N.J. Woman Charged With Scamming $200,000 in Student Loan Fraud
Posted by college-expert in College Plan News on August 20, 2010
A New Jersey woman was arrested last week for running a student loan scam
that allowed her to collect nearly $200,000 in student loans from
fraudulent college loan applications she submitted over a period of four
years (“U.S. Attorney: Browns Mill ‘Student’ Got $192,000 in
Education Loans,” The Trentonian, Aug. 11, 2010).
La’Vada Cruse, 23, has been charged in federal court with mail fraud and
aggravated identity theft.
According to the complaint filed with the U.S. District Court in Camden,
N.J., Cruse applied for 92 student loans between 2003 and 2007, seeking
more than $1 million in student loan funds, even though, according to
authorities, she completed only two college courses in three years. Cruse
applied for the student loans both in her name and in the names of people
whose names, Social Security numbers, and dates of birth she used without
their permission.
From those loan applications, Cruse successfully obtained 17 student
loans totaling $192,000. The lenders issued the student loan checks
directly to Cruse or to a nominee, and Cruse deposited the money into
accounts that she controlled.
Student Loan Scam Included Fake Documents and
Co-Signers
In the loan applications, authorities charge, Cruse claimed to be a
full-time student at any one of six New Jersey–area colleges, and many of
the applications were accompanied by a falsified college enrollment letter
stating that she was a student at the school.
Federal officials later learned that Cruse completed only six credit hours
of classes at Burlington County College in Pemberton, N.J., between 2004
and 2006 (“Burlington County Woman Accused of
Obtaining Thousands in Fraudulent Student Loans,” The Philadelphia
Inquirer, Aug. 12, 2010).
Cruse’s student loan applications also included a fake co-borrower, with
fraudulent biographical, employment, and financial information. Cruse
falsified letters of employment and created fake pay stubs and tax forms
for the ostensible co-signers in order to submit supporting documentation
with her loan applications, authorities said.
U.S. Attorney and IRS Joined Investigation
The Philadelphia Inquirer reports that Cruse came under scrutiny
in 2007 after police questioned her in the parking lot of a bank in
Medford, N.J., where she was sitting in a silver Mercedes-Benz E320 that
contained numerous applications for student loans. In the Mercedes, police
also found identification in various names and illegally obtained credit
cards, according to an arrest complaint.
Medford police were called to the bank after Cruse reportedly attempted
several times to withdraw money from an account that had been frozen on
concerns raised by bank employees.
A local investigation grew into a federal probe that involved the U.S.
Attorney’s Office, the IRS, and the U.S. Postal Service.
If convicted of the mail fraud charge, Cruse faces a prison sentence of up
to 30 years and up to a $1 million fine. The aggravated identity theft
charge carries a mandatory minimum sentence of two years.
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redditMedicaid Bill Means Fewer Cuts to Higher Education and Financial Aid Programs
Posted by college-expert in College Plan News on August 12, 2010
Congress was called back from its annual August recess on Tuesday to pass a bill
that adds $16.1 billion in funding for state Medicaid programs, a move that
will indirectly help public colleges by allowing states to forgo planned cuts to
their higher education budgets and, in some cases, restore suspended college
financial aid programs (“Colleges Get Reprieve as Congress
Approves Aid to States,” The Chronicle of Higher Education,
Aug. 10, 2010).
With less pressure to shift funds from higher education to cover Medicaid
shortfalls, states are expecting to be able to save higher education jobs while
shoring up grant-based aid for students, who ultimately can then take on less debt
from student loans if
state financial aid remains secure.
From California to Maine, governors and college administrators had been preparing
for severe cuts to state higher education budgets if the Medicaid bill failed. In
a June speech, California Gov. Arnold Schwarzenegger warned that his state’s share
of Medicaid funds under the proposed bill, which is expected to fall between
$1.2 billion and $1.8 billion, was “critical to preventing deeper pain
and deeper job losses.”
“If Congress fails to extend the full amount of Medicaid payments for states, we
will have no other choice than to make even more drastic cuts [to higher education
budgets],” Gov. Schwarzenegger said.
In Maine, state universities were facing an $8.4 million budget cut if the
bill failed, which would have come on the heels of an $8 million reduction in
state higher education appropriations since 2008 and a 6-percent cut in the
state’s higher education workforce since 2007.
Although the increased Medicaid funding doesn’t close state budget gaps
entirely — Maine, for example, will probably only get about $77 million
of the $100 million in Medicaid funding that it was counting on — public
college administrators like Rebecca M. Wyke, vice chancellor for finance and
administration for the University of Maine system, are expressing relief at the
bill’s passage.
“We know it's probably not the end of the troubles we'll have to face, but we're
all very thankful Congress has come through with this,” Wyke said.
Obama Speech on Education Reform to Highlight Financial Aid and Student Loans
Posted by college-expert in College Plan News on August 9, 2010
President Obama will highlight reforms made in the arena of financial aid and
student loans as part of a review of his administration’s work in higher education
in a speech today at the University of Texas at Austin (“President to Tout Achievements in
Higher-Education Policy,” The Chronicle of Higher Education,
Aug. 9, 2010).
