Sept. 5, 2007

Ask and Ye Shall Receive

If lenders and college officials weary of the months-long student loan scandal hoped that the August recess might dampen Congress’s ardor to turn over rocks, their hopes were dashed — and on lawmakers’ first day back in Washington, to boot.

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The office of Sen. Edward M. Kennedy (D-Mass.) released a report Tuesday that scrutinizes a batch of practices and policies that in many cases, the senator alleges, violate federal laws and regulations governing dealings between colleges and lenders. Many of the findings build on accusations and revelations that have emerged in previous months: Kennedy’s Republican counterpart on the Senate education committee, Wyoming’s Michael B. Enzi, said the report “simply plows the same old ground,” and several targets of the report derided it as old news, since many of the lenders have now forsworn such practices in adopting the Code of Conduct that New York Attorney General Andrew M. Cuomo has promulgated.

But the Kennedy study does provide, through hundreds of pages of documents collected as part of the senator’s investigation, a glimpse at the two-way relationship in which lenders have sometimes used questionable practices to gain a share of institutions’ loan volume — and colleges have sometimes openly sought such benefits, known in federal student aid law as “inducements.”

“As this evidence makes clear, many FFEL lenders engage in marketing practices that violate both the spirit and the letter of the inducement prohibition of the Higher Education Act,” the report asserts. “Vigorous enforcement of existing law is needed to end these flagrant abuses and protect the interest of millions of parents and students struggling to afford a college education.”

(In another development as the student loan inquiry quickly ramped back up into gear, New Jersey’s attorney general, Anne Milgrim, issued a code of conduct of her own on Tuesday. The code, which prohibits financial relationships of virtually all types between colleges and lenders, adds to an increasingly complicated mix of federal and state student loan laws and rules that colleges will have to abide by going forward.)

The Kennedy report identifies multiple instances in which lenders offered — or colleges demanded — corporate contributions in exchange to win or keep a share of the institutions’ loan portfolio. In several cases, e-mails from student loan company officials discuss the need to donate funds to college functions or campaigns to build or sustain their share of the colleges’ federal student loan volume.

An official from SunTrust bank acknowledged to Kennedy’s staff that the company has “from time to time, offered, donated or paid funds to an institution of higher education in exchange for an agreement that the institution of higher education exert efforts to increase [Family Federal Education Loan Program] volume with SunTrust.” The Kennedy report reveals numerous instances in which college officials appeared to ask lenders directly for such contributions, to sponsor sporting events or provide materials.

And in one case, after the National Education Loan Network paid $50,000 to help pay for the University of Maryland’s “Maryland Day” event last year, a Nelnet official told a university administrator that the sponsorship should earn the company a place on Maryland’s list of preferred lenders. Maryland balked at the suggestion, and the loan official was rebuked (but not fired, the Kennedy report said).

Kennedy’s report also documents the extent to which lenders offered “opportunity loans” — pools of private loan funds for students who would otherwise probably not qualify for traditional student loans — as a way to ingratiate themselves with colleges and earn a cut or a bigger share of their federal loan volume. The report deems Sallie Mae to be the king of this practice, showing instances, for example, in which the company offered Nova Southeastern University an opportunity loan pool with the hope and expectation that it would give Sallie Mae “potential leverage” in a 2005 competition for the university’s graduate student loan business. (Sallie Mae did eventually win that business.)

But the documents collected by Kennedy also reveal a situation in which officials at Case Western Reserve University “required Opportunity Loan funding in order for Sallie Mae to maintain its status as an FFEL preferred lender,” the report says.

That theme — that college officials were frequently complicit in some of the practices for which lenders have been most heavily criticized — emerged in other sections of the report, too. In a portion of the report on the role that college officials play in “steering” their students to lenders that might not offer borrowers the best deal, one document suggests that the University of Oklahoma “limits [its students’] exposure” to lenders who eliminate the upfront origination fee for borrowers “because they do not want to deter students from selecting” lenders that rewarded the university financially for using them. “It appears that the university’s appetite for revenue outweighed its concern for its students’ financial best interests,” the Kennedy report said. Officials at Oklahoma did not respond to a request for a response.

