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College Students Lose, Colleges Win

September 26, 2014

Distressing news today for college students as reported in Huffington Post: the USDOE has decided NOT to punish colleges for “questionable servicing practices” that resulted in students being punished for loan defaults while colleges whose loan servicing caused the defaults allowed to remain open and free of any financial penalties.

Here’s the way it works for college students who need to borrow money to attend college: They can get a federal loan or grant through their college. Over the course of their education, the school they attend might change the companies that service their loans, making it conceivable that a degreed or non-degreed student might have multiple collectors seeking paybacks for the money they borrowed. This phenomenon is called “split-servicing”. As recently as November 2011 USDOE reported that “…some 500,000 borrowers with federal student loans were being forced to make multiple monthly payments to different loan companies.” If one or more of the servicers is negligent in collecting the funds, the student is penalized.  How?

Borrowers in default on at least one of their federal student loans face high collection fees, damaged credit scores, an inability to secure home mortgages or auto loans, and garnishment of their tax refunds and Social Security payments, said Cochrane of the Institute for College Access & Success.

recent federal audit revealed that the Education Department is demanding so much money from seniors with defaulted student loans that it’s forcing tens of thousands of them into poverty. At least 105,000 Americans had a part of their Social Security benefits garnished last year to the point that their monthly benefits were below federal poverty thresholds, according to the Government Accountability Office.

Here’s the way it works for colleges: as long as less than 30% of the college’s student/borrowers do not default on a loan within the first three years they are required to make payments, the government will continue to guarantee the loans. If, however, the default rate is 30% or greater, the college could lose access to taxpayer-provided student aid, and that “…would be the equivalent of a death sentence for most colleges.” 

And here’s what’s happening: at least 20 institutions should have gotten the so-called “death penalty” but they dodged a bullet because the federal government did not include students who were current on payments for ONE loan but made no equivalent provision for the students. This decision had the effect of lowering the percentage of “default students” giving the institutions a reprieve from the “death penalty” but maintaining the penalties applied to students.

Borrowers aren’t getting any relief or similar consideration from the Education Department,” said Debbie Cochrane, research director at the California-based Institute for College Access & Success, which advocates affordable education. “If the school isn’t held accountable for the default, then the borrower shouldn’t either.”

“Borrowers have no control over who services their loans. So why not remove the defaults from the borrowers’ records as well?” Cochrane said.

Of course the real winners in this are the servicers who collect the fees and the banks who collect the money even if the students default. “WHAT???”, you ask?

Jeff Baker, a senior official at the Education Department’s Federal Student Aid office, says the Education Department

…has tried to ensure that all student borrowers only deal with one company when making their loan payments. For example, it has put an emphasis on borrowers with Direct loans and FFEL loans owned by the Education Department, which it purchased under a 2008 financial crisis-era law that amounted to a $110 billion bailout of the student loan industry, according to figures cited by Baker.

I’m not a financial expert, but I BELIEVE that $110,000,000,000 did not go to colleges and did not go to students who couldn’t make loan payments… it went to banks. Oh, and where exactly did that $110,000,000,000 come from? I think my tax returns helped a little bit. Oh… and if I’m wrong and someone wants to set the record straight, please do so…

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