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“Fueled, Serviced, And Collected”: How Wall Street Profits From The College Loan Mess

Five years after Wall Street crashed the economy by irresponsibly securitizing and peddling mortgage debt, the financial industry is coming under growing scrutiny for its shady involvement in student loan debt.

For a host of reasons, including a major decline in public dollars for higher education, going to college today means borrowing—and all that borrowing has resulted in a growing and heavy hand for Wall Street in the lending, packaging, buying, servicing, and collection of student loans. Now, with $1 trillion of student loans currently outstanding, it’s becoming increasingly clear that many of the same problems found in the subprime mortgage market—rapacious and predatory lending practices, sloppy and inefficient customer service and aggressive debt collection practices—are also cropping up in the student loan industrial complex.

This similarity is especially striking in the market for private student loans—which currently make up $150 billion of the $1 trillion of existing student loans.

As detailed in a July 2012 report by the Consumer Financial Protection Bureau and Department of Education, private student loans mushroomed over the last decade, fueled by the very same forces that drove subprime mortgages through the roof: Wall Street’s seemingly endless appetite for new ways to make profit. In this case, investor demand for student loan asset backed securities (SLABS) resulted in private student lenders—primarily Sallie Mae, Citi, Wells Fargo, and the other big banks—to relax lending standards and aggressively begin marketing these loans directly to students.

Unlike federal student loans, private loans have higher and fluctuating interest rates and come without any flexibility for tailoring payments based on income. Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. Between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent. And the volume of private student loans mushroomed from less than $5 billion in 2001 to over $20 billion in 2008. The market shrunk back to $6 billion after the financial crisis as lenders tightened standards.

And just like the subprime mortgage market, not all students were aggressively targeted by these rapacious lenders. The largest percentage of private loans taken out in 2008 were by students at for-profit colleges. In 2008, just 14 percent of all undergrads took out a private loan while 42 percent of students at for-profit colleges took them out. And as we now know, these loans are sinking borrowers—with absolutely no ability to discharge these loans by filing bankruptcy.

The latest student loan default rates issued by the Department of Education show that the three-year default rates for those who started repayment between October 2008 and September 2009 was 13 percent nationally—an average masking sharp differences depending on the type of school the borrower attended. For-profit institutions had the highest average with nearly 1 out of 4 borrowers in default, compared with 11 percent from public institutions and 7.5 percent at private, non-profit institutions.

All these statistics mean that close to 6 million borrowers are in default (almost 1 in 6 borrowers) to the tune of a combined $76 billion, more than the combined annual tuition for all students attending public two- and four-year colleges.

And for the borrower who can’t make payments, the student loan industrial complex is not a good place to be. And it’s costly for taxpayers: the Department of Education paid $1.4 billion last year to debt collectors and guaranty agencies to chase down borrowers who weren’t paying their loans. And here’s where Wall Street grabs another slice of the debt-for-diploma system pie. As reported in The New York Times, of the $1.4 billion paid out last year, about $355 million went to 23 private debt collectors. The remaining $1.06 billion was paid to the guarantee agencies to collect on defaulted loans made under the old federal loan system, which they in turn often outsource to private collectors.

But wait, there’s more! It turns out that two of the nation’s biggest banks own debt collection agencies that have contracts with the Department of Education to collect on federal student debt that’s gone bad: NCO Group, owned by One Equity Partners, the private equity arm of JP Morgan Chase and Allied Interstate, owned by Citi Venture Capital International, the private equity arm of Citigroup. Both of these debt collection agencies are distinctive in that according to a comprehensive report by the National Consumer Law Center, they have received the most complaints filed with the Better Business Bureau in a three-year period. At the same time, NCOs performance in recovering past-due loans has made it one of the top performers for the DOE.

The new cop on the beat—the Consumer Financial Protection Bureau—is now going to be providing federal oversight of the nation’s largest debt collectors, which is welcome news. The Department of Education could also play an important role in rewarding good behavior by their debt collectors. As NCLC recommends in its report, they could incentivize humane treatment of debtors by penalizing agencies for large numbers of complaints filed against them and reward agencies with few complaints.