The victory speech, most likely a political pick-me-up for the Democratic party
prior to what is shaping up to be a contentious mid-term election for
Congressional Democrats, will promote higher education reform as one of the “four
pillars” of the president’s economy-improving domestic policy, which also includes
health care, energy, and financial reform.
“You have heard a lot about the other [three] pillars, but we have made tremendous
progress on education reform as well,” Dan Pfeifferhe, White House communications
director, said to reporters in a conference call, suggesting that achievements in
higher education reform have been dwarfed in the larger public dialogue by
successes in the other three areas.
Pfeiffer and Education Secretary Arne Duncan mentioned to reporters the four main
achievements to be discussed in the president’s speech:
- Ending the Federal Family Education Loan Program (FFELP), which used taxpayer funds to subsidize the issuing of federal college loans by banks and private lenders, and transitioning the origination of all federal parent and student loans to the William D. Ford Federal Direct Loan Program, which issues the loans directly to students, cutting out the third-party middlemen
- Increasing federal funding to community colleges and historically black colleges
- Expanding federal student financial aid, including Pell Grants and Stafford student loans
- Simplifying the Free Application for Federal Student Aid (FAFSA) to help make it less cumbersome for eligible students to get money for college from Pell Grants and federal student loans
President Obama will deliver his speech in Gregory Gym at about 2 p.m.
Central Time. Live streaming of the speech can be viewed on the U.T. Austin “Know” website and at the following URL: http://realaudio.cc.utexas.edu:8080/ramgen/redundant/obama080910.rm
A captioned version of the live stream can be viewed here: http://realaudio.cc.utexas.edu:8080/ramgen/redundant/obama080910cc.rm
Wells Fargo Empties Customer’s Checking Account to Pay Delinquent Student Loan
Posted by college-expert in College Plan News on May 7, 2010
An Atlanta couple has found themselves with their savings wiped out after their
bank, Wells Fargo, cleared out their checking account in order to pay a piece of
what bank officials maintain is an outstanding student loan (“Suddenly, Bank Account Was Gone,” The Atlanta
Journal-Constitution, May 1, 2010).
After Hope and Matt Hughes had problems trying to make a purchase with their debit
card last month, they discovered that Wells Fargo had cleaned them out,
withdrawing $4,059.82 — everything they had — from their checking
account. They were also hit with $385 in overdraft fees for debit-card purchases
they had made on the day their checking account was emptied.
Wells Fargo appropriated the funds under its right of “setoff,” a prerogative held
by most banks that allows a bank to take money from a customer’s savings or
checking account in order to pay off any other account — a home mortgage,
credit cards, student loans — that the customer holds with the bank that’s
overdue.
In the Hugheses’ case, Wells Fargo was collecting money it says it was owed on a
$10,000 student loan Hope had taken out with Wachovia Bank, which was acquired by
Wells Fargo in 2008.
Your Bank’s License to Help Itself to Your Money: The Right of
Setoff
Setoff policies can vary from bank to bank, but in general, banks aren’t required
to provide a customer with advance notice that they’re going to take money from a
cash account as payment for another account. There are also typically no
restrictions, other than the amount that a customer owes on overdue accounts, on
how much money a bank can withdraw.
Seizing money through setoff, however, is usually reserved for a last resort, when
other attempts at collection have failed, says David Oliver, a senior vice
president of marketing and communications with the Georgia Bankers Association.
“We don’t do this without lots of attempts to communicate with our customers and
try to work things out,” Jay Lawrence, Atlanta spokesman for Wachovia, told
The Atlanta Journal-Constitution. “When this happens, we don’t like to do
this. We want our customers to succeed.”
Lawrence declined to comment on the Hugheses’ case except to say that bank records
differ from the version of events given by the couple.
Borrower Believed Her Private Student Loan Was in Deferment
Hope Hughes had taken out three student loans on her way to
a marketing degree from Kennesaw State University: two government-backed federal
college loans and one non-federal private student loan through Campus Partners, a
private education loan program offered by Wachovia.
Hope said she thought she had a six-month grace period after she graduated last
May before she had to begin paying back her student loans.
“After several rounds of calls and faxes to prove she graduated in May 2009,
not December 2008, as the bank believed, and a last-ditch application for a
deferment, she thought things were settled,” The Atlanta
Journal-Constitution reported.
But in January of this year, Wells Fargo apparently wrote off the Wachovia private
loan as a defaulted student loan, sending it to collections. Hope began receiving
bills for $11,338.60 — the total student loan amount, plus interest, fees,
and penalties.
In early April, after the Hugheses had already encountered the problems with their
Wells Fargo debit card, they received a letter notifying them that the bank had
exercised its right of setoff and taken the money from their checking account to
apply toward Hope’s allegedly defaulted student loan.
The balance of the private loan, nearly $7,300, is still outstanding.
In the meantime, Hope and Matt have had to dip into his 401(k) account, put
personal effects up for sale on Craigslist, and negotiate with their other
creditors in order not to fall behind on their home and car loans, which are also
held by Wells Fargo.
“We are so far behind,” said Hope. “I don’t want anybody else to go through what
we’ve been through. … I was blind-sided.”
