Lawsuit claims JP Morgan, Citi, and Nelnet defrauded students and US government

Posted by Student on 2009/10/19 @ 1350 Comments (0) (show tags and categories)

Student Loan Bubble typically focuses on the fundamental questions of student debt in the United States, but as this topic gets more attention, it is inevitable that those companies involved in this industry will also receive more attention.

An ongoing theme of Student Loan Bubble is the structural similarity to the US housing bubble, such as high-risk loans to individuals with no collateral or credit history, decade-long repayment schedules, and variable interest rates. Given the spectacular collapse of the US housing industry and the level of fraud that was later uncovered, it should not be surprising that some are asking the same questions of the student loan industry.

Between bringing a lawsuit against lending companies and established guilt, a lot of evidence must be presented before the connection is made. Student Loan Bubble is curious to watch this case as it unfolds.

Excerpt from: http://www.businessinsider.com/jpmorgan-citi-charg…

The 285 page suit [...] says Nelnet illegally induced students to apply for federal student loans, paying telemarketers to aggressively push the government product, and used false advertising to get more applications, like promising that students would save thousands of dollars in interest payments by consilidating their loans with Nelnet. They then presented false claims to the Department of Education to receive federal funding.

According to the suit, JPMorgan and Citi alledgely “ratified and/or authorized the wrongful acts of Nelnet and have benefitted from such conduct.”

Without specifying a total amount, the suit asks for triple the U.S. claim payments and other damages, plus civil penalties. It asks for $5,500 to $11,000 for each claim Nelnet presented to the Department of Education between 2004 and 2007 (the number is unclear).

The government could have intervened in the suit, but declined, according to court filings.

Student Loan Debt and Low Income Families

Posted by Student on 2009/10/12 @ 2140 Comments (0) (show tags and categories)

The Wall Street Journal recently reviewed the ways low income families are impacted by the US credit crunch. In addition to consumer purchases, The WSJ points to student loan debt as a major factor — sometimes the largest — in the composition of individual debt portfolios.

Excerpt from: http://online.wsj.com/article/SB125511860883676713…

“We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans,” says Ronald Mann, a Columbia University law professor. Now, “it will be harder for families at the bottom of the income ladder to get credit cards,” he says.

The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show.

Although the tone of the article tends to focus on young people and their consumer behaviors, there is also a glimpse at a much more troubling problem.

Treasury Secretary Timothy Geithner, testifying before Congress in July, said: “We now know that millions of Americans were…unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education.”

Student Loan Bubble is curious to hear more about Geithner’s perspective on the inability of Americans to evaluate risk, and if this can be remedied by better information, better financial education, different regulation, or perhaps something else entirely.

Education is an excellent vehicle for elevating one’s socioeconomic status, but The WSJ has identified a major issue for those in greatest need of elevation: disproportionate debt levels, coupled with the previously unheard of suggestion that education might be a risky investment.