06.07.10 | Nervous about a Private Student Loan? Don’t Be!

Posted in Private Student Loans by Evan Jacobs

A lot of students and their families are hesitant, for a variety of reasons, about taking out a private student loan. While federal aid and scholarships/grants are always the best options, it is often necessary to use a private loan to cover the remainder of the cost of attendance. Here are some facts to help ease your concerns about private loans:

  1. You CAN get a private loan with bad credit. You just need to find a parent or trusted family member to cosign the loan for you. A good cosigner is anyone who regularly pays his or her bills on time and is not trapped under a mountain of debt. Plus, a good cosigner can help you get a better interest rate, which can save you money.
  2. You CAN afford a private loan, if you plan accordingly. Among the best ways to plan ahead is to only take out what you need. If you take out more than one loan, you may also choose to consolidate in order to receive a lower monthly payment and better interest rate.
  3. You CAN find a trusted lender. Yes, there are plenty of shady lenders out there who are only out to scam you. Always be sure to do some research before providing personal information to a lender. One great area to start is with our Private Student Loan comparison tool, which features only trusted, legitimate private loan lenders.

04.07.10 | Your Step-by-Step Guide to Paying for Grad School, Part Three

Posted in Graduate Loans, Private Student Loans by Evan Jacobs

This is the second installment in a three-part blog series on paying for grad school. In case you missed it, here are parts one, and two.

Exploring your private student loan options. The last step in this three-part series is devoted to figuring out how to bridge the gap between federal aid and scholarships and the overall cost of attendance.

This is a sticky situation that many students find themselves in. Fortunately, there are a number of private student loan options available to you. One of the primary differences between prospective undergraduate students and prospective graduate students is that the latter can typically apply for private loans without a cosigner.

If you have a specific graduate program in mind, say medicine or the law, there are specialized loans specifically to cover those costs. For example, if you are interested in law school, you can get a private student loan specifically tailored toward paying tuition. You may also be eligible for one-time loans for Bar exam preparation and law internships. These loans are one-time only and can be borrowed up to $15,000. Similar loans are available for business and medical schools. In medical school, you may borrow similar loans to prepare for your boards.

09.23.09 | The Perverse Consequences of a Bankrupt Policy

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

(Editors Note: Today we are running an abridged version of testimony that three major higher education associations have submitted to the U.S. House Judiciary Committee’s Subcommittee on Commercial and Administrative Law, which is holding a hearing this afternoon on the treatment of private student loans in bankruptcy. The three groups — the American Association of Collegiate Registrars and Admissions Officers (AACRAO), the American Association of State Colleges and Universities (AASCU), and the National Association for College Admission Counseling (NACAC) — argue for a reversal of a federal law that makes it exceedingly difficult for financially distressed borrowers to discharge private student loans in bankruptcy. At Higher Ed Watch, we have long argued that Congress should end this cruel policy, which treats private student loans (those without any government backing) much more harshly than nearly any other form of consumer debt, including credit cards.)

By AACRAO, AASCU, and NACAC

Bankruptcy law has restricted the ability of borrowers to discharge their federal student loans since the mid-1970s. For more than a decade, federal student loans have been non-dischargeable altogether, except for cases of undue hardship. While this exceptional treatment of federal student loans under bankruptcy law is harsh, federal student loans do provide basic consumer protections, their own specific discharge provisions, and flexible repayment options that serve as meaningful alternatives to bankruptcy discharge for borrowers. We therefore do not seek any change to the treatment of federal student loans in bankruptcy.

Our concerns focus on the treatment of private educational loans in bankruptcy. Beginning in the early 1990s, for reasons that were never articulated or debated, Congress began to extend the bankruptcy code’s exceptionally harsh treatment of federal loans to private educational loans. Until the 2005 bankruptcy reform act, this identical treatment was limited to private loans that were funded or guaranteed by states or nonprofits. This ill-advised expansion rendered a large number of non-federal loans non-dischargeable in bankruptcy, even if they had none of the important attributes that justified that treatment for federal loans.

In making this change, Congress appears to have assumed that states and non-profits would voluntarily configure their educational loan offerings in a manner that would eliminate the need for bankruptcy discharge for their borrowers. It should come as no surprise to any observer of the student lending industry that the exact opposite occurred. Nondischargeability of educational loans provided eligible lenders with a carte blanche to impose ever harsher conditions on borrowers. Many of these borrowers were unaware that unlike with federal loans, the promissory notes they were signing would obligate them to repay the loans even in cases of school fraud, school closure, or total and permanent disability.