Bank-Based Private Student Loans Hold Out Convenience … and
Vulnerability
As banks have expanded their services from simply being repositories for customer
cash to offering everything from home loans and car loans to credit cards,
insurance, and student loans, customers have increasingly consolidated their range
of financial needs with a single institution. This one-stop banking, or
“relationship” banking, has grown over the past 30 years.
To their advantage, customers may be able to qualify for lower interest rates or
preferred services when they take out additional loans or lines of credit with a
bank where they already have an established relationship.
On the other hand, these customers leave themselves open to their bank being able
to seize their cash, should they ever fall behind on one of those loans or lines
of credit — a situation in which more and more families are finding
themselves as the current recession and high levels of unemployment drag on.
“Our counselors are seeing more and more examples,” said John McCosh, spokesman
for the Consumer Credit Counseling Service of Greater Atlanta, a nonprofit
financial counseling agency. “When people come to us and we go through their
budget and various credit accounts and bank accounts to help them get an overall
picture of their finances, … and if we see that there is any vulnerability
because someone has a delinquent account at the same place where they have their
cash reserves, we will point out that it’s a vulnerability.”
Hope Hughes went to Wachovia for her student loan because she and Matt had banked
there for 10 years, taking out their home and car loans there as well.
Wells Fargo “may have had a right legally” to seize the cash from her checking
account, Hope said. “Ethically, should they have done it? No. Should they have
wiped out my entire bank account? Absolutely not.”
Program Repays Student Loans of Veterinarians Working in Rural Areas
Posted by college-expert in College Plan News on May 6, 2010
The National Institute of Food and Agriculture, an agency of
the U.S. Department of Agriculture, has begun accepting applications for
its Veterinary Medicine Loan Repayment Program, which offers to
repay qualified veterinarians’ federal and private student loans in
exchange for service in underserved rural areas of the country (“NIFA
Begins Accepting Applications for Veterinary Medicine Loan Repayment
Program,” NIFA press release, April 30, 2010).
Eligible
applicants to the VMLR program commit to three years of service in a
designated veterinary shortage area, and, in return, NIFA
will repay up to $25,000 worth of student loan debt per year. Repayment is
limited to the principal and interest on federal student loans and private
student loans used to earn a Doctor of Veterinary Medicine degree, or the
equivalent, from an accredited college or university.
The government-sponsored loan repayment program seeks to address shortages
of veterinarians in high-priority specialty areas in over 150 geographical
locations across the country — areas, says NIFA, that are “critical
to the national food safety and food security infrastructures, and to the
health and well-being of both animals and humans.”
Student Loan Debt Cited as One Reason Vets Eschew Rural
Practice
NIFA attributes one of the biggest causes of such shortages to the high
cost of veterinary school, which can average between $130,000 and $140,000
for four years of veterinary medical training leading to a veterinary
degree.
Upon graduation, many veterinarians decide to practice in cities and other
urban areas, working with small animals, rather than in rural areas,
working with large farm animals like cattle and pigs. Urban practice tends
to pay better than rural practice, allowing new city veterinarians to be
in a better position to pay off their student
loans.
“Most of the veterinarians graduating now go to open practices, which are
predominately either small-animal or equine only. They can charge higher
prices in the city on small animals, and it’s easier work, and they have
emergency clinics to handle after-hours calls,” said Dr. Hardy Stewardson,
a veterinarian who owns a private rural practice in Red River County,
Texas (“Short Supply: Large-Animal
Veterinarians Needed,” Country World, January 25,
2010).
“There are not many people graduating now that will go to a rural town,
where they have to work on everything — cattle, pigs, whatever,
horses, cats, dogs. Most of your veterinarians in rural areas don’t charge
as much for the same services as they do in cities,” Stewardson added.
Expanding Veterinarian Services by Easing the Burden of Student
Loans
With its loan repayment program, NIFA hopes to make the repayment of
college loans and graduate student loans less of a factor for veterinary
school graduates trying to decide between urban and rural practice.
“The lack of adequate veterinary services, especially in the area of food
animal medicine, creates hardships for producers and endangers livestock
throughout rural America,” said Agriculture Secretary Tom Vilsack.
“This program will help alleviate the shortage of trained professional
veterinarians that serve our producers, improving the health of the
livestock industry and helping ensure a safe food supply.”
Applying for the Veterinary Student Loan Repayment
Program
For more information, or to apply for NIFA’s Veterinary Medicine Loan
Repayment Program, visit the VMLRP information page on the NIFA website at
www.nifa.usda.gov/vmlrp.
Proposed Legislation Allows Discharge of Private Student Loans in Bankruptcy
Posted by college-expert in College Plan News on May 4, 2010
Democratic lawmakers in both chambers of Congress have proposed legislation that
would make private student loans eligible for discharge under U.S. bankruptcy
laws.
Sens. Richard Durbin of Illinois, Sheldon Whitehouse of Rhode Island, and Al
Franken of Minnesota introduced the Fairness
for Struggling Students Act (S. 3219) in the U.S. Senate on
April 15, the same day that Reps. Steve Cohen of Tennessee and Danny
Davis of Illinois introduced the Private Student Loan
Bankruptcy Fairness Act (H.R. 5043) in the U.S. House of
Representatives.