Another section of the report examines the now-ended practices in which guarantee agencies like the New Jersey Higher Education Student Assistance Authority engaged to market loans to colleges in their states. The fact that the report notes that the New Jersey agency has “totally abandoned all the questioned practices,” said Sheldon E. Steinbach, a Washington lawyer who represents the New Jersey entity, renders the Kennedy report a “very well written, not totally accurate, historical analysis of what went on. “We’re arguing about history, and most of it is now off the table,” Steinbach said.

That theme was commonly heard from lenders responding to the Kennedy report. “Over the past several months, Nelnet has helped lead the student loan industry to increase transparency in our relationships with colleges and universities,” Ben Kiser, a Nelnet spokesman, said in a prepared statement. “We publicly released a review of our own business practices on our Web site, which included references to virtually all of the matters in the Report, and have adopted a Student Loan Code of Conduct through a voluntary agreement with the Nebraska Attorney General and an agreement with the New York Attorney General. These are new rules for the industry and Nelnet is compliant with them.”

Other lenders noted that many of the criticized practices had been deemed legal at the time by the U.S. Education Department, either in advice they had received directly from department officials or in the federal government’s prevailing regulatory guidance at the time.

“We followed the rules in place at the time, and we did so in a way that benefited students,” Martha Holler, a Sallie Mae spokeswoman, said in response to the charges leveled against the lender in Kennedy’s report.

Some lenders argued that the fact that Congress and the Education Department are now poised to change those rules and laws, in new regulatory guidance and pending amendments to the Higher Education, renders the Kennedy report unimportant. But others said the senator’s report should provide an impetus to officials at the Education Department, who have asserted on multiple occasions that they have been unable to uncover or prosecute much in the way of meaningful inducements in the federal student loan programs.

“I don’t think there are any excuses left for the department to not look into this,” said Stephen Burd, a senior research fellow at the New America Foundation, which itself has investigated wrongdoing in the loan programs. “This report seems to lay out the case and provide really strong evidence that there were quid pro quo arrangements and that laws were violated. It should provide the department with what it has needed to prove that laws were violated.”

— Doug Lederman

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Comments

Student loan reform

In Pennsylvania, our Governor is attacking the officials of the not for profit state agency, PHEAA. He claims they recieved outrageous bonuses of about $500,000 spread among six well paid individuals. This same Governor is also contemplating selling the agency to Sallie Mae. How very, very strange that there is so little commotion among the political class about the one qauarter of a BILLION, that’s $250,000,000, in stock options that Albert Lord took out of Sallie Mae during its recent sale to a private investment group. The Kennedy Report does not even mention this issue. What rubbish!

One would hope that any reform of the student loan program in this country would prevent such outrageous rip offs in the future.

feudi pandola, at 8:45 am EDT on September 5, 2007

Shocked, just shocked

A government-dominated industry demands financial “tribute” from private-sector vendors? Teddy Kennedy, the Wall Street heir, criticizing his Grandpa’s old friends? Lenders playing fast-and-loose with the details?

Shocking, just shocking. Andy, this could be the start of a beautiful run for the presidency. Ya caught ol’ Hill, flat-footed. Way to go, Mr. President.

Buzz, at 8:50 am EDT on September 5, 2007

Opportunity Loans

The allure of “Opportunity Loans” is that they help students who might not otherwise be able to attend an institution of higher education. That is a far more defensible category of inducement than free travel for financial aid representatives, or discounted software for institutions. It is not pleasant for colleges to send students away because their parents have poor credit. I would think any FA staffer would embrace such a solution.

Ironically, this whole lending mess is the fault of Congress. They have not stepped up to provide adequate funding for college students in America, and they have averted their eyes as lenders were given billions of dollars that should have gone to students. Where is the outrage over that?

