June 26, 2007

Student-Loan Companies Meet to Fight Planned Cuts in Federal Subsidies

A group of small and medium-size student-loan companies is teaming up to help fight proposals in Congress that could force them to pay more of the cost of the federally guaranteed loan program.

Both President Bush and the Democrats who control Congress have proposed cutting the subsidy rate on federally guaranteed student loans by at least 50 basis points, or five-tenths of a percentage point. Congress also is considering plans that would set the subsidy rate through an auction process in which banks would bid against each other.

America’s Student Loan Providers, a coalition of lenders and guarantee agencies, summoned their members and supporters today for a forum in Washington at which they repeated their warnings that such subsidy cuts would mean fewer lenders in the marketplace, and higher costs and worse service for borrowers.

A spokeswoman for Sen. Edward M. Kennedy of Massachusetts, chairman of the Senate’s education committee, rejected the criticisms.

Senator Kennedy, who backs both the subsidy cuts and the auction concept, issued a report this month saying that students already were being poorly served by a lending system that caters more to the lenders than to the students. And an auction system “is not likely to lead to more market consolidation because the student-loan market is already highly consolidated,” with most loans already serviced by only about five or six lenders nationwide, said the spokeswoman, Melissa Wagoner. —Paul Basken

Comments

1. Guarantors whose livelihoods depend upon taking defaulted loans, increasing them beyond belief, and strongarming the borrower into paying the massively inflated amount through mafia-like collection tactics should disappear.

   Edfund comes to mind.

   I don’t have a problem with lenders receiving interest subsidies at current levels for students while they are in school.

   Defaulted loans, however, have become a cash cow for not only these guarantors (who often split the penalties extracted from borrowers with collection companies owned by the original lenders), but also for the federal government, which gets back $1.20 for every dollar paid out in default claims.

   This “Gotcha Capitalism” combined with Government Greed is destroying lives, and has to stop.

   — Alan Collinge    Jun 26, 07:46 PM    #

2. If defaulted loans were such a “cash cow,” why is the cohort default rate at its lowest level in history? And why does the lifetime default rate continue to decline?

   — David Starr    Jun 27, 09:16 AM    #

3. The decline in default rates has more to do with a change in the definition of default (from 180 days to 270), provisions that eliminate colleges with high default rates (> 25% in three consecutive years or 40% in any one year), and declines in interest rates than anything else. The lifetime default rates, which are projections not actual figures, seem to be very volatile from one year to the next, perhaps a sign that the model upon which the projections are based keeps changing.

   — Mark Kantrowitz    Jun 27, 10:30 AM    #

4. Well, I respectfully disagree with Mr. Collinge. I believe that the FFEL Program is very much needed to keep the Direct Loan Program honest. The fact that over 80% of the schools and borrowers choose the FFELP with the lender-guarantor model over the government-run Direct Loan Program is an indication of the kind of value and borrower benefits that they receive. Guarantors and lenders partner to offer financial awareness, debt management, default prevention, and other services that do not exist in the Direct Loan model. However, we do not hear this because of the legislators with media ties who benefit from big government and are against privatization, even when the sense it makes is staring them in the face.

   We also spend a lot of time focusing on the few defaulted borrowers, their high balances, and sad stories, instead of focusing on the majority who took their financial obligations seriously and worked with their lenders and guarantors to avoid defaulting, and saving the taxpayers billions in defaulted loan reinsurance. For every one defaulted borrower, there are ten or eleven who satisfactorily repaid their loans with the originating lender. I know I would not have been able to attend college had it not been for student loans. I also know far more people who feel the way I do, than those that feel otherwise. Let’s stop focusing on the negatives, and look at all the people whose lives are richer as a result of the FFEL Program. Now that’s a story that I would love to read.

   — Michael Dobson    Jun 27, 11:57 AM    #

5. Mark is right. I would go a bit further and just state: cohort default rate is a silly metric, and easily manipulated by the lenders for their (and the universities) purposes.

   The most reliable estimates I have seen point to a life- of-loan default rate of perhaps 15% for FFEL loans. Frankly, I think its higher than that, based on homegrown analysis of defaulted borrowers that I have done.

   Finally David: Sallie Mae regularly attributes its soaring profits to “fee income” from defaulted loans.

   Check out their 2003 Annual report, opening comments by Albert Lord if you don’t believe me.

   — Alan Collinge    Jun 27, 12:00 PM    #

6. Michael Dobson mischaracterizes my statements to mean that I am against the FFEL Program. I take no position in the FFEL vs. Direct debate. The astonishing lack of consumer protections for student loans (such as those that credit cards, payday loans, and the like enjoy) apply equally to both.

   Mr. Dobson’s Pollyannish statements do nothing but sweep the dark reality of predatory collection (and lending) tactics for student loans under the rug. Even a 15% default rate (which I feel is low) points to something like 5 million defaulted loans—not a small number. Certainly large enough not to be “happy talked” away.