The House Judiciary Committee recently held a hearing on the proposed House bill
(webcast of the House
Judiciary Committee hearing on the Private Student Loan Bankruptcy Fairness
Act, April 22, 2010).
Student Loans Among Most Difficult Debts to Discharge
As the U.S. bankruptcy law stands now, private student loans — credit-based
student loans issued by private banks without the backing of the federal
government — are grouped together with government-backed federal college
loans under the category of “education loans,” which are exempt from discharge in
bankruptcy in all but extreme cases.
In order to have one’s private student loans erased in bankruptcy, a borrower must
be able to show that repaying the loans would result in “undue hardship,” a legal
standard that can be extremely difficult to meet and that has generally been
reserved for government- and court-mandated obligations — unpaid alimony and
child support, tax debts, criminal fines. Neither car loans nor credit card debts,
not even home mortgages, are subject to the undue-hardship requirement to be
dischargeable in bankruptcy.
In fact, the legal
requirements for discharging education loans are so onerous to meet that most
bankruptcy attorneys avoid the process altogether.
Of the roughly 72,000 student loan borrowers in bankruptcy in 2008, only
0.4 percent sought discharge for their student loans, notes Mark Kantrowitz,
the publisher of FinAid.org and FastWeb (“Congress Proposes Allowing Private Student Loans to Be Discharged
in Bankruptcy,” FastWeb, April 22, 2010).
Half of those roughly 2,880 cases have been resolved, with only 22 percent of
those borrowers succeeding in having some or all of their student loans
discharged. Out of all 72,000 borrowers, just 29 had their student loans
discharged entirely.
Private Student Loans Would be Redefined as Private Consumer
Loans
The protected status currently allocated to private student loans in bankruptcy
wasn’t always the case. Until a change in bankruptcy laws five years ago, private
student loans, like credit cards, car loans, and other privately issued debts,
were dischargeable in bankruptcy.
But in 2005, as a bankruptcy reform bill — eventually signed into law by
President George W. Bush as the Bankruptcy Abuse Prevention and Consumer
Protection Act (S. 256) — was taking shape, a provision was added to
recategorize private student loans as education loans, granting private student
loan lenders the same protections against debt write-offs in bankruptcy as the
federal government, which issues federal student loans that are subsidized by
taxpayers.
“The 2005 bankruptcy restrictions penalize borrowers for pursuing higher education
[and] provide no incentive to private lenders to lend responsibly,”
Rep. Danny Davis criticized, in the comments from lawmakers that accompanied
the notice on Sen. Richard Durbin’s website announcing the proposed student loan
bankruptcy reforms (“Durbin, Cohen, and Others
Introduce Legislation to Restore Fairness in Student Lending,” April 15,
2010).
Davis, Durbin, and the other sponsors of the House and Senate bills seek to
rectify what they see as an unfair bankruptcy exemption by redefining private
student loans as private consumer loans, which could then be considered for
discharge, as any private debt would be in typical personal bankruptcy
proceedings.
The legislation is aimed at “restoring fairness in student lending by treating
privately issued student loans in bankruptcy the same way other types of private
debt are treated,” Durbin said.
Added Sen. Sheldon Whitehouse, “By repealing special treatment for private
lenders, we will hold big banks accountable, protect young people from abusive
lending practices, and make college more affordable.”
Lenders and Advocates Offer Mixed Support for Student Loan Bankruptcy
Bills
Federal student loans are unaffected by the proposed legislation and will remain
categorized as education loans and exempt from discharge in bankruptcy except in
cases that meet the “undue hardship” standard. Unlike private student loans,
federal student loans, as government-funded and taxpayer-subsidized loans, were
shielded from discharge even prior to the bankruptcy reforms of 2005.
This ongoing exclusion in the submitted bankruptcy bills has led to mixed support
among student loan lenders and consumer advocates, some of whom see the omission
of federal student loans from the proposed legislation as creating an uneven
playing field tilted against private lenders.
Supporters of the federal-loan exclusion point out that private student loans
mostly lack the consumer protections guaranteed by federal student loans, such as
fixed, capped interest rates, income-based repayment plans, and payment deferment
options — all of which leaves struggling borrowers more in need of bankruptcy
protection.
Borrowers of private student loans are “at the mercy of the lender if they face
financial distress due to unemployment, disability, or illness,” said
Rep. Hank Johnson, D-Ga., in his testimony before the House Judiciary
Committee.
Without monthly payment caps or flexible repayment alternatives, and subject to
interest rates that can reach into the double digits — as much as two or
three times the interest rates for federal college loans — “private student
loan borrowers are often unable to work out terms that ensure a reasonable and
fair payment schedule,” Johnson said.
Sallie Mae, the largest private student loan company in the United States, while
backing the spirit of the legislation, objects to the singling out of non-federal
private student loans.
“Sallie Mae continues to support reform that would allow federal and private
student loans to be dischargeable in bankruptcy for those who have made a
good-faith effort to repay their student loans over a five-to-seven year period
and still experience financial difficulty,” Sallie Mae spokesman Conway Casillas
told Kantrowitz.
