Is Genesis just the beginning?

Banksy on the Thekla, photo credit Adrian Pingstone

Can the government make a for-profit school tear up its private student loan promissory notes?  We’re about to find out.

The Consumer Financial Protection Bureau filed suit this week against Corinthian Colleges for alleged misconduct relating to its private loan program, called Genesis.  While lawsuits against Corinthian, which operates Heald, Wyotech and Everest, abound, something about this particular suit caught my eye.

The CFPB is asking the court to “order the rescission of all Genesis loans”.  In plain English: the government is asking a federal court to cancel all of the notes on at least 170,000 private student loans, with a combined balance of $568.7 million.  As in, tear them up.  Poof.  Make them gone, as though they had never existed. Continue reading

The Color of Student Debt

“Racial disparities in student debt are closely related to the stark racial disparities in wealth characterizing American society.”

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Race-based differences in student loans are little understood and often ignored in debates about higher education financing.  New research might help us to change that.  Back in 2010, the College Board noted that 27 percent of black bachelor’s degree recipients had student-loan debt of $30,500 or more, compared with just 16 percent of white bachelor’s degree students.  Of those who borrow, black students have an average of over $4,000 more debt than white students.

In “The Color of Student Debt,” researchers lay out evidence that two factors account for “over half of the black-white disparity in student loan debt.”

First, African-American families are much less likely to have wealth (as opposed to income) available to help family members attend college.  How much less likely?  Black families have, on average, six times less wealth Continue reading

Robbing Peter to Pay Paul: Social Security and student loans

Social Security is the most important anti-poverty program in the country.  It kept 22 million people out of poverty in 2012.   What does this have to do with student debt?  Two words:  Treasury Offset.  The federal government can seize portions of your Social Security (including Social Security Disability) check to pay back defaulted federal student loans. 

These seizures are rising sharply. In 2001, 6 recipients had their Social Security offset.  This past year?  156,000.  The total amount garnished came to around $150 million– money that seniors did not put back into the economy.    This problem will continue to grow.  Millions of seniors have student loan debts, and their default rates are higher than the average, standing at roughly 12.5%.

Social Security garnishments are what I call a collateral consequence of default, along with tax and wage garnishment and destroyed credit scores.  Because there is no statute of limitations, it doesn’t matter when you or the student you co-signed for took out the loan.

What do these garnishment look like for real people?  Offsets are limited to 15 percent of a borrower’s benefit, and the first $750 per month of benefits is shielded from student loan offset.  In July 2014, the average retirement benefit was $1255.  Someone with this benefit level would lose $75 to a student loan garnishment.  Twenty-two percent of married couples and about 47 percent of unmarried people rely on Social Security for 90 percent or more of their income.  Women, especially women of color, are more likely to rely almost exclusively on Social Security for income.  While $75 a month might not seem so much to high wage earner, it pushes seniors on fixed incomes that much further into poverty.

Which brings me to the real question:  Why are we prioritizing the collection of old federal student loans over keeping seniors out of poverty?

Blowing the whistle on for-profit education

Blowing the whistle on for-profit education

It’s been a busy week in student loan litigation news.  In addition to the CFPB suit against ITT, the The New York Times reports that former employees have sued Harris (Premier Education Group), a for-profit trade school in New Jersey.

The complaint (filed in 2011 and unsealed in late 2013) reads like a catalog of the worst practices alleged by critics of the for-profit industry.  The whistleblowers contend that school officials violated the False Claims Act by taking in federal student aid after knowingly enrolling students who could not pass basic literacy exams, falsifying entrance exam grades, passing students out of courses that the students had failed, forging students’ signatures on loan documents, and misleading students about their career prospects and eligibility to sit for professional licensing exams.  If the plaintiffs are successful, the suit carries significant penalties, including treble damages.

This isn’t the first time Harris has been sued. The Press of Atlantic City reports that in March 2011, thirty-seven former Harris students brought suit against the school. Among the alleged violations? Misrepresentation of accreditation status, which meant that students were not eligible to sit for a required professional licensing exam, rendering their degrees worthless.

