Swimming With Student Loan Sharks

Scott Thill
September 27, 2007

"Student-loan debt collectors have power that would make a mobster envious," Harvard professor and contract law and bankruptcy expert Elizabeth Warren told the Wall Street Journal in 2005. From wage and tax garnishments to withholding of professional certifications and even termination of employment, they have at their disposal an arsenal of weapons to strike fear into the heart of college students and grads just trying to get through finals or get jobs without losing their sanity.

As it is, for millions of students not born into well-to-do families, loans are lifelines to a better future. But the more time passes and costs for college skyrocket, the more those lifelines become nooses choking off solvency and possibility, in the end leaving students to wonder why they bartered their futures for four or five years away from their parents in the first place.

Plus, it's not like lenders such as Sallie Mae, Citigroup, JP Morgan, Bank of America and others, or their sketchy strategies to recoup current or defaulted student loans, are innocent angels doing good works for the good of their clients. With the relatively recent explosion of debt markets, where government-subsidized companies from the private sector scoop up student loans and then package and monetize them to close deals on everything from employee stock bonuses and even purchases of baseball teams, students have become prime targets for those who hugely profit from past-due payments.

Debt collection and collateralization, after all, are behind the recent implosion of the housing and credit markets at the hands of shady lenders offering too-good-to-be-true subprime loans to anyone within shouting distance. And the student loan scams and scandals of 2007 are the same damaged animal, just calibrated for college rather than suburban castles or McMansions.

And just as the hedge funders and investment banks use collateralized housing debt to buy diamonds and yachts for themselves, student loan scammers use collateralized college debt to give themselves raises or six-figure paychecks at the expense of the students they are supposed to be helping. Worse yet, their scandalous activities are subsidized by the United States government, according to Department of Education researcher Don Oberg, who attempted to blow the whistle on millions of dollars in improperly obtained subsidies, only to be turned back by his superiors for meddling with their money.

And those superiors? Not exactly solid citizens themselves. One of them, Secretary of Education Rod Paige, infamously called the National Education Association, the largest professional employee organization in America representing public school and college teachers and their support personnel, a "terrorist organization." His successor Margaret Spellings, while avoiding loaded War-on-Terror terminology to describe active and retired educators tasked with teaching America's children how to read and write, nevertheless elected to overrule a 2005 finding by the Department of Education's inspector general that advised pursuing one New Mexico lender for over $30 million in improperly acquired payments. She added further salts to students' wounds in 2007 by refusing to pursue $278 million in overpayments to the lender Nelnet, deciding instead to settle with them after they dropped plans to bill the Department of Education for $800 million in further subsidies that they didn't deserve.

The beat-down goes on, as the list of offenses mount. In August, New York attorney general Andrew Cuomo expanded an already ballooning investigation of student loan fraud into the top athletic departments in the nation. Colleges like Auburn University, Ohio University and Texas Christian University are accused of steering athletes to particular lenders in exchange for cash kickbacks and more, a sports-oriented version of a stock investment scam that went viral at universities like Columbia University and more. Cuomo has already settled with several lenders -- including Nelnet, Bank of America, Citigroup and others, to the tune of $13.7 million and counting -- criticizing the Department of Education's weak oversight of loan abuse along the way.

Three Ways To Avoid Student Loan Scams

Borrow directly from the government
Speaking of the Clinton administration, one of its early achievements was the Direct Loan Program, which cut out the middleman altogether in favor of one-to-one correspondence between student and lender. If you can't land a Pell grant or some other kind of funding that doesn't need to be paid back, try this before messing with the private sector.

Know thy lender
If you absolutely have to get in bed with a private lender, realize first that they are in this game for profit and profit alone. To start with, the private lender is far from private: The government has likely subsidized and/or guaranteed your loan, or else they wouldn't be doing business with you. You're there for higher learning; they're there for higher stock valuation. So it is imperative you know who you're dealing with, no small matter considering that many lenders are actually subsidiaries of other companies. Sallie Mae alone claims over 15 of them, including First Trust Financial, Southwest Student Services Corporation and so on. Things like this are why Wikipedia was invented.

Know thy rate
In order to know how long you are going to be screwed, you need to know two things: How much you actually owe and what your lender is charging you to owe it. The first is your principal balance, or what you borrowed, and the rest is interest, what your lender is charging you, often by the day, to borrow it. And given the rate by which that interest is accrued, you could spend years paying off the latter before even beginning to touch the former. So barter as hard as you can for the lowest rate possible, and pay the biggest amounts you possibly can right out of the gate. The smaller the principal, the lower your interest chunk becomes, and the faster you can pay it off. And while the rates fluctuate over time, anything over five percent is grand larceny.

And it didn't help matters that Republican control of the White House and Congress over the last few years translated into little action for the benefit of American education, although it was understandable: Nelnet was America's most generous corporate donor to the National Republican Congressional Committee in 2006. Worse yet, its top three executives were the largest individual donors to the committee as well.

Congressional oversight, at least before the 2006 midterm elections tipped the balance of power in the Democrats favor, was compromised from the start. As Michael Kinsley wrote in the Washington Post in mid-September 2007, "Republicans ... adopted the student loan 'industry' in its infancy, like a stray cat, and have nurtured and protected it ever since." Student and Huffington Post columnist Lauren Wolfe took it step further and implicated the sitting Republican president himself: "George W. Bush has made this plunge even worse. In 2005, his administration reworked the eligibility requirements for Pell Grants and knocked 90,000 students off the list. Instead of funding federal student aid, he gave more than $20 billion in subsidies to private student loan providers."

In other words, if you have a student loan subsidized by the United States government but managed through a private company, you are most likely on the road to getting totally screwed. Badly, and especially if you have trouble finding a job after you graduate to help pay off the very loans that helped you graduate in the first place.

And sure, the Democrats are helping to turn things around slowly. Sen. Ted Kennedy in particular has been hard at work beating the drum on student loan abuse and fraud, and recently celebrated the passage of the College Cost Reduction and Access Act of 2007, which is not only the largest increase in student aid since the GI Bill (passed way back in 1944), but also aims to slash interest rates on subsidized loans in half, recovering around $20 billion for those looking to hit the books without the books hitting them back.

But is it enough? According to a recent report from BusinessWeek, Sallie Mae, the nation's largest student-loan lender, is still on the positive track for a proposed $25 billion buyout from, who else, JP Morgan Chase and Bank of America, two chronic abusers nailed by Cuomo for settlements and scoldings. And even though President Bush signed the College Cost and Reduction Act into law on Sept. 27, thus negating those billions in crooked subsidies, chances are it will be business as usual for Sallie Mae and many other lenders after the smoke clears.

As Mark Kantrowitz, publisher of the website FinAid.org, explained to the Washington Post in late July 2007, passage of the College Cost Reduction and Access Act "will leave larger lenders like Sallie Mae profitable ... and may leave smaller lenders unprofitable." And while the cuts may chop off big enough chunks of Sallie Mae's profit margin, they'll nevertheless still make loads of money from the buyout.

In fact, according to Kinsley, Sallie Mae CEO Thomas J. Fitzpatrick, who was forced out by the private equity firm Friedman Fleischer & Lowe representing the buyout for JP Morgan and Bank of America, still "made $40 million last year and will get millions more if the deal does go through."

For more on the College Cost Reduction and Access Act, read Wiretap's closer look at its key provisions.

Scott Thill runs the online mag Morphizm.com. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.





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