licenses may be suspended include attorneys, health care professionals, teachers, insurance professionals, state officers, and commercial fishermen.
xiv Page 38
xv Note that effective July 1, 2010 the Health Care and Education Reconciliation Act of 2010 eliminated new originations of privately issued, federally guaranteed student loans under the Federal Financial Education Loan Program (FFELP); however, the terms of existing FFELP loans are not materially affected by that legislation. This legislation also reduced the percentage of monthly discretionary income that can be collected on student loans from 15% to 10% for qualified borrowers and reduces the period of time after which timely-paid student loans may be forgiven (from 25 years to 20 years), but these provisions apply only for new borrowers starting in 2014.
xvi It is important to note that before July 1, 2010, Stafford, PLUS, and Consolidation Loans were also made by private lenders under the Federal Family Education Loan (FFELSM) Program. Effective July 1, 2010, no further loans will be made under the FFEL Program. All new Stafford, PLUS, and Consolidation Loans will come directly from the U.S. Department of Education under the Direct Loan Program. (Source:Department of Education website.

Authors

Carolyn Betts is an attorney in private practice in Ohio who serves as general counsel to Solari, Inc. and Solari Investment Advisory Services, LLC. Catherine Austin Fitts is the president of Solari, Inc. and Solari Silver & Gold and the managing member of Solari Investment Advisory Services, LLC and Sea Lane Advisory, LLC.