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Student Loan Scandals

Congress on the Verge of Making Private Loans Safer for Students

July 13, 2010

Congress is expected to approve landmark legislation this week that would, for the first time, put a single federal agency in charge of regulating private student loans, rather than the patchwork of agencies that have done little to curb the types of predatory private loan practices we have written so much about.

Although the final version of the financial regulatory overhaul bill does not go quite as far as we would have liked, it appears that it would go a long way towards making private loans safer for students.

The following are some of the most promising aspects of the legislation. The bill would:

  • Create a federal watchdog agency with the type of broad authority needed to rein in abuses:

The new Consumer Financial Protection Bureau (CFPB) would be in charge of writing rules that apply to all private student loans, including those offered by non-banks, such as Sallie Mae and for-profit colleges. The bureau would have the authority to set standards related to the underwriting and marketing of private loans and to determine the types of disclosures lenders would be required to make to prospective borrowers.  The bureau would not, however, be able to dictate loan terms. The legislation expressly bars lenders from capping the interest rates that they can charge borrowers.

How Congress Could Spoil Catherine Reynolds’ Comeback

June 10, 2010

As we reported on Tuesday, Washington, DC socialite Catherine Reynolds is seriously considering jumping back into the private student loan market. Her return would be big news because she left the business three years ago embroiled in controversy -- with her non-profit company EduCap, which marketed private loans under the brand name Loan to Learn, facing heavy and deserved scrutiny from the Internal Revenue Service, the Senate Finance Committee, and the news media over its questionable practices.

But this is not a done deal yet. The question of whether or not Reynolds re-enters the private student loan business rests largely in the hands of Congress, which is currently considering legislation that could stop her in her tracks.

We are referring to a proposal that is included in the House of Representatives version of the mammoth financial regulatory overhaul bill that would require colleges to certify a student’s need for private loans before that individual could receive them from companies, like EduCap, that market these high-cost loans directly to students. The plan aims to give college financial aid administrators the opportunity to counsel students about their financial aid options so that they do not unwittingly take on unnecessary private loan debt. This is important because, according to the U.S. Department of Education, nearly two-thirds of undergraduates who borrowed private loans in the 2007-08 academic year did so even though they hadn’t exhausted their eligibility for lower-cost federal student loans first. One quarter of these private loan borrowers did not take out any federal loans at all.

Exclusive: A Student Loan Comeback for the Controversial Catherine Reynolds?

June 8, 2010

Higher Ed Watch has learned that Washington, D.C. socialite Catherine Reynolds, the chief executive officer of EduCap, a non-profit company that used to market high-cost private student loans under the brand name Loan to Learn, is in serious discussions about making a comeback in the private student loan business.

According to Congressional sources, Reynolds and her associates have been busy in recent months making the rounds on Capitol Hill -- visiting key lawmakers and their staffs as well as executive branch officials -- to gauge how policymakers would react if Reynolds were to move forward with her plans to re-enter the private student loan marketplace.

We understand that the reception has been underwhelming at best. That’s not too surprising given the controversy that surrounded Reynolds and her student loan company when she decided to suspend its operations in the summer of 2007.

The End of FFEL

March 26, 2010

A little more than 15 years ago, the Federal Family Education Loan (FFEL) program was on the verge of extinction. A Democratic president pushed Congress to phase out the FFEL and replace it with a program in which the U.S. Department of Education would provide federal loans directly to students through their colleges. The transition, however, came to a grinding halt on election night 1994. Republicans gained control of Congress and gave the FFEL program a new lease on life.

But during the intervening years, the student loan industry ran amok. When it came to power, the Bush administration put loan industry officials and lobbyists in charge of the Education Department. Meanwhile, lenders such as Sallie Mae and Nelnet showered Congressional leaders with hundreds of thousands of dollars in contributions each election cycle. The result: a virtually unregulated industry exploiting a federal program to enrich itself at the expense of students and taxpayers alike.

These were the years in which, among other things:

  • A group of lenders systematically overcharged the federal government more than $1 billion in improper 9.5 percent loan subsidy payments.
  • Student loan providers routinely violated a federal law forbidding lenders from providing "illegal inducements" to colleges and financial aid administrators in exchange for getting the schools to steer borrowers their way.
  • Loan companies used relationships they had forged with colleges and trade schools through the FFEL program to push dangerously high levels of expensive private loan debt on low-income and working-class students who had little hope of paying it back.

