BY LEAH BLEIBERG
Shocking allegations of blatant and widespread corruption have rocked the student loan industry and left lenders, universities, and Department of Education officials scrambling to deal with fallout from the growing scandal. Recent investigations, led by New York State Attorney General Andrew Cuomo and Congressional leaders, Senator Edward Kennedy (D-Mass.) and Rep George Miller (D-Calif.), chairmen of Education Committees in the Senate and House, respectively, have uncovered abuses including: financial kickbacks to schools based on loans directed to lenders; preferred or exclusive lender status; payments and/or gifts to financial aid officers (and spouses) like trips to the Caribbean, computer systems, stock shares, consulting fees, etc.; funds and credit lines for schools; large payments to induce schools to drop the direct federal loan program to give lender more business; call centers by lenders wrongfully representing themselves as school employees; selling off loans to wipe out benefits without students’ knowledge; using delaying or intimidating tactics to steer students to lenders not in their best interest; revenue sharing agreements; and more. Some universities and lenders facing threatened lawsuits have agreed to settlements, while others have been targeted for litigation.
The US Dept. of Ed.’s FFELP (Federal Family Education Loan Program), a public-private partnership created by Congress in 1965 to deliver and administer guaranteed education loans for students and their parents, has provided more than $567 billion in low-cost loans to tens of millions of students and parents. How did this noble program to make higher education affordable to many more students decay into an unethical, profit-making enterprise benefiting lenders, university administrators, and even federal education officials? How can students, bombarded with misleading loan offers, hope to sort out complex lending options, rife with fine print, before undertaking hundreds of thousands of dollars of debt?
Like many federal programs, regulations governing how banks can market to students were vague and/or unenforced. According to Stephen Burd, reporter on higher education for the New America Foundation, the DOE “turned a blind eye to problems…[having] left the loan industry essentially unregulated.” Statistics bear witness to the monopoly – only 32 lenders hold 90% of the $85 billion student loan business, while at approximately 300 colleges, one lender controls 99% of the loan volume.
Encouraged by a laissez-faire posture and regulatory loopholes, lenders instituted marketing practices which soon spiralled out of control. Take for example, the notorious “single lender law,” finally repealed last year. If a student had all his loans with only one lender, he was forced to consolidate with that same lender, effectively obviating any chances of finding a competitive deal.
Another practice which has been disallowed for the future, called “School as Lender” still allows previously existing programs to have the schools act as their own lender, when in truth, they are “fronting” for one bank which pays the school per loan. Students are often misled into thinking there is no choice but to borrow through the school. In the rare case that a student is savvy enough to realize he may use any lender, he is often discouraged, with administrators claiming or manipulating lengthy processing delays if another lender is used.
DOE regulations enabled lenders to market products to students without openly revealing limitations or conditions designed to make it almost impossible for students to achieve the benefits. Whereas the Consumer Disclosure Protection Law compels banks to clearly disclose terms in the mortgage and credit card industry, DOE regulations permit banks to create fraudulent, or at best, unclear marketing practices. More than burying critical loan conditions in fine print, banks have further taken advantage of students’ naiveté by fraudulently representing themselves to students as Federal government or school employees.
Congress and the DOE’s inconsistent behaviors stem from a Catch-22. On the one hand, the government wants to promote affordable access to higher ed. On the other hand, they must ensure that the big banks make enough on student loans to not withdraw from the program. Without the $60 billion they invest each year in new student loans, higher education would implode, destroying the student loan market and creating a nationwide crisis where universities could not make payroll and students could not go to school.
Since the Clinton administration, many government officials have recognized problems within the program and have clamored to drop it entirely, making the government the sole lender for all students. But practically speaking, all evidence to date shows that government as lender would not only be more costly to taxpayers, it would likely result in an even worse crisis since the government’s current direct lending program is already $13 billion dollars over budget. Moreover, despite the abuses that plague the system, the banks still manage to get money to students more economically and efficiently than government channels.
