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.

No related posts.

What, then, about those who used debt to create real value? What about the companies that leveraged their debt and invested wisely? What about the individuals who used debt to pay for education? This line of reasoning is loaded, because it takes as a presupposition that “Education is Valuable.” With the caveat that some people might argue over the true value of education, Student Loan Bubble will take it as a given that college usually does increase an individual’s capacity to be a productive member of society.

At what point did we collectively decide that our public funds would be used to reward failed businesses? When did we decide we would use public money to send people to school, only to leave them with crippling debt repayments? As Student Loan Bubble has previously speculated, it is entirely possible that the public financing of education has driven tuition prices up at a rate much faster than inflation.

As a nation, are we entirely satisfied to punish the most productive members of our society with debt that is impossible to discharge, when it was probably a public policy error that inflated tuition prices in the first place?

Certainly, this line of reasoning is not without consequence. This is the perfect storm that would trigger the Student Loan Bubble, which would create a new “dark ages” for US colleges and universities who rely on inflated tuition, and would bankrupt even more lending companies. Those securities that are backed by student loan debt would suddenly become “toxic assets” in exactly the same manner as housing mortgages. Government purchase of those newly-toxic assets would, in fact, be a bailout for the student lending industry.

At this point, Student Loan Bubble is not willing to articulate a formal position on the topic, but there are extremely compelling arguments to be made for both sides of the issue. Consider the following article from banks.com…

Excerpt from: http://www.banks.com/blogs/mortgages/2009/03/13/wo…

In a way, it makes sense. How many of us graduated from school with student loan debt? What would we be able to buy if we didn’t have it? How much more would we be able to borrow if we weren’t making student loan payments? The stated goals of our leaders, since the issue of financial crisis reared its head, have all been connected with getting us to spend more money. So why not make it possible?

Student loan forgiveness would be costly, though. The government would have to buy all the loans from the folks it subsidizes to offer low cost student loans, and then forgive the loans. It could work, though, as part of the effort to cut out the “middle man” when it comes to student loans. If the government began making the loans directly to students, rather than paying others to do so, the government could make money on it. And it might go toward reducing the horrendous deficit we’re in.

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1. Long-term student loan inflation provided money to students, indirectly to colleges A central component of the Student Loan Bubble thesis is the effect of over-abundant federally subsidized debt, which increased students'...
2. Sallie Mae: the privatization of student loan profits A 2006 report by Leslie Stahl of 60 minutes investigates Sallie Mae, the program set up by Congress in 1972...
3. What causes tuition to rise? It's funny how a question might take five words to ask, and require chapters to answer. Here's one such question:...

Dear Chairman Frank and Chairman Miller:

As representatives of students, consumers, colleges, administrators, and counselors, we want to take this opportunity to thank you for your efforts to include consumer protections and accountability under the Troubled Asset Relief Program (TARP) through H.R.384, the TARP Reform and Accountability Act of 2009.

We are writing about an urgent matter related to the planned roll-out of the TARP sub-program, the Term Asset-Backed Securities Loan Facility (TALF), in February. As you know, we are concerned about the planned allocation of TALF funds to private student loan providers. Private student loans are more risky and expensive than federal loans because of high variable interest rates and few consumer protections, and private loan lenders already enjoy special bankruptcy treatment under federal law. For these reasons, financial aid experts agree that private loans should only be a last resort for students. Additionally, we estimate that just eight percent of undergraduates use private student loans, and many of those borrowers have not exhausted their federal loan options.

To ensure that taxpayer dollars in the TALF program serve students and consumers as well as lenders, we ask you to urge the Secretary of Treasury to make the receipt of TALF funds for private student loan financing conditional upon adequate consumer protections and better data collection. Specific conditions that we believe are important for the Secretary implement include:

1. Loan modification and/or work-out requirements, such as reductions in principal and economic hardship deferrals, for current and future private student loans;
2. Discharges in cases of borrower death or severe disability, for current and future private student loans;
3. Limits on interest rates, origination and other fees for future loans;
4. Mandatory loan certification and inclusion of the FTC holder notice for future loans; and
5. Detailed data reporting on individual future loans replicating the reporting required for Family Federal Education Loans (FFEL) pursuant to section 1092b(a) of 20 U.S.C..

A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and will actually be detrimental to many students and consumers. However, if a form of rescue is provided for private student loans, it would be unconscionable to do so without also providing better consumer protections. Implementing these protections will help ensure that private lenders do not unfairly benefit from the bailout at the expense of past, present, and future students and their families.

We realize that there are many pressing issues requiring your attention during these difficult economic times, but respectfully request that you consider this issue a priority given the fast-approaching commencement of TALF fund disbursement.

Sincerely,

American Association of Collegiate Registrars and Admissions Officers
American Association of Community Colleges
American Association of State Colleges and Universities
American Association of University Women (AAUW)
Americans for Fairness in Lending
Campus Progress
Consumers Union
Dēmos: A Network for Ideas & Action
The Greenlining Institute
National Association for the Advancement of Colored People (NAACP)
National Association of Student Financial Aid Administrators
National Center for Public Policy and Higher Education
National Consumer Law Center (on behalf of our low-income clients)
National Consumers League
The Project on Student Debt (an initiative of the Institute for College Access & Success)
National Association for College Admission Counseling
The Sargent Shriver National Center on Poverty Law
U.S. Public Interest Research Groups
United States Students Association

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For its lending and collection businesses, SLM Corporation enjoys unprecedented legal advantages that are not shared by any other class of financing, including many unique techniques for retrieving repayment from students who have defaulted. As a result, the repayment rate for student loans is currently 95%, which is significantly higher than in the past, and is higher than other industries. Stahl interviews several experts to figure out how SLM Corporation came to be, and uncovers a fascinating story of amazing profits and questionable expenses.

RTFA: http://www.cbsnews.com/stories/2006/05/05/60minute…

“It may be called ‘private’ by the people in the system. But it’s not private at all,” says Michael Dannenberg, who analyzes student loan policy at the New America Foundation, a non-partisan think tank.

“What do you call it?” Stahl asks.

“Frankly, it’s a socialist-like system,” he says. “It’s not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk.”

On top of that, Sallie Mae also owns some of the biggest collection agencies in the country. Once a student borrower goes into default, the government pays Sallie Mae all the principle and compounded interest that have accrued.

The loan then passes into the collection phase. If Sallie Mae is the collector, it gets to keep up to 25 percent of whatever is recovered. In 2005, nearly a fifth of its revenue came from its collection business.

“Sallie Mae makes money if you pay back on time. And Sallie Mae makes money if you don’t pay back on time,” says Elizabeth Warren, a professor of bankruptcy law at Harvard Law School.

Warren says it’s a mistake to allow Sallie Mae to be both a lender and a collector.

“It shouldn’t be the case that Sallie Mae gets to play every hand at the poker table while the government is the one that keeps anteing up the money,” Warren tells Stahl. “But let’s be clear. That by itself isn’t enough. We have to decide collectively as a country: do we want to encourage the young people who are trying to get college diplomas? And if the answer to that is yes, the way to encourage them is not to double and triple the amount that they owe when they get into financial troubles.”

By law, private lenders must offer payment options, but that usually means the loans just balloon. So even though 95 percent do pay up over time, many are burdened with heavy debt. In a statement, Sallie Mae told 60 Minutes it makes far more money from those who pay on time, than from those who default

Related posts:

1. Long-term student loan inflation provided money to students, indirectly to colleges A central component of the Student Loan Bubble thesis is the effect of over-abundant federally subsidized debt, which increased students'...
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