The primary benefit to eligible issuers of these loans was that the bankruptcy code’s unorthodox treatment of their loans insulated them from the economic consequences of otherwise untenable lending practices. Predictably, these lenders were at the forefront of predatory educational lending practices, and began to provide high-dollar private-label loans to borrowers without much concern about their ability to repay the loans. Low-income students, particularly those attending expensive for-profit career schools, were targeted through collaborative marketing and origination relationships between schools and lenders, who in some cases jointly forecasted future default rates of more than 50 percent on the subprime loans that they aggressively promoted.

The comparative advantage that the “non-profit” issuers of such private-label loans enjoyed was quickly seized upon by other predatory providers, who sought a similar advantage for their products. In 2005, again without hearings or debate, Congress extended the exceptional bankruptcy treatment initially afforded only to federal loans to all educational loans. That unfortunate change, in turn, led to an explosion in subprime educational lending practices, which this ill-thought-through federal incentive unwittingly facilitated. Predatory lending targeting low-income and minority communities expanded, while an entire new line of “direct-to-consumer” programs targeted middle- and upper-middle-income families with easy, but punitively harsh educational credit offerings. The most salient feature of these programs is that their issuers were substantially shielded from the consequences of their high-risk products by the fact that borrowers could not discharge these predictably unaffordable loans even in bankruptcy, and that the promissory notes were really a modern indenture instrument.

In addition to its fundamentally negative consequences of promoting irresponsible lending practices, the vagueness and imprecision of the actual language of the 2005 amendment has created loopholes for additional fraudulent and abusive practices. For example, the statutory language fails to define the “educational loans” that it excludes from eligibility for ordinary bankruptcy discharge. This lack of precision allows virtually any credit transaction with families with students in school to be arguably nondischargeable. This same imprecision makes it impossible to track and analyze the scale and scope of the private-label educational loan market, since colleges may well be entirely unaware of credit that might be marketed to their students and their families. This same lack of institutional awareness makes it quite likely that families and students may be induced to borrow more than their actual unmet need.

Mr. Chairman, the subcommittee’s hearings today are a very important first step in documenting and addressing the problems associated with the highly unorthodox special treatment that Congress opted to extend to private educational loans. As stated above, the unconditional extension of non-dischargeability to private loans has created a perverse incentive for risky lending practices that victimize borrowers and reward the most irresponsible lenders at the expense of other creditors. This fundamental distortion of the bankruptcy code also rewards shoddy schools by enabling them to arrange for inappropriately large private-label loans for their students through collusion with subprime lenders. We find it particularly offensive that entities profiting from these predatory practices justify their special treatment in the bankruptcy code by claiming that non-dischargeability lowers the cost of all private educational loans. There is no evidence that the enactment of the 2005 changes lowered the cost of loans, and therefore, no reason to believe that its repeal would increase the cost.

Legitimate private educational loan programs are subject to underwriting criteria to ensure reasonable prospect of repayment. Bankruptcy, let alone dischargeability in bankruptcy, is not even remotely probable factors for such programs. As previously stated, we believe that non-dischargeability of loans has facilitated the marketing of subprime loans to more vulnerable populations, and that their unorthodox treatment has served as a powerful incentive to promote over-borrowing. We urge the subcommittee to examine a complete exclusion of private educational loans from the special bankruptcy treatment previously reserved only for federal loans.

Mr. Chairman, we thank you for your leadership on this important issue, and stand ready to work with you and your colleagues as you act on the findings of today’s hearing.

The American Association of Collegiate Registrars and Admissions Officers is a nonprofit, professional association of more than 10,000 higher education admissions and registration professionals who represent approximately 2,500 institutions in more than 30 countries. The American Association of State Colleges and Universities represents more than 400 state colleges, universities, and systems of higher education throughout the United States. The National Association for College Admission Counseling represents more than 11,000 college admissions officers, high-school guidance counselors, and financial-aid administrators. The groups’ views are there’s alone and do not necessarily reflect those of the New America Foundation.