Tad, at 9:05 am EDT on September 5, 2007

More...in PA

I agree with you Feudi! Even more ironic that the governor’s call for PHEAA a quasi-state agency, to “act like a state agency", despite the fact they are under a siege led by the “For Profit” monster from Virginia. Does he think the bonuses will get smaller if PHEAA/AES is sold off to Sallie Mae?

Ironic and galling especially when you factor that the outgoing Chancellor of the State system of higher education in PA is the highest paid “public” employee in the state in Salary and bonuses, higher than both Rendell and Dick Willey, and yet no comment from Rendell about that.

If I were Dick Willey, I would agree with Rendell and tell him that the public agency that PHEAA chooses to emulate is the chancellors office for PASSHE. Better yet, he should apply for the job so he can get a pay raise, and still be paid a pittance in comparison to “you can call me AL” Lord.

Say what you want about “oppurtunity loans", but many low income students who had maxed their too low, stuck in 1986, Stafford loans would not have been able to go to school without them.

And Cuomo missed the point that even if by some miracle you could have gotten lenders to divert the OL money back into Stafford loan rather than just taking profit, well yes we might have gotten a lower interest rate, but it was the artificially low grade level limit (and no Pell grant increases) that was the real problem. If the student can’t cover the tuition balance they will not be allowed to attend.

Blind Man, at 9:55 am EDT on September 5, 2007

Opportunity or Life Sentence?

The problem with “opportunity loans” is that they encourage students to borrow more than they should, that they are sometimes offered by unethical institutions, that they target minority students who don’t have the resources to complete programs and advance, that they have an incredible 70% default rate, that they cost tax payers money, that they ruin lives instead of improving lives...shall I go on?

You cannot convince me that lending people money they cannot afford to borrow makes economic or ethical sense. Look at the housing market and the foreclosure rates. This is predatory lending all over again, but Sallie still gets her cut.

There are other ways: Pell Grants. Subsidies. Scholarships. Tax-supported higher education. When you instead force students to borrow (which is what you do when you provide no other options but still sell the need for higher education), you sentence them into a life of indentured servitude or worse.

I hope Kennedy et al fight for those of us former borrowers still struggling under the weight of this defeating system. We need our education and we need HELP!

kgotthardt, at 12:20 pm EDT on September 5, 2007

Sub-prime college

Kgotthardt’s comments are correct...this is predatory lending and also deceptive. I’ve had the opportunity on several occasions to turn down various lenders’ offers of these “opportunity loans.” Besides being a way to funnel debt to people who shouldn’t be borrowing, what also turned me off was that the lender always emphasized how the school can brand the loan whatever way they wanted (in other words, hide the lender’s identity to borrowers), be entirely responsible for selecting the borrowers, the amounts, etc. This was all under the guise of “the school’s control,” but sounded suspiciously like sticking the school with some of the legal liabilities should any problems arise. I’m no lawyer and that might not be the case, but either way, it didn’t pass the “smell test.”

And Senator Enzi is wrong, this report is not entirely old hat. It sheds more light on deceptive practices by at least one state guarantee agency (NJ), who led schools down the single-lender path in exchange for millions in lender kickbacks. NJ’s GA not only made a bundle from a deal they disclosed to no schools, but this also resulted in subpoenas to all colleges in the state as well as a code of conduct from the state Att’y General. GA’s are supposed to be, I would think, neutral and not force schools towards lenders, and certainly not receive kickbacks for doing so. And if the only defense they can offer is “we stopped doing it,” well, then that doesn’t pass the “smell test” either.

THS, at 1:00 pm EDT on September 5, 2007

Whoa

” .. Ironically, this whole lending mess is the fault of Congress. They have not stepped up to provide adequate funding ..”

As if colleges are not responsible for controlling costs? They’re not drunken yahoos, back in port after six months at sea.

Please — a pot is calling a kettle burnt-black.

Buzz, at 1:15 pm EDT on September 5, 2007

Don’t forget the victims of this whole deal.

