(Editors Note: Today we are running an abridged version of testimony that three major higher education associations have submitted to the U.S. House Judiciary Committee's Subcommittee on Commercial and Administrative Law, which is holding a hearing this afternoon on the treatment of private student loans in bankruptcy. The three groups -- the American Association of Collegiate Registrars and Admissions Officers (AACRAO), the American Association of State Colleges and Universities (AASCU), and the National Association for College Admission Counseling (NACAC) -- argue for a reversal of a federal law that makes it exceedingly difficult for financially distressed borrowers to discharge private student loans in bankruptcy. At Higher Ed Watch, we have long argued that Congress should end this cruel policy, which treats private student loans (those without any government backing) much more harshly than nearly any other form of consumer debt, including credit cards.)
By AACRAO, AASCU, and NACAC
Bankruptcy law has restricted the ability of borrowers to discharge their federal student loans since the mid-1970s. For more than a decade, federal student loans have been non-dischargeable altogether, except for cases of undue hardship. While this exceptional treatment of federal student loans under bankruptcy law is harsh, federal student loans do provide basic consumer protections, their own specific discharge provisions, and flexible repayment options that serve as meaningful alternatives to bankruptcy discharge for borrowers. We therefore do not seek any change to the treatment of federal student loans in bankruptcy.
Our concerns focus on the treatment of private educational loans in bankruptcy. Beginning in the early 1990s, for reasons that were never articulated or debated, Congress began to extend the bankruptcy code's exceptionally harsh treatment of federal loans to private educational loans. Until the 2005 bankruptcy reform act, this identical treatment was limited to private loans that were funded or guaranteed by states or nonprofits. This ill-advised expansion rendered a large number of non-federal loans non-dischargeable in bankruptcy, even if they had none of the important attributes that justified that treatment for federal loans.
In making this change, Congress appears to have assumed that states and non-profits would voluntarily configure their educational loan offerings in a manner that would eliminate the need for bankruptcy discharge for their borrowers. It should come as no surprise to any observer of the student lending industry that the exact opposite occurred. Nondischargeability of educational loans provided eligible lenders with a carte blanche to impose ever harsher conditions on borrowers. Many of these borrowers were unaware that unlike with federal loans, the promissory notes they were signing would obligate them to repay the loans even in cases of school fraud, school closure, or total and permanent disability.
Is there a looming student debt crisis at our nation's for-profit colleges and trade schools? The latest data from the U.S. Department of Education's National Center for Education Statistics (NCES) certainly seems to suggest so.
According to an analysis of this data by the College Board, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more of student loan debt. That's one-and-a-half times more than graduates at higher-cost private colleges and three times more than those at public universities and state colleges. At the same time, one in five students who earn associate degrees at proprietary schools graduate with a debt load of at least $30,000. That's four times more than associate degree recipients at community colleges. [The average annual salary of associate degree recipients is around $38,000.]
The data in question comes from the 2007-08 edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The study provides the most comprehensive data available on how students and their families pay for college.
But even this data doesn't provide a complete picture of the burdensome amount of debt proprietary college students are taking on -- as it does not include median debt levels for the millions of low-income and working-class students who drop out each year from for-profit colleges and trade schools buried in debt but without the training they need to find jobs that will help them repay their loans. Many of the largest publicly traded for-profit school chains have an extremely spotty record of graduating students.
By Ben Miller and Stephen Burd
The Federal Reserve Board has proposed regulations that could significantly weaken a federal law that aims to protect students from being misled into taking out high cost private student loans. In a notice in the Federal Register on March 24, the agency said that it is considering including exemptions, or "safe harbors," to a provision Congress added to the Higher Education Act last year that prohibits lenders from using a college's name, mascot, logo, or emblem to market private loans to students.
Under the Federal Reserve's proposal, a lender would be able to continue engaging in these practices as long as it disclosed "in a clear and prominent way" that the college it is referring to "does not endorse the creditor's loans, and that the creditor is not affiliated with the educational institution." The agency says that this "safe harbor approach" is needed because a lender "may at times have legitimate reasons for using the name of a covered educational institution" in its marketing materials.