   Further, Mr. Dobson insinuates that all defaulted borrowers did not take their loans seriously. This could not be further from the truth. The Student Loan industry has thrived for far too long on the public perception of college students as lazy, irresponsible young people who would like nothing more than to skate on their debt. From thousands of defaulted borrowers I have personally contacted, I can say that this characterization represents a tiny fraction of defaulted borrowers- certainly far less than 10%. In most cases, borrowers faced health, employment, or personal problems that simply made it impossible for them to maintain regular payments, and in most all cases, the lender was far less than willing to work with them. Why? Because lenders don’t care if you default. On balance, it can actually be far more profitable for them when you do. So when we hear stories of lost paperwork, denied deferment and forbearance requests, wrong addresses used by the lender, and otherwise horrible loan administration that resulted in a default, one can’t help but wonder if this was by design.

   One needs only visit the site of Nelnet’s collection company, Premiere Credit (www.premierecredit.com) for 5 seconds to see how predatory this industry has become.

   I would almost go so far as to say that in contrast to the 70’s when (supposedly) students weren’t taking their loans seriously, and were defaulting in record numbers on purpose, today exactly the converse is true: despite the students best efforts to avoid default, their loans are being collected on, and “thrown over the wall” by the lender.

   I am getting extremely tired of student loan interests using this principle of personal responsibility as a cover for their greed, wrecklessness, and corporate IR-responsibility.

   — Alan Collinge    Jun 27, 01:32 PM    #

7. In the debate between Collinge and Dobson, we cannot agree more with Alan’s comments. Michael should be thankful that he does not fit into the “sad stories” category. The collection tactics that are being used against the disabled who are on fixed meager incomes are outrageous. They fit exactly into Comment No. 1 by Alan. Indeed, when someone is diagnosed with cancer, the bureaucrats at these collection arms ask absurd questions of the doctor such as how long can the patient sit or stand, indicating whether or not they can still get a job at McDonald’s to pay a defaulted loan that is now triple its original amount. For a nation that can absolve other nations of billions in dollars or spend billions in questionable foreign aid, how is that the disabled are given the “runaround” by this all-powerful agency called the Department of Education (DOE)? Who is the DOE really protecting when they deny on technicalities that someone is unable to repay a loan due to unforeseen circumstances? We should be ashamed that this system has been set up to protect the predators against the weak and disabled. How is that a government agency that is designed to determine a person’s disability — the Social Security Administration — is not a determining factor when it comes to whether or not the DOE believes someone is disabled? In effect, one U.S. agency calls another a liar when one says a person is disabled and the other denies it. We know of horror stories where people have lost homes, cars and families over the predatory practices to collect on these “defaulted” loans, while the banks and their executives have made millions in profits and bonuses.

   — steve    Jun 27, 03:41 PM    #

8. What needs to come to light is the hidden percs of lenders on huge profitability and risk protection. For example, student loans, already guaranteed by the government to lenders, are exempt from bankruptcy protection when all other loans can be forgiven? What a deal for lenders! A risk free investment, payed for by the government no less. Bankruptcy protection, as the constitution founders intended it, is not for profitability special favors. Nor is it a crime. A difficult place yes, but not a crime. Here lenders get to use crime support to collect on loans, even garner other family members in times of hardship and frustration. Trouble is, youth and years of recovery is not always on the side of the borrower, espeically adult student!

   — Thomas    Jul 1, 08:00 PM    #

9. Thomas is exactly right. The fact that student loans are exempt from bankruptcy proceedings is outrageous. The lenders then have all the power to collect against people who went bankrupt because of unforeseen circumstances in the first place! One particular case I am familiar with involves a woman who went bankrupt, included the student loan, and court proceedings proved that she had no assets due to an unforeseen disability involving a car accident. Her disability income was just over $12,000 a year (anyone reading this ever try to pay rent on that kind of income?) Yet, the Department of Education (DOE) did not see this situation as “undue financial hardship.” The nameless bureaucrats then had the audacity to let the loan go from the $6,500 that was discharged in the bankruptcy proceedings to $13,000 with interest and penalties tacked onto it. The disabled person then had their Social Security benefits garnished resulting in their car being repossessed. Is this justice and what our Founding Fathers had in mind when they got rid of unjust debtor’s prisons? Apparently, the answer is the DOE is above the law when it comes to ensuring mega-interest and penalties for a system that has no shame! One can only question how these bureaucrats sleep at night. And in discussing the discharge of these loans that only result in mega-profits for bankers and lenders, can anyone compare these meager amounts that would have to be absorbed by the system with the amount of “pork” Congress wastes every year or the billions in questionable foreign aid? Yet, how does this government agency — that should be focusing on making America stronger through the education process — treat our own disabled and bankrupt citizens?

   — steve    Jul 2, 02:16 PM    #

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