Let’s not forget the people who are hurt by this...the students.

I’ve said before, and will probably say 10,000 more times that student loans are the most devoid of standard consumer protections of any loan instrument in our nation’s history.

No Bankruptcy,No refinancing,No statute of limitations,Exemptions from usury laws, Exemptions from the FDCPA.

Taken together, and is it any wonder that Sallie Mae’s “fee income” has increased by 107% over a 4 year period?

Is it any wonder that citizens are going off the grid, fleeing the country, even taking their own lives because of their student loans?

Alan Collinge, Founder at Studentloanjustice.org, at 2:20 pm EDT on September 5, 2007

Sorry, I disagree with Alan

Students are the victims? That’s a tough one to swallow.

While you are correct, one cannot escape student loan debt via bankruptcy…

Federal student loans come with taxpayer-subsidized fixed rates.

(Where else could a borrower with zero credit history and no collateral borrower thousands of dollars at a 6.8% fixed rate?)

But moreover, these loans also offer deferment and forbearance options that allow borrowers to put loan payments on hold for years.

These options are readily available to students or parents experiencing financial hardship.

Repayment plans can also be adjusted to match lower incomes after leaving school.

These options are unimaginable in the world of credit card debt, auto loans, and mortgages.

Jim Andrews, at 5:40 pm EDT on September 5, 2007

“These options are unimaginable in the world of credit card debt, auto loans, and mortgages.” Actually Jim, that’s not true. Credit cards often offer programs that protect consumers in the event of a financial hardship: payments are not expected and in many cases, interest will cease to accrue. It’s a kind of inexpensive insurance the consumer can purchase. The same kinds of programs are offered for mortgages and other loans.

The other issue here is not necessarily the interest rate but the insurmountable debt that accrues during forbearance as interest continues to be capitalized. People in financial straights don’t have much of a choice but to have this interest capitalized because even paying JUST the interest means paying more than they can afford.

If you want to offer student loans, offer the “emergency” insurance with it...and a 1% fixed interest rate. But for goodness sakes, don’t offer even THESE loans to students who can’t complete their programs or who have to borrow so much to enter public service jobs that their meager salaries will never earn them enough to pay it off!

kgotthardt, at 8:55 pm EDT on September 5, 2007

WHO IS THIS REALLY HURTING??

I have read all of these comments and a lot of them talk of “predatory lending” and how the student is getting hurt in all of this. With the new legislation coming down the pipe from Washington that everyone thinks is the cure-all for the student loan program is going to make student loans more of a burden than ever. FFELP lenders are already taking away the borrower benefits in anticipation of this bill going into effect. I don’t care if you red, black, white or blue you should know what you’re getting into before you sign a financial agreement. College costs money...always has and always will. No one should get a free ride just because they’re rich, poor, black, white, disabled, not-disabled. It doesn’t matter!! The FFELP program is not a much of satan as everyone is making them out to be. Oh yeah and Sallie Mae is not the standard for the industry, sallie mae is actually in my opinion the worst of the worst. However, what would you rather have 1% off of your interest after so many on-time payments and.25% for automatic debit of your payments...or NOTHING!! That’s what choice you will have if this goes through. Yes you could go to the Direct Loan Program, but after the DL holds as many loans as Sallie Mae will it actually be better?? Stop and think about that for a minute.

Kimberly, at 8:55 pm EDT on September 5, 2007

IN ADDITION!

Most of the students I come in contact with in my line of work don’t even know how much they actually owe!!! Don’t you thinks parents and students should know that before they have to pay it back?? READ THE PAPERWORK!! KNOW WHAT YOU’RE SIGNING!!

Kimberly, at 8:55 pm EDT on September 5, 2007

Jim Andrews, If you know anything about this

industry, and it appears that you do, you would know that Sallie Mae, for instance, attributes its record breaking profits to “fee income". you also know that Sallie Mae lobbied intensely to remove bankruptcy protections first for FFEL, and then for private loans. You never even bothered to comment on the other basic, standard consumer protections that are absent for student loans, so I won’t repeat them.