09.10.09 | The Growing Student Debt Crisis at Career Colleges

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

Is there a looming student debt crisis at our nation’s for-profit colleges and trade schools? The latest data from the U.S. Department of Education’s National Center for Education Statistics (NCES) certainly seems to suggest so.

According to an analysis of this data by the College Board, 60 percent of bachelor’s degree recipients at for-profit colleges graduate with $30,000 or more of student loan debt. That’s one-and-a-half times more than graduates at higher-cost private colleges and three times more than those at public universities and state colleges. At the same time, one in five students who earn associate degrees at proprietary schools graduate with a debt load of at least $30,000. That’s four times more than associate degree recipients at community colleges. [The average annual salary of associate degree recipients is around $38,000.]

The data in question comes from the 2007-08 edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The study provides the most comprehensive data available on how students and their families pay for college.

But even this data doesn’t provide a complete picture of the burdensome amount of debt proprietary college students are taking on — as it does not include median debt levels for the millions of low-income and working-class students who drop out each year from for-profit colleges and trade schools buried in debt but without the training they need to find jobs that will help them repay their loans. Many of the largest publicly traded for-profit school chains have an extremely spotty record of graduating students.

Overall, according to the study, 92 percent of full-time students attending proprietary institutions took out loans in 2007-08 to finance their education. In comparison, two-thirds of students at private colleges, and a little more than half of those attending four-year public colleges, borrowed student loans that year. This is not entirely surprising as for-profit colleges tend to be expensive and serve the most financially needy students.

More disturbing is the extent to which proprietary school students are being asked to rely on high-cost private student loan debt to help cover their costs. In 2007-08, 43 percent of students at for-profit colleges borrowed private student loans, compared to 28 percent at private colleges, 15 percent at public four-year colleges, and 7 percent at community colleges. As we reported in April, the proportion of private loan borrowers at proprietary institutions has skyrocketed over the last five years. In 2003-04, about 15 percent of students at these schools took out private loans.

Meanwhile, the median debt load of bachelor’s degree recipients at for-profit colleges in 2007-08 was $32,653. In comparison, the median debt load of students graduating from private colleges was $22,375, and from public colleges was $17,700. A quarter of these proprietary school students left with $40,000 or more in debt, compared to 22 percent at private colleges, and 10 percent at public universities

Nearly two-thirds of bachelor’s degree recipients graduated from proprietary institutions that year with private loan debt, compared with 42 percent at private colleges and 28 percent at public colleges.

The news isn’t much better for students who earn associate degrees at  proprietary schools. Overall, nearly all associate degree recipients at for-profit colleges graduated with student loan debt in 2007-08, and 60 percent had private loans. The median debt load for these graduates was $18,783. In comparison, only 38 percent of associate degree recipients at community colleges graduated with debt, and only 15 percent had private loans. The median debt load for those students was $7,125.

In looking at this data, we think that it is critically important to understand the population of students that for-profit colleges and trade schools serve. According to the Career College Association, 43 percent of proprietary school students are members of minority groups and almost half are the first in their families to attend college. Of those who are of traditional college age, more than 50 percent come from families with an annual income of less than $40,000.

Research shows that each of these factors correlate with a student’s likelihood of defaulting on their student loans. And in fact, the Department of Education estimates that about 40 percent of federal student loans going to for-profit students ultimately end up in default. That’s compared to about 12 percent for college students overall. [Unfortunately, there is no comparable data available on private loans.]

For-profit college lobbyists and leaders like to talk about the role they play in helping low-income and working-class students achieve their dreams. But by loading up financially needy students with unmanageable levels of debt, including high-interest private loans, they are actually destroying the dreams of many of their students.

The time has come for policymakers to take notice — before this looming crisis becomes full blown.

08.27.09 | Private Student Loans, Good for All Seasons

Posted in Private Student Loans by Kristin Morris

Imagine having an application for school with NO deadline. What’s that you say? An application like that already exists? Which one? Oh, I didn’t realize a private student loan application could be completed at anytime – even in the middle of the semester.

I think most of us naturally assume that every school related application has a specific financial aid deadline, and for good reason. Most applications do have specified deadlines. I recall when I entered my junior year of school, back in the golden age, that people were telling me to make sure my SAT prep class and test were taken by this date, and that I needed to send out my college application(s) by the end of this particular month, and that I was crazy if I hadn’t completed my FAFSA and scholarship applications by the middle of January of my senior year. By the way, for a complete list of grade by grade college preparation plans from 8th to 12th, visit college action plans. The process of getting into college was completely overwhelming to me.