Over the last two decades, our nation—in a major shift from its historical roots—slowly privatized and financialized the responsibility of paying for college. The result is a system in which the entire pipeline of student loans—now the largest source of “aid” for most students—is fueled, serviced, and collected by Wall Street.

The student loan industrial complex invites a more profound question: given the billions in profit generated by federal and private student loans, along with the billions in administrative costs absorbed by tax payers, is debt the most efficient and equitable way to provide access to higher education?

 

By: Tamara Draut, The American Prospect, November 16, 2012

November 19, 2012 Posted by | Education | , , , , , , , , | 2 Comments

“Romney’s Higher Education Plan”: A Giveaway To Wall Street Banks And Predatory Schools That Fund His Campaign

2012 presumptive presidential nominee Mitt Romney released his higher education plan Wednesday, decrying the nation’s “education crisis.” During a speechbefore the U.S. Chamber of Commerce, Romney blamed President Obama for rising tuition prices and increasing student debt.

Of course, tuition increases and growing debt are a phenomenon several decades in the making. And Romney’s plan would make the problem decidedly worse in two important ways, giving federal money away to Wall Street banks and predatory for-profit colleges, two industries to which Romney has extensive ties.

First, as he’s promised before, Romney intends to divert money away from student aid — instead giving it away to banks — by repealing Obama’s student loan reforms:

Reverse President Obama’s nationalization of the student loan market and welcome private sector participation in providing information, financing, and the education itself.

President Obama did not nationalize the student loan market. (Plenty of banks still make private sector student loans.) Instead, Obama and the Democrats cut private banks out of the federal student loan program, ending billions in subsidies that were needlessly going to banks for acting as loan middlemen. The money saved went into the Pell Grant program. Romney’s plan would entail taking away Pell money in order to pay Wall Street to service federal loans.

Second, Romney would remove regulations meant to protect students from predatory for-profit colleges:

Ill-advised regulation imposed by the Obama administration, such as the so-called “Gainful Employment” rule, has made it even harder for some providers to operate, while distorting their incentives.

This rule simply states that colleges leaving too many students crippled with debt and without good jobs lose their access to federal dollars. Many for-profit schools make nearly all of their revenue from the federal government — in the form of the various streams of aid used by their students — yet have much higher rates of student loan default than public schools. Only 11 percent of higher education students in the country attend for-profit schools, but they account for 26 percent of federal student loans and 44 percent of student loan defaults.

Romney is already intimately tied to the for-profit college industry. Inside Higher Ed noted that two of his advisers “have lobbied on behalf of the Apollo Group, the parent company of the University of Phoenix.” On the campaign trail, Romney has effusively praised Full Sail University, a for-profit institution. And it seems that his policy platform would be a boon to this industry which is, in many instances, extremely predatory.

By: Pat Garofalo, Think Progress, May 24, 2012

May 24, 2012 Posted by | Education | , , , , , , , , | 2 Comments

The Virginia Foxx Bill: “Protecting The Freedom Of For-Profit Schools To Suck Off The Government Teat Without Any Accountability Whatsoever Act”

Earlier this year, the U.S. House of Representatives voted to pass a bill with the impressive, everybody-can-get-behind-this title “Protecting Academic Freedom in Higher Education Act.” Sponsored by the ultra-conservative North Carolina Republican Virginia Foxx, the bill ostensibly took aim at an issue close to small-government-loving hearts: intrusive federal regulation of for-profit colleges — fast growing, highly profitable outfits like DeVry University or the online-only University of Phoenix.

Like so many of the bills passed by the House since Republicans gained the majority in the 2010 midterm elections, the bill was designed to repeal specific actions taken by the Obama administration. In this case, the issue at hand was the Obama administration’s efforts to ensure greater “program integrity” in the for-profit educational sector. Specifically, a new federal definition of what constitutes a legitimate academic “credit hour” and a new requirement that all online providers of post-secondary education be accredited in each and every state in which they do business.