Further, and I don’t expect you to know this, but even the federal government MAKES (not loses) money from defaulted loans, realizing a 20% reutrn for every dollar it pays out in default claims.

This IS a predatory market. Forbearance and deferments are no bargain for the borrower. interest accrues the whole time (only a small fraction of deferments are subsidized).

Students ARE victims in this, Jim, although I can tell that you hold such disdain for this group that you will probably never be convinced. Those of us who are no longer students, but rather citizens in our 30’s, 40’s, 50’s, and beyond who have seen our debt triple, quadruple, or even far worse can attest to this fact, and it is a fact.

Further, citzens are indeed going off the grid, fleeing the country, and taking their own lives on account of their student loans. I will be happy to introduce you to a few I met just in the past week if you doubt, Jim.

Also Karen is right: Credit Cards offer hardship insurance programs. Why not Student Loans? I proposed this to JC Flowers last month, and received no response.

Finally, to Kimberly and Jim, I can’t help but notice a distinct lack of respect for the people that you claim to be working for (At least you, Kimberly). It is YOUR JOB to guide students through the financial aid process, to educate them about the realities of borroweing, etc, and hear you are, Kimberly, practically making fun of these students for their lack of knowledge about the FACTS about student loans. Facts that YOU are supposed to be making known to them. This speaks less to the students ability to grasp the concept of lending, and more to YOUR commitment to DOING YOUR JOB.

I am more than tired of lenders and Financial Aid officers pointing the finger at the students responsibility, when it’s clear at this point that this is just a shameful cover for their own IRresponsible behavior.

Last point: how did we get to the place where the universities and their financial aid officers are routinely siding with the interests of lenders, as opposed to the interests of the students as this dialogue clearly illustrates?

Alan Collinge, Founder at StudentLoanJustice.Org, at 5:50 am EDT on September 6, 2007

Oh, please — get a grip

” .. Further, citzens are indeed going off the grid, fleeing the country, and taking their own lives on account of their student loans ..”

Sir, get a grip. You are in a dispute with a lender — not trying to bring about world peace. For 99% of Americans, the sky is not falling, for this reason. Really.

For reasons that you do not explain, you got behind with student loan payments, began arguing with the lender, and went into penalty status.

Lender late fees are disgusting. The lenders are about to have their heads handed to them by U.S. Sen. Carl Levin, D-Mich. They deserve it, and have no one to blame but themselves.

But to be clear: no one held a gun to your head and forced you to borrow $38,000. You did that, yourself. Adults negotiate settlements — children have temper tantrums.

Playing the victim is epidemic today. From students who won’t do assigned reading, to administrators who PR rather than manage, to yahoos who live in high-cost environments and expect others to bail them out financially. Well — that dog won’t hunt.

Buzz, at 11:05 am EDT on September 6, 2007

“Adults negotiate settlements” Um, Buzz...that’s the whole issue. Student borrowers CANNOT negotiate settlements. Sallie doesn’t settle. If we COULD settle it justly, we wouldn’t be having this argument. DUH.

kgotthardt, at 9:00 pm EDT on September 6, 2007

Hey Buzz

Hey Buzz,

Who do you work for? What’s your real name? What’s with the fake one?

I think you need to educate yourself about the real human tragedies that are indeed occuring as a direct result of lendr (and guarantor, and federal government) Greed.

You can scoff at the people who have fled the country, been forced to live off the grid, or family members of those who have taken their own lives, but that doesn’t make their suffering any less real.

Just becuase you don’t care, and because you likely hold a financial interest in maintaining the status quo, so that students can continue to be fed to the student loan industry like “turkey’s at the Thanksgiving dinner” to quote Elizabeth Warren, doesn’t mean the problem doesn’t exist.