I had been so used to letting Mom handle things for me and now I was the one in the center of the storm. That’s why it’s good to know there is a floating deadline when it comes to student loans. After the Mom and Dad ATM runs out it’s comforting to have a place to go to get the funds you need.

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05.21.09 | Mixed Signals from Congress Lead to Misguided Proposals on Private Loans

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

By Ben Miller and Stephen Burd

The Federal Reserve Board has proposed regulations that could significantly weaken a federal law that aims to protect students from being misled into taking out high cost private student loans. In a notice in the Federal Register on March 24, the agency said that it is considering including exemptions, or "safe harbors," to a provision Congress added to the Higher Education Act last year that prohibits lenders from using a college’s name, mascot, logo, or emblem to market private loans to students.

Under the Federal Reserve’s proposal, a lender would be able to continue engaging in these practices as long as it disclosed "in a clear and prominent way" that the college it is referring to "does not endorse the creditor’s loans, and that the creditor is not affiliated with the educational institution." The agency says that this "safe harbor approach" is needed because a lender "may at times have legitimate reasons for using the name of a covered educational institution" in its marketing materials.

The Federal Reserve also proposes widening this exemption even further for private student loan providers that appear on a college’s preferred lender list. In those cases, the agency says, it "would be misleading" for a lender to state that a school has not endorsed its loan products. Instead, it would simply require that the lender "clearly and conspicuously disclose that the loan is not being offered or made by the educational institution."

At Higher Ed Watch, we believe that these proposals would completely undermine both the letter of the law and its intent. But we don’t believe that the fault for offering these misguided proposals rests entirely with the Federal Reserve. Congress is also to blame for sending mixed signals to the agency about how this provision should be enacted.

The language that Congress included in the Higher Education Act reauthorization legislation it approved last year is absolutely unequivocal in prohibiting co-branding. It reads:

"A private educational lender may not use the name, emblem, mascot, or logo of the covered educational institution, or other words, pictures, or symbols readily identified with the covered educational institution, in the marketing of private education loans in any way that implies that the covered educational institution endorses the private education loans offered by the private educational lender."

However, in report language accompanying the final bill, the legislation’s authors appear to back away from the blanket prohibit. They suggest that lenders could comply with this provision simply "by including a clear prominent and conspicuous disclaimer that the use of the name, emblem, mascot, or logo" of a college "in no way implies endorsement by the covered educational institution of the lender’s private education loans."  In the Federal Register notice, the Federal Reserve specifically cites the report language to explain its justification for its proposals.

While we understand that the conferees muddied the waters with their explanation of the provision, we believe that the Federal Reserve should be obligated to abide by the letter of the law rather than by the explanatory statement in the conference report. We also believe that the proposal to exempt loan providers that are recommended by colleges to their students is a direct violation of law, which clearly prohibits colleges that have entered "a preferred lender arrangement with a lender" from allowing that loan provider to use its "name, emblem, mascot or logo" in the marketing materials it provides students. The conference report is silent on this provision.

A bright-line prohibition is absolutely needed because as we’ve seen over the last several years, the use of co-branding can lead to significant confusion among students who may believe that a loan from a private creditor is actually endorsed, if not disbursed, by their schools. This lack of clear understanding can influence borrowing decisions, leading students to take out loans they may not have otherwise considered. Given that private loans carry very high interest rates and are extremely difficult to discharge in bankruptcy, it is absolutely essential that borrowers are fully informed about the type of debt they are taking on.

If co-branding is still occurring, the types of disclosures that the Federal Reserve proposes would not bring sufficient clarity to students. In most other types of marketing, there is a clear understanding that the appearance of an individual or symbol on a product or as part of a commercial is an endorsement on their part. Students will generally make the same assumption when assessing private loan marketing materials. In other words, they may focus more on a symbol that appears to imply endorsement than on a disclosure that says it does not.

As a result of all the controversy surrounding co-branding, many lenders, including loan giant Sallie Mae, have stopped or at least scaled back their engagement in these types of activities. If the Federal Reserve’s proposals are enacted, we fear that loan providers will revert to form, leaving students as confused as ever. Surely that’s not what Congress intended when it approved legislation containing this vital provision.