The Federal Reserve also proposes widening this exemption even further for private student loan providers that appear on a college's preferred lender list. In those cases, the agency says, it "would be misleading" for a lender to state that a school has not endorsed its loan products. Instead, it would simply require that the lender "clearly and conspicuously disclose that the loan is not being offered or made by the educational institution."
At Higher Ed Watch, we believe that these proposals would completely undermine both the letter of the law and its intent. But we don't believe that the fault for offering these misguided proposals rests entirely with the Federal Reserve. Congress is also to blame for sending mixed signals to the agency about how this provision should be enacted.
As we wrote yesterday, newly released data by the U.S. Department of Education's National Center for Education Statistics provides disturbing news about the growth of private student loan borrowing, particularly at the nation's for-profit colleges and trade schools.
But the data's release also brings to light a more basic problem: the government's inability to collect and disseminate accurate and timely information about student debt. This is a major failing, as it leaves public officials without the vital information they need to make sound student aid policy.
As it stands now, the most comprehensive information available comes from the National Postsecondary Student Aid Study (NPSAS), a nationally representative survey that aims to determine how students and their families pay for college. Unfortunately, NCES conducts this survey only every four years. As a result, the information it provides becomes dated quickly.
Up until the release of the latest edition of the NPSAS survey last week, student aid analysts and policymakers have had to rely on five year old data to try to understand student loan trends, even though there has been an explosion in private loan borrowing during that period of time. By relying on the old data, public officials have been able, at least to some extent, to downplay concerns about the hazardous amount of high-risk debt many financially needy students have been taking on. [As we have just learned from an analysis of the data from our friends at the Project on Student Debt, the percentage of undergraduates taking out private loans jumped considerably during this time period, from 5 percent in 2003-04 to 14 percent in 2007-08.]
We have long been concerned that for-profit colleges and trade schools have been aggressively pushing financially needy students to take on high-cost private student loan debt to help cover their costs. Newly released data by the U.S. Department of Education's National Center for Education Statistics (NCES) certainly appears to bear these concerns out.
According to an analysis of the data by our friends at the Project on Student Debt, the percentage of students at proprietary institutions taking out private loans has skyrocketed in recent years, from 13 percent in 2003-04 to 42 percent in 2007-08. In other words, more than 4 in 10 students took out these expensive loans last year to attend schools that have a spotty record of retaining and graduating students.
Overall, the analysis found that for-profit college students are borrowing private loans at rates that are incredibly disproportionate to their numbers. While only 9 percent of all undergraduates attend these institutions, these students represent 27 percent of all private loan borrowers.
The data in question come from the latest edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The survey provides the most comprehensive data available on how students and their families pay for college.
[Editor's Note: The National Consumer Law Center is releasing a report today asking the Obama administration and Congress to provide relief for financially distressed private loan borrowers. In this guest post, Deanne Loonin, the report's author, explains why these individuals are deserving of help and outlines steps federal officials can take to ease their burdens and protect future borrowers.]
By Deanne Loonin
For many years, private student loans generated steady, if unspectacular, profits for lenders. The business model was relatively conservative, providing loans mainly to graduate students and creditworthy borrowers. Over the last decade, however, the student loan industry turned that model on its head. Spurred by Wall Street, lenders began aggressively marketing expensive private loans to high-risk students with little ability to repay them. For the most part, these companies were eager to make these loans because they could securitize them and shift the risk onto investors.
The recent crash in the private student loan market should not have been so surprising. The writing was on the wall but, as so commonly occurred during the bubble economy, most chose not to read the warning signs. Most rating agencies continued to rate private loan pools highly, even after signs of trouble began to emerge.
Lenders have paid a price for their irresponsible practices. By all accounts, delinquencies and defaults on these loans are continuing to accelerate and investors have little interest in taking a stake in these loans.
But the heaviest price is being paid by financially distressed borrowers who never should have been stuck taking out these unaffordable loans to begin with. At the National Consumer Law Center's Student Loan Borrower Assistance Project, we have found private loan providers to be universally inflexible in granting long-term repayment help for these borrowers. Meanwhile, while the government is considering offering assistance to lenders so they can continue making private loans, it has yet to offer any relief to these borrowers.