And you can attack me personally. No problem. Im really just the messenger anyhow, and while I got screwed (Sallie Mae denied my deferment when I was unemployed, and defaulted me the day after I requested it), and my loans exploded with penalties and fees, many of the folks who I speak for got screwed far, far worse, and I’d be more than happy to educate you on these stories.

I suggest you take a look at a random sampling of stories submitted to the SLJ website before making these grandiose statements, and dispensing your self-serving, paternalistic wisdom.

We’re not kids, Buzz. In fact, judging from your knee jerk, over simplified rhetoric, I would venture to say that the median age of SLJ members is older than you are, friend.

Email me anytime. You obviously have been doing research on SLJ for reasons unknown, so I trust you have my email address.

Alan Collinge, Founder at StudentLoanJustice.org, at 5:55 am EDT on September 7, 2007

Alan Coolidge! This one is for you.

In what part of my comment am I making fun of the students that I am “supposed” to be helping understand that student loan process? Is this because I say that most of the students I work with don’t even know how much they owe before they start paying? Let me ask you this...When you take out a mortgage, or a credit card or any other financial obligation for that matter don’t you ask how much you will have to pay back? Or is that just me..How many times have you purchased something without asking how much it will cost you? What you are saying is that people should be able to borrow whatever they want and not pay it back due to “ignorance of the facts". That is simply not how it works. The students I work with I explain things to them sometimes 4,5 or even 6 times until they tell me that they understand it. However, I am not the one who borrowed the money. All I am saying that maybe they should have known what they were getting themselves into BEFORE they sign on the dotted line. Furthermore, I have visted your website and read some of your comments on this website and I am convinced that you actually don’t know a lot about the subject of which you preach. Student loans ARE forgiven if you pass away. They can also be included in some bankruptcies, I have seen both of these instances occur. ALSO! If you are late on a payment you can apply for a deferment or a forbearance and make it retroactive for BEFORE you were late on that payment. It’s like the payment never happened, I have helped people do it. Maybe you shoud help the borrowers you work with better understand the process instead of running from it or whining about it to the government. OH! By the way since I will be losing my job due to this new bill I will make sure I tell my 4 year-old on Christmas that it’s ok that she didn’t get any presents this year because we made Alan Coolidge happy and saved students an extra $ 20 a month on their student loan bill that they CHOSE to apply for. I’m glad I get to pay for other peoples education when I am 22 and can’t afford one for myself. HURRAY!

Kimberly, at 9:20 pm EDT on September 22, 2007

A little more to chew on.

Furthermore! I don’t know who you THINK I work for Alan but a university financial aid office is NOT it. I work for a consolidation company. So by the time the borrowers are to me they are usually already in pretty deep. I wish I did work for a university financial aid office so I could educated borrowers about their loans because I actually take the initiative to read up on the terms and news in the industry. Not just fake it to make a quick buck. I have instructed borrowers to go to Direct Loans if that is what’s best for them. However, I can only do so much and the goes the same with financial aid officers. The student has to know what they are signing BEFORE they sign. They are not kids anymore, it’s time to read between the dotted lines.

Kimberly, at 9:20 pm EDT on September 22, 2007

To Kimberly

Kimberly,

It is months since I posted on this thread, so you may not ever read this, but...

I did not call for, and did not support the cuts in subsidies to the lenders.

I do support, and support strongly the cuts in the guaranty percentages, and also the retention percentages for the guarantors.

Frankly, I don’t think the cuts to the lender subsidies was a very wise move with regards to the interests of the students. The reduction in interest rates for undergrad subsidized loans is small potatoes.

All I have ever wanted was a reinstatement of the standard consumer protections for student loans that exist for every other type of loan in this country.

Believe it or not, I am in very good agreement with a number of lending companies- consolidation companies, even that want the marketplace opened up to more competition. The subsidy cuts wil probably shake out a few of the smaller lenders, and this certainly does nothing for the borrowers.

So don’t blame me for Congressional actions. It wasn’t me, and I’m not for it.

Alan Collinge, Founder at SLJ.Org, at 6:00 am EST on January 28, 2008

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