04.23.09 | In the Dark on Student Loan Borrowing

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

As we wrote yesterday, newly released data by the U.S. Department of Education’s National Center for Education Statistics provides disturbing news about the growth of private student loan borrowing, particularly at the nation’s for-profit colleges and trade schools.

But the data’s release also brings to light a more basic problem: the government’s inability to collect and disseminate accurate and timely information about student debt. This is a major failing, as it leaves public officials without the vital information they need to make sound student aid policy.

As it stands now, the most comprehensive information available comes from the National Postsecondary Student Aid Study (NPSAS), a nationally representative survey that aims to determine how students and their families pay for college. Unfortunately, NCES conducts this survey only every four years. As a result, the information it provides becomes dated quickly.

Up until the release of the latest edition of the NPSAS survey last week, student aid analysts and policymakers have had to rely on five year old data to try to understand student loan trends, even though there has been an explosion in private loan borrowing during that period of time. By relying on the old data, public officials have been able, at least to some extent, to downplay concerns about the hazardous amount of high-risk debt many financially needy students have been taking on. [As we have just learned from an analysis of the data from our friends at the Project on Student Debt, the percentage of undergraduates taking out private loans jumped considerably during this time period, from 5 percent in 2003-04 to 14 percent in 2007-08.]

Nowhere is this deficiency more glaring than in the government’s tracking of private loan borrowing at for-profit colleges and trade schools. The latest study shows that the percentage of students at proprietary schools taking out private loans has skyrocketed in recent years, from 13 percent in 2003-04 to 42 percent in 2007-08. Wouldn’t that information have been helpful for lawmakers to know last year when they were reauthorizing the Higher Education Act?

The information NPSAS provides also has other limitations. While the data set is helpful in identifying broad trends, it does not include a large enough sample to provide reliable statistics on private loan borrowing at individual colleges. As a result, it’s difficult to identify schools that may be pushing students to borrow private loans without first exhausting their cheaper and safer federal student loan options.

Clearly a better source of data is needed to provide more useful and up-to-date information on students’ borrowing trends.

Luckily, there is a relatively simple solution, as Matthew Reed of the Institute for College Access and Success (TICAS) wrote in a guest post for us last year. Congress should require lenders to report all the private loans they make to the National Student Loan Data System (NSLDS), the database that the Education Department currently uses to track federal student loans. In addition, the Department should be required to issue annual reports generated from this system to provide up-to-date information on student loan borrowing trends.

As Matthew pointed out, the Higher Education Act directs the Department to use the database in part for research and policy analysis regarding student debt levels — including analyzing factors such as family income and the type of institution attended. But the Department has made very little use of this authority as of yet, besides publishing aggregate federal loan volume numbers and calculating cohort default rates.

Ideally, we believe the Department should be required to publish the following:

  • Loan volume by loan program and loan type for each institution (unsubsidized/subsidized Stafford loans, PLUS loans, private loans, etc.)
  • Average cumulative debt levels for students graduating from college each year at the state, national, and institutional levels.
  • Average cumulative debt levels for students leaving college without completing a degree or certificate program.
  • Data on borrowing patterns by income level and demonstrated financial need.
  • Data on borrowing patterns by students who receive Pell Grants.

Armed with this information, policymakers would no longer have to wait years to get a very limited view of what’s really happening on college campuses.

[Disclosure: Higher Ed Watch is supported in part by the Institute for College Access and Success, which runs the Project on Student Debt.]

Image used under a Creative Commons license from flickr user LensENVY

04.22.09 | Skyrocketing Private Loan Debt at Trade Schools

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

We have long been concerned that for-profit colleges and trade schools have been aggressively pushing financially needy students to take on high-cost private student loan debt to help cover their costs. Newly released data by the U.S. Department of Education’s National Center for Education Statistics (NCES) certainly appears to bear these concerns out.

According to an analysis of the data by our friends at the Project on Student Debt, the percentage of students at proprietary institutions taking out private loans has skyrocketed in recent years, from 13 percent in 2003-04 to 42 percent in 2007-08. In other words, more than 4 in 10 students took out these expensive loans last year to attend schools that have a spotty record of retaining and graduating students.

Overall, the analysis found that for-profit college students are borrowing private loans at rates that are incredibly disproportionate to their numbers. While only 9 percent of all undergraduates attend these institutions, these students represent 27 percent of all private loan borrowers.