The CFPB bares its teeth

The CFPB bares its teeth

In a move applauded by consumer advocates, the Consumer Financial Protection Bureau filed suit against ITT Technical Institute.  The Huffington Post reports that this marks the first suit brought by the new consumer protection agency against a for-profit school.

The complaint alleges that ITT violated the Consumer Financial Protection Act and the Truth in Lending Act by enticing students through deceptive marketing and strong-arm recruiting tactics. ITT allegedly misrepresented its graduation and placement rates, and misled consumers about the school’s accreditation.

The complaint also alleges that ITT coerced students into taking out private loans for ITT’s own private gain. How? Well, tuition at ITT is much higher than students can afford, even after maxing out federal financial aid. To close the tuition gap, ITT offered students temporary credit from ITT. That credit came due within nine months–something many of the students were not told during a rushed financial aid discussion. When many of those students were unable to pay the hefty tuition price tag within the required nine months, ITT allegedly forced those students into private loans, due within 10 years, with a 16% interest rate. Defaults at ITT on those private loans topped 70%.

This isn’t ITT’s first legal rodeo.   Former students sued ITT for misrepresentation in 1995.  In 2005, ITT settled a lawsuit with the state of California for inflating grades in order to get more state aid. And ITT’s problems don’t end there; it revealed in an recent SEC filing that a long list of state Attorneys General have issued subpoenas or “civil investigative demands” under state consumer protection statutes.

Of Student Debt and Stagnant Wages

Student debt is bearing the blame for continued weakness in the housing market.  According to the Washington Post, “regulators and industry experts warn that young adults can no longer save for down payments or qualify for the mortgages they need to buy their first homes.”

But Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau, points out that debt burden alone does not tell the whole tale for first-time homebuyers:

“Real wages when adjusted for inflation have actually been flat for new college graduates for about the past ten years. So young people have more debt but are earning the same or less income.”

Everything you always wanted to know about Sallie Mae…

From the advocates at the National Consumer Law Center comes an eye-opening report on Sallie Mae. My first thought was that the “Sallie Mae Saga” should be required reading for everyone who cares about “the dangers of relying on a for-profit publicly traded company to protect borrowers and taxpayers.”  My second thought was that it should be required reading for everyone.

The prepay prevention plan

Every student loan has a prepay option, but servicers make them almost impossible to use.  Ever wonder why they make it so hard?  Rohit Chopra and his team at the CFPB asked private loan servicers and came to some conclusions:

“Creating obstacles for borrowers to direct payments to a specific loan can increase future servicing revenue.  Incentive misalignment was one cause of significant harm to consumers in the mortgage servicing industry. This may also be a contributing factor to the frustration experienced by many private student loan borrowers who submit complaints to the CFPB about payment allocation issues.”

In other words, the harder it is to prepay, the more money the servicer makes.

In my day we worked our way through college…

The Milwaukee Journal Sentinel notes that working your way though a four year public institution, even in a low-cost city, would be impossible at minimum wage.

“In 1978, a UW-Madison student paying his or her own way, without any help, had to earn $2,362. It could be done at minimum wage by working full-time through the summer and about 10 hours a week through the academic year, or a total 891 hours.  Today, a full-time UW-Madison student going it alone couldn’t physically work enough hours at minimum wage to earn $18,402 for tuition, fees, room and board. It would take 2,538 hours, or about 50 hours per week for 50 weeks.”

Climbing the Tuition Wall

Are climbing walls driving the increase in tuition?

The Wall Street Journal has argued since since the late 1990s (sorry, the WSJ hides its light under a pay wall) that universities are able to raise tuition because the government gives students loans to pay that tuition. Universities, in an attempt to lure students, build “Club-med style amenities,” like climbing walls. But are these the drivers of the massive increases in tuition that students and their families are now expected to bear?

Not necessarily. The New York Fed points out that, since the 1980s, state subsidy for higher education has steadily decreased. Between 2000 and 2010, state funding decreased by 21%.  The economics of this are relatively simple, even for a lawyer like me:  In the face of declining state subsidy, public colleges raise tuition to cover costs.

For more information, check out these reports by the Center on Budget and Policy Priorities and the American Institute for Research.  And the situation may not improve anytime soon.  The American Institute for Research reports that the amount that tuition has been raised is not enough to make up for the gap in state funding.

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