Foxx’s bill repealed both measures. (The Senate has yet to address the measure.) According to Foxx, the new federal regulations threatened “innovation” in the educational sector. As reported by InsideHigherEducation, Foxx is on record as declaring that for-profit colleges do a “a better job of being mindful about efficiency and effectiveness than their nonprofit peers.” By, for example, flexibly providing online education when and where low-income working Americans want it, the for-profit free market delivers the kind of quality higher education that Americans so desperately need. The government should just stay out of their business.

I stumbled upon this story while researching the student loan crisis and at first I was perplexed. I didn’t understand why Republicans were opposed to higher academic standards for the for-profit sector, and I didn’t get the connection to student loans. But it didn’t take much research to discover what was really going on: an example of blatant hypocrisy sufficient to outrage even the most jaded observer of American politics.

The for-profit educational sector is an industry almost entirely subsidized by the federal government. Around 70-80 percent of for-profit revenues are generated by federal student loans. At the same time, judging by sky-high dropout rates, the for-profit schools do a terrible job of educating students. The Obama administration’s efforts to define a credit hour and require state accreditation were motivated by a very understandable desire: to ensure that taxpayers are getting their money’s worth when federal cash pays for a student’s education. In contrast, Foxx’s legislation is designed to remove that taxpayer protection. So here’s a more accurate title for her bill: “The Protecting the Freedom of For-Profit Schools to Suck off the Government Teat Without Any Accountability Whatsoever Act.”

The for-profit educational sector has been growing extraordinarily rapidly for the past decade: 12 percent of all post-secondary students are now enrolled in for-profit schools, up from 3 percent 10 years ago. But the main beneficiaries of the growth appear to be the shareholders and executives of the largest publicly traded for-profit schools, not the students.

  • 54 percent of the students who enrolled in 2008-2009 in 14 publicly traded for-profit schools had withdrawn without a degree by 2010.

The pathetic performance of the for-profit sector in delivering actual degrees becomes all the more alarming when you realize that most of the students who are dropping out paid for their educations with student loans that have to be paid back: According to a report released in the summer of 2010 by Sen. Tom Harkin, D-Iowa, “Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education,” in 2009, the five largest for-profit schools reported that government grants and loans accounted for 77.4 percent of their revenue.

The Harkin reports comes to a stark conclusion:

The Federal government and taxpayers are making a large and rapidly growing investment in financial aid to for-profit schools, with few tools in place to gauge how well that money is being spent. Available data show that very few students enroll in for-profit schools without taking on debt, while a staggering number of students are leaving the schools, presumably many without completing a degree or certificate.

It is precisely this situation that the Obama administration’s efforts to ensure “program integrity” were designed to address. Student loans are tied to credit hours: By requiring a more rigorous definition of credit hour, the administration was attempting to make sure that government money was paying for actual education. Similarly, the requirement that all for-profit schools must be accredited by the individual states in which they do business was a measure designed to keep fly-by-night online schools operating out of states with weak accreditation requirements from enrolling out-of-state students and ripping them off. The issue is not “innovation.” The issue is basic consumer protection.

One would imagine that Republicans, who theoretically oppose government involvement in the private sector, and are always looking for ways to cut government spending, would approve of efforts to seek greater accountability for taxpayer funds. Virginia Foxx, after all, was notorious for being one of only 11 members of Congress to vote against a federal relief package for victims of Hurricane Katrina, citing the “high potential for the waste, fraud and abuse of federal tax dollars.”

But as it turns out, Foxx herself is benefiting from the waste and abuse of federal tax dollars. Among the top 20 financial contributors to Foxx in the 2011-2012 cycle are the Association of Private Sector Colleges/Universities, the Apollo Group (owner of the University of Phoenix), and Corinthian Colleges. Since federal student loans comprise the vast majority of the revenues of those for-profit schools, it follows that their campaign contributions to Foxx are also made possible by U.S. taxpayers.

 

By: Andrew Leonard, Salon, April 16, 2012

April 17, 2012 Posted by | Education | , , , , , , , , | Leave a comment

   

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