The data in question come from the latest edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The survey provides the most comprehensive data available on how students and their families pay for college.

The Project on Student Debt crunched the numbers to try and get a clearer picture of how private loan borrowing has changed on our nation’s campuses since the last survey was conducted in 2003-04. It found that the proportion of undergraduate students taking out private loans jumped considerably over the five year period, from 5 percent to 14 percent in 2007-08.

Meanwhile, the number of students taking out private loans without first exhausting their cheaper and safer federal student loan options is on the rise. The analysis found that the proportion of private loan borrowers who did not take out federal student loans rose to 26 percent from 22 percent in 2003-04. Fourteen percent of all private loan borrowers did not apply for federal financial aid last year, and 12 percent applied for aid but did not take out federal loans.

Private loan borrowers are not only overrepresented at proprietary schools, but at expensive private colleges as well. The data shows that students attending private colleges compose make up about 13 percent of all undergraduates, but 22 percent of those taking out private loans.

While the numbers of students taking out these loans at private colleges are troubling, we are most concerned about the rapid growth of private loan borrowing at for-profit colleges and trade schools because these institutions have such a poor record of graduating students. According to a study conducted last year by Mark Schneider, the Department’s Commissioner of Education Statistics from 2005 to 2008, for-profit schools have "the lowest median graduation rate" of any sector at 38 percent. This figure "is almost twenty points lower than their private nonprofit counterparts and seven points lower than public institutions," including community colleges, Schneider wrote. The median rate at for-profit schools drops to less than 25 percent when counting only black students.

In addition, Schneider found that about half of proprietary school students attend institutions that graduate less than one-third of their students, compared to "around 10 percent in both private nonprofit institutions and public universities." And while more than 30 percent of black students attend colleges that graduate less than one-third of their black students, the percentages jumps to more than 60 percent at proprietary institutions.

At Higher Ed Watch, we have often warned of the hazards of private loans, particularly for students attending questionable for-profit trade schools. Private loans almost always have worse terms than federal loans, and lack important safeguards. In addition, they offer far fewer options for borrowers in repayment.

The latest NPSAS data should set off alarms about the untenable position we’re putting many financially needy students in — loading them up with high-risk debt to attend schools that are more likely than not to leave them stranded. Hopefully, these alarms will no longer go unheard.

[Disclosure: Higher Ed Watch receives support from the Institute for College Access and Success, which runs the Project on Student Debt.]

04.09.09 | Guest Post: Five Steps the Government Can Take to Help Private Loan Borrowers

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

[Editor's Note: The National Consumer Law Center is releasing a report today asking the Obama administration and Congress to provide relief for financially distressed private loan borrowers. In this guest post, Deanne Loonin, the report's author, explains why these individuals are deserving of help and outlines steps federal officials can take to ease their burdens and protect future borrowers.]

By Deanne Loonin

For many years, private student loans generated steady, if unspectacular, profits for lenders. The business model was relatively conservative, providing loans mainly to graduate students and creditworthy borrowers. Over the last decade, however, the student loan industry turned that model on its head. Spurred by Wall Street, lenders began aggressively marketing expensive private loans to high-risk students with little ability to repay them. For the most part, these companies were eager to make these loans because they could securitize them and shift the risk onto investors.

The recent crash in the private student loan market should not have been so surprising. The writing was on the wall but, as so commonly occurred during the bubble economy, most chose not to read the warning signs. Most rating agencies continued to rate private loan pools highly, even after signs of trouble began to emerge.

Lenders have paid a price for their irresponsible practices. By all accounts, delinquencies and defaults on these loans are continuing to accelerate and investors have little interest in taking a stake in these loans.

But the heaviest price is being paid by financially distressed borrowers who never should have been stuck taking out these unaffordable loans to begin with. At the National Consumer Law Center’s Student Loan Borrower Assistance Project, we have found private loan providers to be universally inflexible in granting long-term repayment help for these borrowers. Meanwhile, while the government is considering offering assistance to lenders so they can continue making private loans, it has yet to offer any relief to these borrowers.

Apparently federal officials have decided that these borrowers are "too small" to help. In reality, their numbers are large, but their political power is not. To the extent that their problems are exposed, it is generally through the voices of investors angry at crashing stocks and declining revenues.