Casillas emphasized Sallie Mae’s position that Congress should “extend the same
consumer protections to all education loans, regardless of the source or tax
status of the entity or governmental institution providing the funds.”
Alan Collinge of StudentLoanJustice.org, an advocacy group for borrowers in
default on their student loans, agrees that Congress should provide bankruptcy
protection for “all student loans, public or private, held or guaranteed by
nonprofits and for-profits.”
But Collinge objects to any sort of special preconditions — like the
repayment caveat proposed by Sallie Mae that would require borrowers to have been
repaying their student loans for at least five years before the loans are
dischargeable — saying that student loan borrowers should be afforded “the
same fundamental consumer protections that all other borrowers enjoy.”
Another student advocacy group, the United States Student Association, has thrown
its strong unilateral support behind the reform bills. “This legislation ends the
special treatment private student lenders have enjoyed for years at the financial
and personal expense of debt-ridden college graduates,” said USSA’s president,
Gregory Cendana (“Students Back Measures to
Restore Fairness in Private Student Loan Bankruptcy Laws,” United States
Student Association, April 20, 2010).
“If a struggling individual can file for bankruptcy on their home, credit card, or
even gambling debts, then why not student loans? This is an anomaly in bankruptcy
law that arbitrarily treats student borrowers worse than other types of
borrowers,” Cendana added.
According to the USSA, student loan borrowers in the Unites States currently hold
an estimated $730 billion in outstanding federal and private student loan
debt, of which 60 percent, or $440 billion, is in deferment or
default.
Republicans Express Concern for Potential Impact on Student
Lending
Although some Congressional Republicans agree with the need for reform to address
the issue of ballooning student loan debt, Trent Franks, the Republican
representative from Arizona and the House Judiciary Committee’s ranking minority
member, doesn’t see the dischargeability of private student loans as a
solution.
“H.R. 5043 is not the answer to the growing debt burden that our nation's
graduates face. The real culprit is the rising cost of higher education,” Franks
said during the Judiciary Committee’s hearing on the Private Student Loan
Bankruptcy Fairness Act.
He also questioned why private student loan lenders are being targeted. “This bill
singles out private student loans for less favorable treatment in bankruptcy than
loans funded by the government and nonprofit organizations. Now, why should we
single out private student loans for less favorable treatment?” he asked.
“The exception from bankruptcy discharge that private student loans currently
receive is vital, … ensur[ing] that private capital continues to flow into
the student lending market,” Franks said.
Franks maintains that the availability of private student loans is critical for
families to be able to pay for college. Private student loans “are used to help
fill the gap between the actual cost of attendance and the limits on federal loans
and school-provided financial aid,” he said. “And because this gap is increasingly
growing wider, private loans are becoming a more and more important tool to
finance education.”
Under the proposed bills, with greater exposure to the risk of bankruptcy
write-offs, lenders of private student loans would have to tighten credit
restrictions even further to appease investors, making private student loans even
more unavailable to all but those borrowers with the most sterling credit
histories.
“Student lenders are finding it more difficult to raise capital because investors
are not buying securities backed by student loans,” said Franks. “Legislation like
H.R. 5043 that makes student loans less attractive to investors will
inevitably have the effect of shrinking an already depressed private student loan
market.
“If lenders are forced to scale back student lending because private student loans
are subject to bankruptcy discharge, many students will be denied access to higher
education,” Franks said.
Ultimately, he warned, the proposed legislation “will discourage private lending
and encourage abuse of the bankruptcy system.”
Noted Consumer Advocacy Attorney Likens Private Student Loans to Subprime
Loans
But Deanne Loonin, attorney at the National Consumer Law Center, who was also
called to testify at the House Judiciary Committee hearing, disputes Franks’
prognosis of the bills.
“The harsh treatment of students in the bankruptcy system was built on the false
premise that students were more likely to abuse the bankruptcy system,” Loonin
said in her submitted written testimony. “Yet there is no evidence, and has never
been any evidence, to support this assumption.”
Speaking before the House committee, she also accused private student loan lenders
of engaging in predatory lending.
Private student loans reflect “all the features of subprime lending, including the
failure to assess reasonable ability to repay,” Loonin said. “Poor underwriting,
irresponsible lending, high fees, origination fees up to 10 percent, APRs …
all variable-rate — 15, 20, over that percent.”
Moreover, she testified, when she contacts student loan lenders on behalf of
struggling borrowers to try to negotiate more manageable repayment terms, the
lenders “offer virtually nothing” to the borrowers. Without being able to
discharge their private student loans in bankruptcy, even as a last resort,
financially distressed borrowers are left with no recourse and ongoing student
loan payments that can keep them from being able to save money and get back on
their feet.
“Basically, the most vulnerable borrowers are the least likely to be able to repay
the loans,” Loonin said, “and they are the ones who are hurting the most.”
Further Reading
Loonin, Deanne, and Brett Weiss. “Undue Hardship? Discharging
Educational Debt in Bankruptcy.” Testimony submitted to the U.S. House of
Representatives Committee on the Judiciary, Sept. 23, 2009.
