The Economic Downturn and Student Loans: Some Practical Advice for Borrowers

Today's post is from Alan Michael Collinge, author of The Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back and founder of StudentLoanJustice.Org, a grassroots organization, and political action committee.

Student loan companies will soon be lined up at the Federal Treasury, seeking loans against bundles of high interest, private loans that they made to students, often with their parents as co-signors. Meanwhile, hundreds of thousands of students and their families see their livelihoods wracked by student loans in ways worse, even, than defaulting home mortgage borrowers. As we progress through this economic downturn, there is a strong potential for increased predatory activities by the student lending industry, and borrowers need to be prepared to take extra steps to protect themselves.

A bit of history: federally guaranteed student loans have been largely impossible to discharge in bankruptcy for the past decade. The federal guarantee on these loans was used as the reason for removing this basic protection. It was a very weak argument—no other loans, federally guaranteed or not, have special exemptions from bankruptcy protections. In practice, this unique lack of bankruptcy protection has given the green light to lenders to attach penalties and fees onto debt without fear of the borrower. The largest lender in the country, Sallie Mae, saw its fee income increase by 228% between 2000-2005 (its loan portfolio grew by only 87% during this time), and their CEO bragged to shareholders in their 2003 annual report that their record earnings that year were attributable to collections on defaulted loans. So, no bankruptcy protection for the borrower means free money for the lenders, and lots of it!

Removing bankruptcy and other protections from federal loans wasn't enough for the student loan industry, however: in 2005, student loan giants Sallie Mae, Citibank, and others lobbied Congress successfully to remove bankruptcy protections, as part of the 2005 Bankruptcy Bill, for private student loans as well. No one seems to be able to find out who inserted this language into the bill—no Congressman can be found who is willing to claim credit. Nonetheless, it happened. That the student loan companies were able to get this passed was shocking to unbiased experts and analysts of this industry.

The student loan companies claimed at the time that by eliminating bankruptcy options for borrowers, the industry would be able to make loans to people with lower credit scores. After passage of the bill, however, it was shown conclusively that lenders did not follow through on their promise. Students with low or marginal credit scores received loans at roughly the same rate as before the legislation was passed.

What the industry did do was pile as much of this private loan debt on the students as possible, often with credit card-like interest rates, and at hugely unfavorable terms (Bethany McLean at Fortune Magazine, for example, found a student who had been stuck with a 28% annual percentage rate).

Unlike home mortgage borrowers, who at least have standard bankruptcy protections on their side as a worst, last option, student loan debtors are stuck with principal, interest, and massive penalties and fees. Students across the country are discovering, typically after the fact, that they've been paralyzed by an insurmountable debt, often with interest that exceeds their monthly earnings. Co-signing parents and other relatives forced to step in sometimes must liquidate the equity in their homes in order to pay.

The Student Loan lobbying machine has been very successful in putting down attempts to reverse this ridiculous legislation, most notably efforts led by Sen. Dick Durbin (D-IL), and Rep. Danny Davis (D-IL). In a leaked Sallie Mae strategy memo from 2006, the second priority listed was to "protect private credit economics (including bankruptcy)." Even with a new Congress in 2007, the industry was somehow able to convince the Blue Dog Democrats to kill the Davis legislation.

Academia has been largely unwilling to speak out for the borrowers on the bankruptcy issue, as their financial interests lie with the lenders. Student loans are again being called upon to make up for budget shortfalls—this time, owing to large endowment losses. Tuition at our nation's colleges continues to increase dramatically, even as the economy slows.

The Fed's bailout action potentially lays the groundwork for the promulgation of bad lending onto a new generation of borrowers unless Congress acts swiftly to protect them. Come January 20, President Obama should work with the new Congress to immediately reinstate bankruptcy protections for private student loans. The bailout loans will be given "haircuts" that will serve to mitigate taxpayer losses on these assets, and the lending industry will have to make do with this basic consumer protection. Of equal importance is the need for the next Congress and presidential administration to work towards the reinstatement of a much broader set of consumer protections for federally guaranteed loans.