In our report, we argue that these borrowers desperately need a safety net to give them some hope of escaping their debilitating debt and starting again. Among other things, we recommend that the government do the following:

  • Require private lenders and servicers that receive federal bail out assistance to offer loan modifications and other kinds of repayment relief to borrowers who are clearly struggling to repay their high-cost debt. Servicers should have the authority to modify loan terms, change interest rates, forbear or forgive principal, extend maturity dates, and offer forbearances, deferments, and other types of flexible repayment options. There is ample precedent in the mortgage sector tying loss mitigation and other consumer benefits to the receipt of federal funds.
  • Restore the rights of financially distressed borrowers to discharge private student loans in bankruptcy. As readers of Higher Ed Watch well know, the loan industry persuaded Congress in 2005 to make private loans as difficult to discharge in bankruptcy as federal loans.  As a result, borrowers who are too poor to repay their private loans are treated in the same severe way in bankruptcy courts as people who fail to pay child support, alimony, overdue taxes, and criminal fines.
  • Cancel the private loan obligations of borrowers who took on this debt to attend unlicensed, unaccredited trade schools that have shut down unexpectedly. As Higher Ed Watch has reported extensively, private lenders have partnered with unregulated trade schools to help students take on high-cost private student loans to attend these institutions, and then refused to cancel them when the schools shut down. These loan providers have spared no expense to try to prevent victims who challenge these practices from having their day in court. In the current environment where creditors are rewarded with bail outs for prior bad acts and where no one wants to take responsibility for the meltdown, taking action in this area is one small way to hold lenders liable for the damage they have done.
  • Impose more stringent regulations on the private loan market, including placing a cap on the interest rate and fees that private loan borrowers can be charged, and requiring lenders to strengthen their underwriting standards. Private loans should go only to borrowers who likely will be able to repay them, and they should be available at reasonable rates.
  • Strengthen consumer protection laws to expressly give victims of abusive lending practices the right to file individual and class action lawsuits against lenders and schools, and ban lenders from including mandatory arbitration clauses in loan contracts. Private loan borrowers who have been harmed currently have very little recourse because the loan industry often uses its market power to limit their access to justice.

Our report shows how an unsustainable business model helped lead to a credit crunch that has decimated our economy.  These unsustainable products were taken out by individuals trying to improve their futures.  "Unsustainable" in human terms means individuals who pursue their dreams of upward mobility, only to find that these dreams are shattered due to unaffordable debt loads that they will never be able to repay.  While it may be impossible to get all of these individuals back on track, it is clearly possible to help some. The fact that lenders are hardly trying is a national disgrace. We cannot truly begin to reshape the future and improve access to education without redress for those left behind.

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." Her views are her own and do not necessarily reflect those of the New America Foundation.

03.11.09 | Mailbag: Getting the Runaround from Sallie Mae

Posted in Financial Aid, Private Student Loans, Student Loans by Kristin Morris

As the student loan industry mobilizes to battle the Obama administration over the President’s plan to eliminate the Federal Family Education Loan (FFEL) program, we are starting to hear a lot from lenders about the superior customer service that the bank-based program allegedly provides. "Direct Loans are simply not subject to the same quality of service," Marcia Sullivan, director of government relations at the Consumer Bankers Association, recently told The New York Times.

Are these claims true? We really can’t say since there haven’t been any empirical studies comparing the level of customer service offered by the two federal student loan programs. But we are skeptical about the quality of service private lenders are providing, because of comments we have received over the past two years from federal and private student loan borrowers who have complained about their dealings with Sallie Mae, the nation’s largest student loan company.

Given the heated battle that is just getting started on Capitol Hill, we thought we’d share some of these comments with you.

