Private Student Loans

Yesterday, we expressed our strong opposition to a Bush administration proposal that would potentially bailout lenders who have engaged in predatory private student loan practices.

If you haven't heard yet, Treasury Secretary Henry Paulson quietly inserted a provision in his $700-billion bailout plan designed to come to the rescue of struggling student loan providers. While virtually no details of the plan are yet available, it appears that the proposal would not only focus on federal student loans but would potentially allow loan companies to dump hundreds of millions of dollars of bad private loan debt on the backs of taxpayers. This is a terrible idea.

At Higher Ed Watch, we firmly believe that student loan companies, like Sallie Mae, should have to bear responsibility for the consequences of the predatory private student loan practices they engaged in by pushing high-cost private loans on high risk borrowers. For years, they bore the risk while gladly raking in profits.

If Congressional leaders go along with this ill-conceived provision and bail out lenders, then we believe they have a fundamental obligation to also come to the aid of financially distressed private loan borrowers who have been victimized by predatory practices. At the absolute least, Congress needs to reverse a 2005 law that made it extremely difficult for borrowers with unmanageable levels of private student loan debt to discharge these loans in bankruptcy. As we have said many times before, it makes no sense that the government has made it easier for people to discharge credit card debt than private loans they took out to attend college.

Over the last two years, we have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loans.

Yesterday, the U.S. House of Representatives pushed through a bill that would extend a previous effort to bail out student loan providers. Before the Senate acts on this legislation, Higher Ed Watch urges lawmakers to view this as an opportunity to come to the aid of financially distressed borrowers struggling with private loan debt.

The House legislation, H.R. 6889, would extend the expiration date of two parts of the Ensuring Continued Access to Student Loans Act (ECASLA) to July 1, 2010, a year longer than they were originally written to last. First, the measure would continue a program that allows the Secretary of Education to either buy outright or purchase participation interests in newly disbursed student loans. These programs have resulted in between $3 billion and $4 billion of loan agreements with student loan giants Sallie Mae and Nelnet, as well as several other lenders, according to various sources.

Second, the bill would also continue allowing entire schools to be eligible for assistance through the "lender of last resort" program if 80 percent or more of their students cannot find loans. While this would ensure that all students at a given institution would receive loans either through a guaranty agency or other designated lender of last resort, there are no reports that this extremely complex program has been used.

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It's been nine months since we last heard from New York Attorney General Andrew Cuomo on student loan issues, but his return to the scene this week could not be more welcome. In reaching a new round of settlements with student loan companies, he once again demonstrated his willingness to step in when federal regulators fail to do their jobs.

On Tuesday, Cuomo announced that he had reached settlements with seven student loan companies that he found to have engaged in deceptive and misleading practices while marketing consolidation and private student loans directly to students. The companies -- EduCap (also known as Loan to Learn), Nelnet, Campus Door, GMAC Bank, Graduate Loan Associates, NextStudent, and Xanthus Financial Services -- agreed to abide by a code of conduct banning unscrupulous practices and donate $1.4 million to the fund Cuomo has established to help educate students and their parents about financial aid. An eighth lender, MyRichUncle, adopted the code voluntarily, even though Cuomo had not raised concerns about the company's conduct.

Last year, while testifying before the House Committee on Education and Labor about sweetheart deals between colleges and lenders, Cuomo made a statement that is as true today as it was then. "The practices we have uncovered were not undiscoverable until now," he said." Rather, the entity charged with maintaining the integrity of the student loan market failed."

[Editor's note: At a time when loan industry advocates and the news media are raising alarms about private student loan providers tightening their lending standards, we at Higher Ed Watch believe it's important to remind readers about the dangers these high interest loans pose for financially-needy students. In this post, consumer advocate Deanne Loonin warns that these loans are particularly damaging because of the way they have been financed. In the weeks ahead, we will take a closer look at the tactics that some loan companies have used to erode key consumer protections for private loan borrowers.]

By Deanne Loonin

In my experience representing borrowers through the Student Loan Borrower Assistance Project, I have found that a great many borrowers who are in financial distress could get back into repayment if only lenders would work with them to modify loan terms or offer flexible repayment options. At the same time, I have also found private student loan providers to be universally inflexible in granting long-term repayment relief for borrowers. Even in the most severe cases, the creditors I have contacted have offered no more than short-term interest-only repayment plans or forbearances, during which interest on the loans continues to accrue. This experience holds true for both for-profit and non-profit lenders.

Lenders who refuse to offer help often say that they are acting in the best interests of borrowers, who will be harmed, they claim, if they make payments so low that they do not reduce principal. This is a good principle in theory, but not particularly practical for borrowers in severe financial distress, especially those facing long-term problems such as disabilities. Unfortunately, these borrowers have reached a point where they will not be able to repay their loan balances without substantial help and flexibility from their lenders.