Loonin, Deane. “The Private
Student Loan Bankruptcy Fairness Act of 2010.” Testimony submitted to the U.S.
House of Representatives Committee on the Judiciary, April 22, 2010.
Private Student Loan Delinquencies Fall During the Last Months of 2009
Posted by college-expert in College Plan News on May 3, 2010
The last three months of 2009 saw a decrease in late payments for private student
loans and reversed a five-quarter trend of rising delinquencies, according to the
first publicly released analysis of private student loan payment data from credit
reporting agency TransUnion.
The agency’s data, based on 270 million consumer credit files, recorded a
4.9 percent drop in the ratio of delinquent private student loans —
defined as private student loans past due by 90 days or more — to
6.03 percent in the fourth quarter of 2009, down from the third-quarter rate
of 6.34 percent (“Student Loan Late-Payment Rate Falls,” Chicago Sun-Times,
May 2, 2010).
The decline in private student loan payments 90 days or more past due put an end
to a trend of increasing delinquencies that began in the second quarter of 2008.
The 30-day delinquency rates saw an even greater drop, falling 6.6 percent to
7.52 percent, down from a third-quarter high of 8.06 percent.
Also encouraging is TransUnion’s finding that the average outstanding balance for
delinquent private student loan accounts, $13,033, was lower in the fourth quarter
than the average outstanding balance of $17,754 on current and active accounts.
Data Shows Possible Link Between Private Student Loan Delinquencies and
Unemployment
At a state level, the three highest fourth-quarter delinquency rates for private
student loans were in Florida (9.44 percent), Mississippi
(9.09 percent), and Tennessee (9.07 percent), where government data
shows significant jumps in unemployment.
The three lowest fourth-quarter private student loan delinquency rates were in
Vermont (3.28 percent), New Hampshire (3.6 percent), and North Dakota
(3.75 percent), states where, although unemployment has risen, the increase
has been more modulated than throughout the rest of the country.
Falling Private Student Loan Delinquencies Good Short-Term News for
Lenders Looking for Long-Term Recovery
While late payments on private student loans are down from the previous quarter,
TransUnion’s year-over-year data reveals that delinquencies have grown sharply
over the preceding 24 months. The fourth-quarter 30- and 90-day private student
loan delinquency rates are up 10.4 percent and 11.67 percent,
respectively, from 2008 and up by 16.93 percent and 15.52 percent,
respectively, from 2007 (“TransUnion: Student Loan Delinquencies Down This Quarter, but Rise
Year Over Year,” TransUnion press release, April 27, 2010).
Delinquency rates at Sallie Mae, the largest lender of private student loans, are
in line with the trends identified by TransUnion, notes Tim Ranzetta for the
Student Lending Analytics Blog. In the fourth quarter of 2009, Sallie Mae’s
90-day-plus delinquencies were running at 6.1 percent, down from
6.2 percent in the previous quarter, while both of these quarters mark a
substantial spike from the delinquency rates of around 4 percent in the
fourth quarter of 2008 (“TransUnion Finds Private Student
Loan Delinquencies Decline in 4Q 2009,” April 27, 2010).
“Given that Sallie Mae seems to be a barometer for the industry,” Ranzetta writes,
“readers might be interested to know that 90-day-plus delinquencies in the first
quarter, 2010, rose to 6.4 percent (from 6.1 percent the previous
quarter), which the company attributed to seasonality” — a majority of
borrowers graduating in May and June, entering repayment in the fourth quarter of
that year, which then results in a higher saturation of delinquent accounts in the
first quarter of the following year.
Despite this surge in year-over-year delinquencies and the fact that investors are
still cool to securities backed by student loans, TransUnion is predicting that
the future long-term outlook for lenders of private education loans will be more
favorable, at least in terms of the volume of new private student loans issued.
“The total dollar value of new private loans originated in 2009 fell by nearly
half when compared to the private loan heydays of 2006 and 2007. [But] federal
loans, which faced similar funding challenges …, still increased more than
30 percent for the same period,” said Thomas Morrissey, manager of
TransUnion’s analytic and decisioning services business unit.
“Even as government loans retake a larger share of today’s student loan business,”
explains Morissey, “private loans are expected to steadily regain a good portion
of their prior market share as the economy rebounds due to escalating tuition
costs, no expected increase in federal loan limits, and a still-soft real estate
marketplace” that continues to make it nearly impossible for families to draw on
home equity and home equity lines of credit to help pay for college.
TransUnion is predicting the number of new private student loans to remain flat
throughout most of 2010, possibly see a slight increase around the year’s end, and
then recover by the 2011–12 academic year.
Sallie Mae Cuts 2,500 Jobs in Response to New Federal Student Loan Law
Posted by college-expert in College Plan News on April 30, 2010
Sallie Mae, the largest student loan company in the United States, is cutting
2,500 jobs over the next two years in response to new legislation that ends
taxpayer subsidies to private lenders for the origination of federal student
loans.