All the while, the direct student loan program was delivering the same federal loans to students at lower costs for taxpayers and without all the scandals.

Yesterday, Congress finally said enough is enough. We salute those policymakers in the White House and on Capitol Hill who courageously decided to put the interests of students and taxpayers first.

Keeping Non-Profit Loan Agencies on a Pedestal

March 25, 2010

Which student loan industry group has the most clout in Washington? Judging by the student loan reform bill that Congress is poised to enact, the hands-down winner would have to be the Education Finance Council (EFC), a trade association for non-profit student loan companies. The organization has clearly benefited from the common perception on Capitol Hill that non-profit student loan agencies are more upstanding than their for-profit peers -- which, as we’ve said before (see here and here), is a dubious proposition indeed.

As we recently reported, the pending legislation, which would eliminate the Federal Family Education Loan (FFEL) program, includes a set-aside for non-profit loan agencies taken from a proposal that EFC quietly shopped around Capitol Hill last summer (and that Higher Ed Watch was the first to make public). The measure would give each and every one of EFC’s nearly 30 members a no-bid contract to service the Direct Loans of up to 100,000 students attending institutions in their home states.

Just how big a benefit will this be for the association’s members? Consider this: while most of the student loan industry is warning of the job losses that will occur after the bill passes (claims that in many cases have been wildly exaggerated), a top official with the Missouri Higher Education Loan Authority (MOHELA) has indicated that his agency will soon be posting job ads. “It’s very possible we’ll need to hire 400 to 600 more people,” Will Shaffner, the agency’s director of business development, told the St. Louis Post-Dispatch earlier this week.

At Higher Ed Watch, we have repeatedly stated our opposition to this provision, which is obviously a giveaway to wavering Democrats with close ties to the loan agencies in their states. We find this provision particularly troublesome because the history of FFEL is replete with these types of political tradeoffs and carve outs, which have made the program administratively cumbersome, inefficient, and vulnerable to waste, fraud, and abuse.

To be absolutely clear, we have no problem with encouraging non-profit lenders to compete for a servicing contract from the Department of Education. But they should not be treated more favorably -- or compensated more generously -- than their competitors.

A "Key" Battle Against Students

March 10, 2010

On Super Bowl Sunday in 2008, Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight school chain, shut down without warning, leaving its 2,500 students in the lurch – heavily indebted with tens of thousands of dollars of expensive private student loans and little practical training. The students, however, fought back and most have succeeded in getting their debt discharged or at least reduced. Under threat of legal action, lenders such as Citibank and Student Loan Xpress have backed down and agreed to forgive much of the debt these students took out to attend this fly-by-night school.

But one lender has refused to budge. KeyBank continues to fight tooth and nail to force Silver State students to pay back every single penny they borrowed from the company. The battle is expected come to a head later this month when a federal district court in Northern California is scheduled to hear KeyBank’s motion to get the court to throw out a class action lawsuit brought against the lender by former Silver State students who are seeking to have their high-cost private loans canceled.

The students accuse the Ohio-based lender of colluding with the school to defraud them. From 2002 to 2005, the bank was Silver State’s exclusive private student loan provider -- a time when the flight school chain grew by “an astounding 2,786 percent,” according to the lawsuit. During this time, the school directed prospective students to apply for private loans from KeyBank to cover the full cost of attendance – between $50,000 to $70,000 per student – that they were required top pay upfront before the classes started. The willingness of KeyBank to waive its credit requirements to provide these high-cost loans to financially needy students served “as a fundamental catalyst” for the school chain’s “exponential growth.”

Soon after enrolling, the students discovered that the school was ill-equipped to deliver the training that was promised. “SSH was unable to provide the equipment, instructors, or maintenance necessary to enable the students to gain their pilot ratings,” the lawsuit says. KeyBank was made aware of these problems, the students’ lawyers say, but continued to help market the school for several years. [In 2005, KeyBank severed its ties to Silver State, forcing the school to find other lending partners to make and service the loans]

KeyBank officials deny any wrongdoing, saying that they had little involvement with the school except to provide financing to their students. Therefore, they say, they can’t be held responsible for mismanagement at the schools with which they work.

In weighing these arguments, the court can not look at this case in isolation. It needs to understand that the bank’s actions are part of a much larger pattern of predatory lending.