Isn't it in the loan providers' interest to provide a helping hand? Don't they benefit if they can ease borrowers, who otherwise will default on their loans, back into repayment?

Last week, we identified our favorite and least favorite provisions in the mammoth Higher Education Act reauthorization legislation that Congress overwhelmingly approved on Thursday. Neither list, however, included sections of the bill that target the types of "pay for play" conflicts of interest in the student loan programs that Higher Ed Watch helped expose last year. That's because, frankly, we had mixed feelings about the provisions.

The legislation certainly takes some positive steps to safeguard students. It, for example, bars colleges from entering into revenue-sharing arrangements, in which colleges get a cut of each loan their students take out. Colleges are also forbidden from entering into "opportunity loan" deals with lenders -- arrangements in which loan companies waive or loosen credit requirements on private student loans in exchange for becoming the exclusive provider of Federal Family Education Loans (FFEL) on a campus.

The legislation also prohibits colleges from allowing lenders to staff their financial aid offices or to run the call centers that students depend upon to answer their questions about student aid. And it forbids schools from assigning first-time borrowers' federal loans to a particular lender through award packaging or other methods. This should put a stop to some colleges' particularly deceptive practice of providing pre-filled out master promissory notes to incoming students in order to shepherd them toward favored lenders.

By Ben Miller, Stephen Burd, and Sara Mead

A decade after its last reauthorization and five years since an updated version was due, a new version of the Higher Education Act is finally ready for Congressional passage. With both chambers set to vote on the bill this week, Higher Ed Watch will take a closer look at various parts of the legislation over the next two days. Today, we praise lawmakers for doing the following:

• Putting Teeth Into Loan Auctions

Last year, Congress created a groundbreaking pilot auction program that uses market forces to set student loan subsidy rates for lenders making federal PLUS loans to parents. With about a year left to enact the pilot project, lawmakers have added penalties for lenders who win an auction and then back out. The bill allows the Education Secretary to punish lenders that violate the terms of the auction agreement by one of the following methods: fining the lender for any additional costs needed to find and subsidize a replacement PLUS loan lender; banning the offending lender from future auctions; or, kicking them out of the Federal Family Education Loan (FFEL) program entirely. We particularly like the fact that the Secretary can retrieve the fine by reducing subsidies paid to the lenders on other FFEL loans or having another federal agency garnish other subsidies the lender might receive. While we have some complaints about the language (it doesn't, for example, address the PLUS loan auction bidding cap, which needs to be more flexible to encourage robust bidding in a range of financial market conditions), overall, we believe that this provision is an important step forward in getting this pilot program off the ground.

Yesterday, Sen. Barack Obama (D-Ill.) unveiled plans to rewrite federal bankruptcy laws to make it easier for financially-strapped senior citizens, military families, and individuals suffering medical emergencies to get relief from debilitating debts. While we are pleased that the presumptive Democratic presidential nominee is proposing to overhaul the 2005 bankruptcy bill, which was a glaring example of politicians putting corporate interests over regular people, we urge him not to forget another group who desperately needs help -- borrowers who have taken on unmanageable levels of private student debt and now find themselves in severe financial distress.

As we have noted previously, Congress tucked a provision into that bankruptcy bill making it extremely difficult for borrowers to discharge private student loans. That special provision was added in a secret conference committee, without any public debate or notice.

For most unsecured debt, a borrower who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of various loans. But there is a short list of debts that the law subjects to a different status, allowing discharge in only the most extreme circumstances. The government, for example, makes it nearly impossible for people to escape child support responsibilities, overdue taxes, and criminal fines.

Federal student loans also can't be discharged. There's at least some justification for providing federal loans that status since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death, and disability. But there is no good reason for private loans to be accorded the harshest bankruptcy status.

For a long time we have known that KeyBank has played a leading role in aiding and abetting the efforts of sham for-profit trade schools to scam vulnerable students. What we didn't realize, however, was the integral role that KeyBank played in fueling the growth of Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight-school chain that left its 2,500 students in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation. Most of these students are now stuck having to repay nearly $70,000 in high-cost private loan debt for training they did not receive.

Thanks to a class-action lawsuit filed by several former Silver State students in California, we recently learned that KeyBank was Silver State's exclusive private student loan provider from 2002 to 2005, a time when the flight-school chain grew by "an astounding 2,786 percent." KeyBank appears to have severed its ties to Silver State in 2005, forcing the flight-school chain to find other lenders to provide private loan funds to its students. As we previously reported, Silver State then forged an exclusive arrangement with the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA), to make and service the loans.