As the student loan industry mobilizes to battle the Obama administration over the President's plan to eliminate the Federal Family Education Loan (FFEL) program, we are starting to hear a lot from lenders about the superior customer service that the bank-based program allegedly provides. "Direct Loans are simply not subject to the same quality of service," Marcia Sullivan, director of government relations at the Consumer Bankers Association, recently told The New York Times.
Are these claims true? We really can't say since there haven't been any empirical studies comparing the level of customer service offered by the two federal student loan programs. But we are skeptical about the quality of service private lenders are providing, because of comments we have received over the past two years from federal and private student loan borrowers who have complained about their dealings with Sallie Mae, the nation's largest student loan company.
Given the heated battle that is just getting started on Capitol Hill, we thought we'd share some of these comments with you.
We have heard, for instance, from many borrowers who complained that they could not get straight answers from Sallie Mae customer service representatives about how much they owed. One such comment came from a father who had co-signed his son's private loans:
It appears that KeyBank's predatory private student loan practices are finally catching up with the company.
Late last month, the bank settled a lawsuit filed by 51 former students from TAB Express International, a defunct flight school in northern Florida, who had accused the lender of colluding with the school to defraud them. The settlement puts an end to the case, which was scheduled to go to trial before a jury this week in a state circuit court in Florida.
Meanwhile, according to a U.S Senator in Florida, the FBI and a group of state attorneys general are investigating the exclusive lending arrangements that KeyBank had with TAB Express and Silver State Helicopters, a Nevada-based chain that shut down suddenly on Super Bowl Sunday last year.
As we have reported previously, there has been in recent years a proliferation of unlicensed and unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. Their growth has been fueled by lenders that have "partnered" with these institutions to provide expensive private loans to the at-risk students these schools tend to attract. The lenders have then turned around and, like subprime mortgage providers, securitized the loans, shifting these high-risk loans onto unsuspecting investors.
By Deanne Loonin
For years, lenders fought and clawed to get into the largely unregulated world of predatory private student lending. During this time, a particularly unholy alliance developed between unlicensed and unaccredited schools, like Silver State Helicopters, and mainstream banks and lenders. The creditors didn't just provide high-interest private loans to students to attend unscrupulous schools; they actually sought out the schools and partnered with them, helping to lure students into scam operations. They then turned around, and like subprime mortgage providers, made big money on these loans by securitizing them and shifting the risky debt onto unsuspecting investors.
Lenders got away with this because no one was paying attention. Regulatory agencies simply ignored their responsibility to stop unfair lending practices.
As Higher Ed Watch revealed in December, these schemes have been carried out in violation of federal (and in some cases state) laws. This is a national disgrace that requires quick federal action to prevent future abuses and to provide redress for those who have seen their dreams of bettering themselves shattered by greed.
At issue is the FTC Holder Rule (more accurately referred to as the Federal Trade Commission Preservation of Claims Rule), which puts lenders on the hook when they have "referring relationships" with trade schools that defraud students or shut down unexpectedly. Under the provision, students are entitled to recover any payments they have made and to have their remaining indebtedness canceled.
At Higher Ed Watch, we have long opposed the idea of the government bailing out private lenders who have engaged in predatory private student loan practices. Our view, as we have said before, is that student loan companies should have to bear responsibility for the consequences of pushing high cost private loan debt on high-risk borrowers. After all, for years, they gladly raked in profits from these loans.
Over the past six months, we have heard from scores of financially distressed borrowers who are outraged that the government would rush to the aid of private student loan providers without offering any relief to them. With U.S. Treasury Department officials preparing to start carrying out this month their plans for reviving the credit markets to help provide capital and liquidity to lenders so they can continue making high-cost private loans, we feel that it is our duty to make sure these voices are heard.
Typically in our mailbags, we provide a sample of comments that have been submitted on a given subject. But as we sifted through the dozens of comments we have received in recent months, one particularly caught our eye because it perfectly illustrates the human costs of a system that has left so many students vulnerable to abuse from predatory lenders and unscrupulous trade schools.