Obviously, the student loan program must be overhauled with proper monitoring and new regulations regarding disclosure of loan sales, marketing to students, and lender-school relationships. Even as these investigations compel immediate legislation to enact new “codes of conduct” and emergency measures like Education Secretary Margaret Spellings suspending lender’s access to the National Student Loan Data System for wrongfully trolling for business, Rep. George Miller blasted the Dept. of Education for allowing the system to “spin out of control.” In harshly critical language, he continued, “At the very time that our nation’s students are struggling harder than ever to pay for college, it is clear that our nation’s federal student loan program has been hijacked by third parties interested in boosting their bottom lines,” At one point in the conference call with reporters, he accused the department of ignoring mounting evidence, saying “They were told about this six years ago. Hello, where have you been?”
Most importantly, school tuition must become more affordable, grants and scholarships more available. If not, students will increasingly find themselves priced out of higher education, exactly what the student loan program was created to prevent. Students now graduate with record amounts of debt. Health professionals, including PhDs in psychology, medical and dental students, are hitting $300,000 in student loans. The likelihood that these borrowers will eventually default is becoming increasingly worrisome for the government.
Student HELP Foundation, a non-profit organization founded to provide students with the best possible loan offerings and debt guidance, has been holding nationwide seminars to educate students how to protect themselves from unscrupulous practices that exploit their financial naiveté. Yet even we are shocked at the smug, you-be-damned attitude that these investigations have revealed. Meanwhile, amidst the brouhaha, students can protect themselves, if they get the right advice and guidelines to enable them to negotiate a good deal. For graduating students who are interested in saving money, some important guidelines to follow include:
Be an Educated Consumer, especially on Consolidations. Consolidation Loans are where you stand to lose the most, sometimes tens of thousands of dollars. Learn the tricks of the trade. If a deal sounds too good to be true, and is far below the average, beware. Ask if your loan will be sold to another lender. Ask for a guarantee in writing that if your loan is sold, all rates and benefits travel with it and that you will receive clear notification from your old lender. Buyers of student loan debt do NOT have to give the initial benefits to the borrower and even if they do, if you toss their mail as advertising, not realizing they are your new bank, your payment to the new lender will probably be late. Mor
eover, borrowers who use auto-debit may not be aware that they must create a new auto debit with the new lender. Use a lender with an excellent reputation for honesty and customer support, and that openly delineates the limitations in their benefit programs.
Use your bank account to your advantage. Since so many benefits are tied to on-time and no missed payments (sometimes for the life of the loan), the single best strategy you can use is to guarantee you pay on time every single month. The easiest way to ensure that is a) keep two months worth of payments in your checking account which you won’t touch b) get overdraft protection on your checking account and c) use auto-debit to pay your student loan debt. Most lenders don’t disclose that if the payment is even one day late this benefit will be lost. Thus if in month 60 a borrower sends in a late payment, the borrower loses the 1.00% interest rate discount. Employing these strategies can help you avoid this scenario.
Maintain accurate contact information. Make sure your lender has your contact information (address, email, and telephone) accurately. The most common scenario for losing benefits due to late payments comes from invoices sent to either the borrowers’ parents’ home or previous address (e.g., the borrower’s school address). We recommend enrolling in online billing to avoid this lose-before-you-begin situation.
Other important benefits. Many students unable to pay loans as soon as they graduate are not aware of the options called forbearance and deferment, which offer ways to postpone repayment. Other borrowers may need temporary forbearances to make major purchases (home, car, etc) until they can catch up with their debt. Many lenders cancel discounts when a student goes into forbearance or deferment. Anytime you are offered a benefit, be sure to ask about limitations. Many lenders will not offer the “fine print” unless asked and even then, may be less than forthcoming.
While Student HELP looks forward to the wholesale reform these findings will certainly engender, we stand proud that smaller, non-profit lenders represent the good guys who have always championed the students’ rights. Despite the egregious lack of oversight and unethical practices, it is still possible to save money and obtain a good student loan package. The bottom line: be well-informed, find a lender you can trust, and stay on top of the situation by monitoring mail and email, following changes in regulations, and staying in touch with your lender.
Leah Bleiberg is the Vice-President of Student HELP Foundation.