I urge those now in repayment on their loans to be very vigilant. The name of the game in the student loan industry is in attaching every penalty and fee possible onto delinquent and defaulted debt, and we can expect this trend to only intensify during times of economic uncertainty. For federal loans, the industry actually has a perverse incentive to default loans in many instances, and borrowers should guard against this at all costs. For example, don't assume that deferment and forbearance requests will be acknowledged by the lenders without contacting them personally to verify receipt. Also, make sure that your payments are posted in a timely fashion by your lender, and that you aren't hit with late fees that can persist for months after a later payment (another clever ploy by the industry). We may be hopeful for change in the form of meaningful legislative action, but in the meantime, students, former students, and their co-signors will have to fend for themselves.

You might also be interested in Nan Mooney's post about weathering the financial storm or Victor Tan Chen's post on Obamanomics for the missing class. You can also join the Student Loan Scam Facebook group.

Comments

[Carefulwhatyouwishfor]

Alan, do not promote the Danny K. Davis bill which required a lengthy time period for private student loans to have been in repayment before they could be discharged. You and many others are not aware that most debtors were disallowed discharge on their student loan debt under similar provisions in the pre-1998 law which also required loans to have been in repayment for a period of time. Lenders systematically applied retroactive forebearances and deferments for the sole purpose of protecting the loan from discharge down the road. Judges then cooperated with the lenders by tolling the discharge period, stating time and again in their decisions that lenders should not be penalized for "helping" borrowers stay out of default. Most of the time, the forebearances and deferments had not even been requested by the borrower. There were fifteen-year old loans that were not allowed to be discharged because of the underhanded way that forebearances and deferments were applied. It was also required that the debtor file the dreaded Adversary Petition to determine the dischargeability of the student loan. I say dreaded, because bankruptcy lawyers dread them, won't touch them, and debtors end up filing pro se, and the little guy loses time and again against the big guns of the student loan industry. How many "hardship discharges" have you seen pro se debtors win? Exactly. Do not promote any legislation that requires a repayment time before the debt is discharged, which in turn leads to the borrower having to file an adversary petition to let the judge and the highest paid lawyers decide the fate of the debtor. Lenders have many years' experience at manipulating the dates and paperwork, and when it comes to adversary petitions, they have the judge on their side every time. Debtors will be no better off under a Davis-type bill. I doubt that the well-meaning Rep. Davis is aware of the mine field he would be creating for the distressed low income debtors he is trying to help. Senator Durbin's bill was the only fair legislation to have been introduced and his is the legislation to champion.

[Alan Collinge]

Thanks for the comment. Actually, both Durbin and Davis bills applied only to private loans- which makes both not applicable to most borrowers- and I agree, a 7 year repayment period is not acceptable. Period. My only point in mentioning them was to highlight the strength of the student loan industry in killing them.

Hillary Clinton's Student Borrower Bill of Rights (S.511) was the best piece of legislation to be introduced in the past 3 years, but she didn't push it and now is leaving the Senate.

BTW>According to Paul Basken at the Chronicle of Higher Education, Sallie Mae has stepped up their use of "verbal forebearances". Some borrowers are finding their loans placed in forebearance without their knowledge. This is a convenient way for the lender to charge interest while the repayment clock isn't ticking. I would guess this is in anticipation of bankruptcy rights being restored in the next Congress with the ridiculous 7 year repayment caveat attached.

Write me offline, and let's chat any time: justice@studentloanjustice.org

-Alan

[Heather]

Please help us. I have been part of a blog recently about private student loans and the number of people now in default is jumping. Meanwhile, I hear the lenders and some federal aid lobbyists claiming that they can't change the private loans because university enrollment is down and people need those loans to go to school. Guess what, community college enrollment is UP! Many of us who did take student loans for private universities have been criticized for our decisions to go to more expensive schools. We were given money in 2001 /2002 without any credit check. I was offered a bunch of money simply because I went to grad school at NYU. I was brainwashed to believe that a master's degree would bring me a higher salary. The private student loan people seemed to think so as well.
It was my mistake to borrow that money but a mistake that will never be made again. Unlike credit card borrowers who are able to claim bankruptcy and then do it again, I will never ask for or be granted a private student loan again. So why should they be allowed to ruin my, and my childrens, life?