Sallie Mae has informed 1,200 employees at offices in Killeen, Texas, and Panama
City, Fla., that they will lose their jobs by the end of the year, according to
reports from The Associated Press. An additional 1,300 jobs are expected to be
phased out in 2011 (“Sallie Mae Cuts 2,500 Jobs Citing Student Loan Law,” USA Today,
April 23, 2010).
The job cuts come in response to the Student Aid and Fiscal Responsibility Act,
which was passed in March as part of the Obama administration’s larger health care
reconciliation bill (H.R. 4872).
SAFRA, which goes into effect June 1, ends the Federal Family Education Loan
Program (FFELP) and its decades-old practice of federally subsidizing bank
middlemen to originate federal student loans that are guaranteed by the U.S.
government, thereby pushing Sallie Mae and other private student loan companies
out of the federal student loan business.
The legislation instead expands the government’s Federal
Direct Student Loan Program, which issues federal college loans directly to
borrowers rather than through third-party private companies like Sallie Mae, so
that the U.S. Department of Education will originate all federal student loans
going forward.
“We’ve been warning about the impact of this legislation, and [cutting jobs] is a
direct result of that,” said Sallie Mae spokesman Conwey Casillas (“Sallie Mae
Closing; Boyd Holds Out Hope,” Panama City News Herald, April 21,
2010).
Supporters of SAFRA maintain that the overhaul of the federal student loan system
and the end of government-subsidized third-party lending will save taxpayers
billions of dollars and shift what had previously been bank subsidies into other
education-based programs, including federal Pell grants for low-income students.
At the same time, the elimination of the FFEL program means nearly a third of
Sallie Mae’s 8,600 employees will have to find new jobs in a struggling economy in
which unemployment continues to hover near 10 percent.
The student loan reform is “not good for the company, and it’s certainly not good
for the employees,” said Sallie Mae Chairman and CEO Albert Lord.
The Department of Education, however, disputes Sallie Mae’s claim that the job
cuts are all due to the move from FFELP to Direct Lending.
Sallie Mae Transitions From Originating to Servicing Federal Student
Loans
Sallie Mae’s restructuring efforts will begin in about 60 days. In Killeen, all
500 jobs will be phased out during the remainder of 2010 and possibly the first
quarter of 2011 before the facility there is closed. The company will take the
same approach in eliminating all 700 jobs from its facility in Panama City.
Sallie Mae said it will offer employees a minimum of four months’ severance and
also provide assistance in helping them find new jobs or transfer to other
positions within the company (“News That Local Call Center Is Closing Stuns Workers,” KWTX TV,
April 22, 2010).
As it transitions away from being an originator of federal student loans, Sallie
Mae will need to reorient staff away from issuing federal student loans toward
federal student loan servicing — handling borrower payments, repayment plans,
and collections.
Sallie Mae is one of four student loan companies — Nelnet, Great Lakes
Educational Loan Services, and the Pennsylvania Higher Education Assistance Agency
(PHEAA) are the others — that won contracts with the Department of Education
to service $550 billion in current outstanding federal student loans as well
as future federal student loans originated under the Federal Direct Loan
program.
Sallie Mae will also continue to originate and service its own private student
loans, which are not backed by the federal government and which are intended to
supplement a student’s federal college loans when federal student aid and other
financial aid isn’t enough to cover the student’s college expenses.
To help employees at FFELP-based student loan companies like Sallie Mae, the
Education Department has created a $50 million fund to aid in transitioning
workers from loan origination to loan servicing.
First Marblehead Partners With SunTrust to Offer Private Student Loans
Posted by college-expert in College Plan News on April 26, 2010
First Marblehead Corp., one of the country’s leading providers of private student
loans, announced today that it has entered into a joint private student loan
program with SunTrust Banks, Inc., to begin sometime between July and
September.
SunTrust will fund the program’s school-certified private loans, and First
Marblehead will provide various loan- and customer-support services, “including
loan processing, product support, program support and portfolio management, and
program administration services” (“First Marblehead
Enters Into Loan Program Agreement With SunTrust,” First Marblehead press
release, April 26, 2010).
First Marblehead projects that it will be able to help SunTrust fund $200 million
in private student loans during the course of the companies’ collaboration.
“We are pleased that this partnership with First Marblehead will enhance the
options we offer for families and students seeking assistance to fund the rising
costs of college,” said Mark Smith, SunTrust’s executive vice president in charge
of specialty lending.
With SunTrust Partnership, First Marblehead Rolls Out ‘Monogram’ Loan
Customization Program
The joint student loan venture with SunTrust will be the first to use First
Marblehead’s new “Monogram” program, which allows student loan lenders “to
customize a loan program to meet defined risk control and return objectives,”
First Marblehead explained.
“Partnering with SunTrust provides First Marblehead a meaningful opportunity to
structure, process, and originate private student loans in this new market
paradigm of credit, risk management, and revenue sharing,” said Daniel Meyers,
First Marblehead’s president and CEO. “This loan program will put our Monogram
structure into the marketplace and demonstrate that our revenue model does not
require a capital markets takeout.”
Since it was founded in 1991, First Marblehead has processed more than 6 million
student loan applications and disbursed over $16.5 billion in private student
loans, according to the company website. First Marblehead was a
provider of the private student loans offered by NextStudent in 2005–08.