We have heard, for instance, from many borrowers who complained that they could not get straight answers from Sallie Mae customer service representatives about how much they owed. One such comment came from a father who had co-signed his son’s private loans:

When my son’s loans were coming due, he called to find out about payment schedules, and a payment book, which never arrived. He finally got a notice that he was past due in payments. He talked to several people at Sallie Mae, and got several different amounts that were due. Finally got someone to state that they would send out payment coupons, which they did. He made the first payment, and then, his own fault, forgot about mailing the next payment until 2 days before due. He called Sallie Mae, and they had a totally different amount that was due, other than was on the payment coupon, and told him that he was late with his payments….. Not the case, we have canceled checks to prove otherwise. I called them, spent 3 hours on the phone, talked to about 5 different people, and got about 5 different amounts that were due… then I got the song and dance that if I paid them $377 on that day, everything would be caught up…. so I made the payment… never got a corrected payment booklet, or coupon, so we called again to make phone payment, and got ANOTHER DIFFERENT amount that was due… I cannot understand why they cannot give us a clear amount of payment that is due, and why it changes with each person that we talk to. (Scammed, February 6, 2009)

Others also complained of being asked to pay fees for services that were not rendered:

This past summer I knew I was about to have a lot of financial difficulties. I was 8 months pregnant, did not have a job because I had just moved into a new area…and well no one wants to hire someone who is clearly pregnant (sad but true). Anyway, I knew that I was not going to be able to make payments much longer on my private loans until at least after my child was born and when I was employed again.

So I called to speak with someone over the phone to make sure that there wasn’t something they could do to help me. I was told by the rep that if I paid $100 ($50 for each private loan – I had two) that I would be able to put my loans in forbearance. I actually advised the representative at that time that my online account showed that I was ineligible for forbearance. The representative assured me that this was not the case and if I paid this fee I would not owe another payment until December 27th, 2008. I even asked her several times to make sure we were on the same page that I would not owe anything until late December. She agreed with me each time.

Anyway, I went ahead and paid their fee and thought this would take care of my problem until December. I figured this would give me enough time to sort through some things and hopefully be able to start paying them again.

Well the next month rolls around and it shows that I still owe a payment. I called and asked why my loans were not put into forbearance when I had paid their $100 fee to do so. The representative told me that the payment only brought me current on my account and my loans WERE NOT put into forbearance like they had told me they would. Then she instructed me to pay ANOTHER $100 to put them into the so-called forbearance that I am pretty sure would have not happened for a second time. I kept explaining to them that I had already paid this fee and I would NOT be paying it again but it was like they could not understand that concept at all. (Private Loan Forbearance, January 12, 2009)

Another commenter, who was having trouble making payments on her loans because she was suffering from a debilitating illness, wrote in about "the runaround" she experienced trying to get the company to work out an affordable repayment plan:

I contacted Sallie Mae every step of the way and always got the runaround or a different story from them every time I called. They lost records of my communications. They would promise one thing and then renege. My $24K loan suddenly was hit with late payment fees and penalties almost equal to the amount of the original principle…With every plea for help, and always with the promise of paying back, I was met with a door slammed in my face. (Another Response to Ex-Loan Huckster, October 31, 2008)

Others accused the company of taking actions specifically to drive up the cost of their loans.  One borrower, who had taken out a total of $130,000 in federal and private loans to attend the Savannah College of Art and Design, wrote:

I know that borrowing that money comes to be my fault to some extent — but what isn’t my fault are the company policies and procedures of Sallie Mae. They have lost NUMEROUS payments of mine, and they have tacked on $1,000s in mysterious processing fees of which I can not get an answer from their "reps" as to what they are. (Not Full Sail but SCAD, March 2, 2009)

Others simply questioned the company’s competence:

I do not have federal loans through Sallie Mae. I have only private loans through Sallie Mae. I pay about $400 on these loans monthly, which is more than the minimum amount required…

But yesterday I received a phone call from Sallie Mae saying I am late on my federal loan payment. Again, I have no federal loan with them. Yet they seem to think I have a $10K federal loan at 7.22% variable interest rate in addition to my private loans. NOTE: This interest rate would be above my interest rate on my private student loans.

I completed graduate school in 2003. I have not been back to school and I have no plans to go back to school. I have been paying my private Sallie Mae loans at a rate that will have them paid off ahead of (Sallie Mae’s) schedule.

This is absolutely lunacy, especially when Sallie Mae touts its "borrower benefits"; its customer service and cries poverty to Congress at every opportunity. (I do not have federal loans, June 15, 2008)

Now this is obviously not a scientific survey. And we’re not saying that customer service in the Direct Loan program is perfect. But when we have received as many complaints as we have about the predominant student loan company in the country, we’ve got to wonder whether touting the loan industry’ s customer service capabilities is really going to fly.

As always, we appreciate the comments we have received on this topic and others. Please keep them coming.