[Bob]

I almost think that it is best for all student loan borrowers to simply boycott paying their student loams. This will force an extreme crisis and congress will have to act. I mean, isn't this what basically happened to mortgages. Enough people simply stopped paying and the crisis ensued. They talk about it on the news every night. You rarely hear anything about student loans. I know it is unrealistic, but how else can we force their hand

They need to make all student loans dischargable immediately. There should be no minimum amount of time that loans need to be repaid. If someone has filed chapter 7 (with the new rules) it by default means they are in financial hardship. It should not matter how long they have been paying.

I filed chapter 7 withing 2 years of graduating. Unfortunately, the student loans are still hanging over me and still growing by leaps and bounds. There is really no realistic way to pay them off. They are already spread out over 30 years and I am 45 years old.

[Sam]

If you go to http://dockets.justia.com
you can search under type of lawsuit. If you choose 'Contracts / Student Loans' you can see exactly what is going on. Over 13,000 people have been sued by the federal gov't in the last two years. These civil suits are conducted quietly and out of sight. The media is nowhere to be found and almost every single case the outcome is known before the start of the trail.

The amount 'owed' according to the government makes you question what exactly is going on. Take for example, USA v. DeWitt, the amount demanded by the government was $6,000,000.

Seems a little high if you ask me, but we don't often question a government's judgment do we? Also, why aren't we hearing more about these lawsuits. Over 13,000 lawsuits in 2 years is a big enough number and we know $6,000,000 is big enough. Why?

[valerie]

I'm too having a issue with my student loans, I feel salliemae representatives are laughing at me , because I'm trying to put them in forberrance/deferrment due to economical hardship,I was told by representatives of sallie mae to send in 150.00 and that would put them in forberrance/deferrment. I do that and wht you know I'm still getting harrasing calls, I spoke with a rep tonight that told me I took it upon myself to send in the 150.00, nobody ask me to do that,then she sid if im'm unemployed how was I able to send in teh 150.00 , and then ask me how am I living everyday, plese help if anybody is fed up and want to go to congress, we have rights something has to give who knew this recession was coming. help please help. lets all come against theis giant. becasue Giants do FALL

[Lucas]

Valerie - Your experiences with Sallie Mae sound pretty strange. I'm in complete agreement that these loan companies (esp. Access Group and Sallie Mae) are running a major scam on students, but I've never had any problems with the representatives that you typically come into contact with over the phone. In fact, they have been so pleasant and (I hate to say it) helpful that I figured they were acting that way because they were under such a microscope right now. Why in the world would they tell you to send $150?

[Jerry Cox]

Non-traditonal Adult Studens BEWARE:

I returned to college at age 44 to finish my degree. During my lifetime I had been told over and over that if I had a degree I would qualify for this or that position, bunk!!!

In an effort to finsish my degrees quickly I was shown how easily I could live off my loans, and work part time to complete sooner. At 44 I did just that, worked 50 hours a week, wife worked 40 and we barely made it.

I truly believed others when they told me the Masters would imporve my job opporutnites and then the Docotroate would make my dreams of being that academian administrator come true... What bunk... rarely are 50 year old caucasin, recenlty graduated men selected as Vice Pres. or Presidents, no matter the business expereices they have had.

So after 10 years of wasted time, $160,000 in student loan debt and now saddled with poor credit, not being able to pay for or receive a loan for a home, and living on a middle income I cannot pay an additonal $2000 a month. I work in the construction field; great use for the doctorate!