Shuttered I.T. School Sued for Siphoning Millions in Tuition and Student Loans
Posted by college-expert in College Plan News on April 23, 2010
Maryland-based computer training school ComputerTraining.edu is being sued by the
Pennsylvania state attorney general’s office and in a federal class-action claim
for abruptly shutting down its operations four months ago and leaving its students
with thousands of dollars of debt from federal and private student loans but
without certifications and without refunds (“Fallout Spreads From ComputerTraining Collapse,” The Baltimore
Sun, March 24, 2010).
In December 2009, ComputerTraining, which had been a stable business for
17 years, suddenly closed the doors to all 25 of its campuses across
14 states and declared bankruptcy. Self-billed as “America’s Largest I.T.
Academy,” ComputerTraining was a for-profit career school offering six-month
Microsoft-certified computer technician programs with tuition ranging from $13,500
to more than $28,000.
“Just days before closing their schools in late December 2009,” the recently filed
class-action lawsuit claims, “the ComputerTraining defendants … siphoned
massive amounts of student loan funds from accounts their students had with Sallie
Mae and other loan companies, lenders, and sources.”
Lawsuits Seek Millions in Damages to Recoup Students’ Tuition and Student
Loan Money
Although ComputerTraining’s course catalog and standard enrollment agreement
promised students a money-back refund if the school closed before the completion
of their program, no tuition or fees have been refunded. Until it was taken down,
the ComputerTraining website was referring students to state agencies for refund
information.
As a result, Maryland, Ohio, and several other states are dipping into insurance
pools and bonds to reimburse nearly 1,000 students who took out federal and
private student loans to pay more than $5 million in tuition to the failed
company. Other for-profit career schools may now be left paying higher fees into
these state-run tuition recovery funds.
John Ware, executive director of the Ohio State
Board of Career Colleges and Schools, says his state is having to spend
$500,000 from a $1.7 million recovery fund while students struggle to get
reimbursed.
“Once we get that squared away, we’re going to work with the [Ohio] attorney
general to see who we can go after legally,” Ware told The Baltimore
Sun.
Some states aren’t waiting. Pennsylvania Attorney General Tom Corbett filed suit
against ComputerTraining in January for full restitution of almost $2 million
in tuition already paid by students from his state.
His office is also seeking fines and civil penalties for violations of Pennsylvania’s Unfair
Trade Practices and Consumer Protection Law, along with injunctions that would
prohibit ComputerTraining from operating in the state, freeze the company’s
assets, and protect and preserve student and business records (“Pennsylvania Sues ComputerTraining.edu,” Lancaster
Intelligencer Journal, Jan. 15, 2010).
In Michigan, a multimillion-dollar class-action lawsuit was filed in federal court
on April 14 on behalf of 20 ComputerTraining students. The lawsuit, brought
by The Googasian Firm in Bloomfield Hills, Mich., seeks compensation for
negligence, breach of fiduciary duties, negligent misrepresentation, unjust
enrichment, breach of contract, fraud, and civil conspiracy (Plaintiffs v.
ComputerTraining.edu, class-action complaint, filed April 14, 2010, in
U.S. District Court for the Eastern District of Michigan).
Stricter Credit Restrictions on Private Student Loans Were the Beginning
of the End
Because ComputerTraining demanded that students pay full tuition for its programs
in advance — with the exception of students who obtained student loans from
Sallie Mae, who only had to pay half their tuition upfront — most students
found themselves “obtaining one or more student loans, borrowing money from family
or friends, or tapping into savings, such as IRAs and 401(k) accounts” in order to
enroll (“Students Say Computer School Rolled Them,” Courthouse News
Service, April 16, 2010).
But in early 2009, amid the ongoing credit crisis, as lenders tightened credit
requirements for private student loans, prospective students began finding it
difficult to get the student loan money they needed. The resulting sharp decline
in enrollment caused ComputerTraining to begin struggling immediately.
To encourage enrollment, the rapidly declining company cut tuition by half at many
campuses and allegedly began engaging in ethically dubious activities such as
“attract[ing] new students through radio ads after officials knew [the company]
was going broke,” said Thomas Howlett, an attorney with The Googasian Firm (“Suit: ComputerTraining
Recruited Knowing It Would Close,” The Detroit News, April 15,
2010).
The Michigan class action alleges that, during the second half of 2009, “the
ComputerTraining defendants … began an admissions push that included hiring
numerous additional salespeople, increasing the compensation and commissions to
such persons, … and/or enrolling as many students as possible.”
Despite its efforts, the company collapsed anyway.
On December 31, 2009, students received an e-mail from ComputerTraining
stating that all of its schools and corporate offices had been closed without
warning by Branch Banking & Trust, the company’s main lender, who is now suing to
recoup a $1.5 million loan.
“If they were in such dire financial straits, they must have had wind of that by
the time I enrolled,” Craig Potter of Metamora, Mich., told The Detroit
News. Potter paid $13,500 to ComputerTraining for what was supposed to be six
months of classes that began in October.
“I think they were just trying to get a
big money grab at the end,” Potter said.