From the Mailbox: The Power of Financial Aid Administrators

February 24, 2010
By Ed Policy

At Higher Ed Watch, we value the comments we receive from readers -- even the really angry ones from student loan industry officials that accuse us of being “socialists” for wanting to end a government program. We understand that people on both sides of the student loan reform debate are passionate in their views, and we enjoy fostering vigorous debate on this subject.

Occasionally, however, we receive comments that are so misinformed they demand a response. Take, for example, one we received yesterday in response to a post we wrote about how Sallie Mae uses the relationships it has forged with colleges through the Federal Family Education Loan (FFEL) program to cross-sell its more expensive private loans to students. “I am not a supporter of Sallie Mae by any means, but you have provided incorrect information,” the commenter wrote. “Financial Aid offices CANNOT recommend any lender over another when providing information for Stafford or private loans as it is against federal regulations.”

We found this comment bewildering because there is absolutely no prohibition in federal law or regulations against colleges recommending lenders to students. Most schools participating in FFEL do, in fact, recommend favored lenders to students by providing them with a list of “preferred lenders.”

Nelnet Defends Decision to Subpoena the Ed. Dept.

January 26, 2010

Late last week, the student loan company Nelnet acknowledged for the first time that it has subpoenaed the U.S. Department of Education for records it believes will definitively show that the Bush administration had approved the company’s plans to aggressively grow its 9.5 percent student loan holdings. Higher Ed Watch broke the story in a blog post earlier this month.

In an interview with the Lincoln Journal Star, Ben Kiser, a spokesman for Nelnet, defended the company’s decision to issue the subpoena, saying that it would provide the corporation with evidence it needs to fight a whistleblower lawsuit brought by Jon Oberg, the former Education Department researcher who uncovered the 9.5 student loan scandal. In December, a federal court judge allowed the lawsuit, which seeks the return to the federal government of $1 billion in taxpayer subsidy overpayments, to proceed against Nelnet and five other student loan companies.

“In order to defend against the groundless claims in the lawsuit, it is natural that Nelnet would request documents in the Department’s file,” Kiser told the newspaper. “Since the government elected not to intervene and prosecute the case, a subpoena to the Department is the proper way to obtain this evidence.”

As we have previously stated, the release of these documents could be a major breakthrough in helping to resolve some of the long unanswered questions surrounding the Bush administration’s role in the 9.5 student loan scandal. Specifically, we hope that these records, which are likely to become public as the lawsuit progresses, will provide answers to the following questions: what did the Education Department’s former political leaders know about the lenders’ scheme to gain windfall profits, when did they know it, and why did they take so long to do anything about?

EXCLUSIVE: Nelnet Subpoenas Ed. Dept. for Records that Could Show the Bush Administration’s Complicity in 9.5 Scandal

January 14, 2010


Higher Ed Watch has learned that the student loan company Nelnet recently had a subpoena issued to the U.S. Department of Education for documents it believes will definitively show that the agency's former leaders signed off on the company's plan to aggressively grow its 9.5 percent student loan holdings. Nelnet took this action shortly after a federal court judge ruled in favor of allowing a False Claims lawsuit filed by Jon Oberg, the former Education Department researcher who uncovered the 9.5 student loan scandal, to proceed against the company and five other lenders.

The release of these documents, which are likely to become public as the lawsuit progresses, could be a major breakthrough in helping to resolve some of the long unanswered questions surrounding the Bush administration’s role in the 9.5 student loan scandal. Specifically, what did the Department’s former political leaders know about the lenders’ scheme to gain windfall profits, when did they know it, and why did they take so long to do anything about it?

Guest Post: Getting Rid of Collection Agencies Part 2

January 12, 2010

By Deanne Loonin

As I argued last week, the growing reliance of the federal government, student loan guaranty agencies, and colleges on private collection agencies not only to collect on student loans but to resolve disputes and provide repayment information to financially distressed borrowers has been a disaster. Debt collectors are not adequately trained to understand and administer the complex borrower rights available under the Higher Education Act, and the government doesn’t provide sufficient oversight over their activities.

I firmly believe that the time has come to eliminate private collection agencies from the federal student loan programs. The Department of Education, for example, should terminate its contracts with these agencies and, like the I.R.S., hire in-house staff to resolve disputes and collect debts.

I fully recognize, however, that these steps will not be accomplished overnight. So today, I am recommending interim steps the government and other loan holders can take to help protect borrowers’ rights during the collection process. Most of the following steps do not require Congressional or regulatory change but rather a commitment to provide respectful and accurate services to borrowers and to oversee the process so that violations are punished at all levels of the organization:

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