I am now 60 years of age and can never own a home or have good credit all because of repayment of student loans. I am constantly turned down for mortgage loans becuase fo the debt ration I owe for these loans. I have no credit cards, and only have two vehicle payments and the household rent.

If we can help poorly managed automotive companies why can't we help the citizen who is trying their best?

I was also told by a friend that soon I will not be able to get health insurance because of this debt. If I had know the true implications and true value of these degrees I would not have returned to college. I try to convince anyone interested in college to find a good career where such is not needed.

[T.P.]

The experience that "Valerie" had with Salie Mae is not strange. I am a physician who went to medical school overseas. I recieved a top notch education from a respected university in a first world country. I went there because I married a citizen. I had gone to graduate school previously and put those loans in deferment/forbearance to attend medical school. In my 2nd year, the AES people called to tell me that my $46,000 was now due because I had "no business going to medical school overseas when I had an outstanding loan." Seriously.
The school pulled major strings with TERI and got me a double loan to pay off the first loan. Irony was that the new loan was also serviced by AES. All they did was collect a second origination fee.

[T.W. T.]

Has anybody been sued by The Educational Resources Institute (TERI)? They are dragging me into court in July of this year, demanding full payment of $10k+ for a loan that I took out in chiropractic school back in 1993.

In 1999 I had an unexpected disaster that took its toll on my business and I had to file for Chapter 7 bankruptcy. My bankruptcy attorney automatically believed that all student loans were non-dischargeable, but he told me to list them all anyway in the bankruptcy paperwork.

In 2000 I consolidated all of my loans with the USDE via the William D. Ford consolidation program. All the loans I listed for consolidation were consolidated, except for the ones guaranteed by TERI.

At first the private lender that originated the loan sent me collection letters. Then I began receiving and phone calls from private collection agencies. I ignored all of them because I honestly believed that all of my loans were consolidated with the USDE. I ignored the harassing calls for years. Now, almost 9 years later they are hauling me into court.

What really hurts is that the trial will be held in the town in which I have practiced for nearly 14 years. There will definitely be damage to my reputation.

My attorney is a good attorney, but he is essentially clueless in matters of student loan law. I have spent hours researching the internet for any info. that will help him prepare for my defense. I am stressed out of my mind over this upcoming trial. My wife is stressed and my in-laws know nothing about it, but they soon will. It could result in dire consequences to my marriage and family relationships.

I am claiming dismissal on grounds of statute of limitations, which is 5 years on promissory notes in the state where I am being sued, (I'm not even a resident of that state, thought I work there). I know there is no SOL on federally insured loans, but TERI claims I can't use SOL because they are a non-profit guarantor.

Does anyone have any personal stories similar to mine? I mean, have you been sued by TERI and what was the outcome? Any resources you can tell me about?

[Asada]

The wave? More like Flood! I looked at the amount of money ppl had to pay back in aggregate and laughed- there is no way the American people can pay that back. We simply don't make enough money.

I find it Ironic, looking at the economic downturn and wondering what could be done, most don't even know what a loan guaranteer is, and I surely didn't know how much I owed in loans.

Now I have the information down pact. But still...the amount of fraud/loan sharking/misleading drivel is impressive. The housing market seemed more honest....

[Jeff Boone]

Regarding the comment from T.W.T., May 12, 2009. I am being sued by TERi. I have been trying to resovle this issue for 4 years to no avail. I have hired an attorney, and will meet with him a week. I have 30 days to respond.

What happend to you?

[Student Loans]

No, money comes from people. Priority should be given to Student Loans, because education is an investment in the success of its society. While I am 100% for health care reform in the states, the funds needed are pure cost with no real investment in the society as a whole.
People without a college education are less important than those with one? The people within the debt collection business provide a valuable and necessary service.
People who invest in lenders who then in turn provide loans to people with expectation the loans will be repaid. The repayment provides income for the lender as well as a return for investors.
It’s not glamorous, but there are hundreds of thousands of hard working people who provide for their family by filling that need.