Student Loans are Just that . . . Loans. Defaulting is a Risky Proposition – Part I

Millions of Americans are up to their wallets in debt for money they borrowed way back when and thought they’d get around to paying off . . . well . . . eventually. Good luck with that.

Almost 6 million people are at least a year behind in paying off their student loans for post-secondary education. And with new-graduate unemployment as high as it is, the prospects are getting worse. A September 9, 2012 article in the New York Times paints a pretty bleak picture. Sixteen percent of all those with outstanding balances—representing a whopping $76 billion—are in default. So what’s the upshot?

Many of the defaulters are being hunted down, not by the FBI or the local sheriff, but by collection agencies. This is ironic because in my last blog post I discussed the need to regulate collection agencies. Who should regulate them? The federal government (as well as the states). Who is hiring them? The federal government. So while the Consumer Financial Protection Bureau (CFPB) is taking steps to protect debtors from unsavory collection practices, the U.S. Department of Education (DOE) is hiring some of those same agencies the CFPB is trying to get in line. In the last fiscal year, the DOE paid $1.4 billion to collection agencies and other “bounty hunters” in order to recoup its losses.

Many years ago, there was a TV commercial for Chiffon margarine that ended with the catch phrase, “It’s not nice to fool Mother Nature.” Learning she had been fooled into thinking Chiffon was butter, Mom would summon up a thunderbolt. Substitute the U.S. government for Mother Nature and collection agencies for the thunderbolt, and you get a picture of what defaulters are up against. Unlike pitiful little banks and lame mortgage lenders, the fed can muster up some pretty loud thunderbolts of its own. The Times article tells the story of 29-year-old single mother Amanda Cordeiro of Florida, who is in the red on a student loan to the tune of 55 grand. She has had two tax refunds seized (private companies can’t do that) and has changed her phone number several times in the last year to avoid the harassing phone calls the CFPB is trying to put a stop to.

Other defaulters have had Social Security payments garnisheed. This makes life miserable for a lot of former students, especially those who have taken pricey courses at private for-profit schools, like University of Phoenix, ITT Technical Institute, Kaplan University and DeVry University. Many of these schools specialize in Internet coursework with disappointing completion rates for students and less-than-stellar job placement records. The educational institutes frequently coach students into taking out the loans, which are paid directly to the schools. Often, those who fail to find well-paying employment take it on the lam because they have no way to pay back the loans. Students who attended profit-making schools –about 11 percent of all students – account for nearly half of all defaults. Dropouts were nearly four times as likely to default as those who graduate.

While there are programs available to help desperate students pay off their loans over an extended period, with outstanding balance forgiveness at the end of that term, the companies that administer the loans for the government frequently fail to inform the borrowers of those programs. Mounting penalties and accumulating interest rates can lead to huge debt and ruined credit ratings, making life even more difficult when defaulters tries to take out a loan on a car or home, or when they apply for credit cards.

It is very difficult to wipe out government loans through bankruptcy, and they have no statute of limitations. The government has been able to recoup a whopping 80 percent of defaulted debt, about four times the rate of nongovernment lenders.

You may know the acronym ARM as standing for “adjustable rate mortgage.” ARM can also mean “accounts receivable management,” as debt collectors call themselves. The ARM industry is booming thanks to defaulted student loans. ARM companies seek government contracts because of their high rate of return.

When borrowers are delinquent paying for a year, the lender (Uncle Sam) declares them in default. If it cannot find the debtors, the government sics collection agencies on them.

 I leave you and those you care about with a checklist:

  •   Be very, very careful about taking courses from Internet post-secondary schools (see my column of July 17, 2012);
  •  Don’t take out a student loan unless you are damned sure you are going to finish your course of study;
  •  If you do apply for a student loan, get all the information up front about programs to help students who are having trouble paying off their loans;
  •  If you are already delinquent, go to the agency through whom you acquired the loan and ask for the information on extended payback programs;
  • And finally, if you are in debt up to your neck, don’t go making babies, or you’ll be asking for a heap of grief.

To be continued. “See” you in part 2.

Want to Bitch About Credit Card Issuers? Have we got a Site for You!

You have probably heard about the Dodd-Frank Act. It aims to regulate speculative and unfair practices on the parts of financial institutions. Most Congressional Republicans are out to kill it. Many Democrats want it strengthened. Part of that act is the creation of the Consumer Financial Protection Bureau (CFPB). How silly! Complaints against lenders? Why on earth would we big, bullying consumers need protection from those sweet little-bitty banks like JP Morgan Chase, Bank of America and Citibank?

When financial consumer advocate and Harvard Law Professor Elizabeth Warren advocated before Congress for the creation of the CFPB she was raked over the coals by the free market boys (and girls?). It soon became clear that if and when the bureau was created, she had a Klondike Bar’s chance in a microwave of being approved for the post of director. That position eventually went to Richard Cordray, the former attorney general of Ohio, a well-known consumer protection guy. President Barack Obama had to appoint Cordray with a recess appointment to avoid the free-market contingent in the House. Warren went back to Massachusetts to run for the U.S. Senate.

It looks like Cordray is taking this job seriously. The CFPB made a formal announcement today that it has set up a web site that allows

CFPB Director Richard Cordray
Richard Cordray

consumers to post grievances against companies that provide credit cards, mortgages and student loans. The grievances are posted in the form of databases.

Since the bureau opened for business last July, it has received 45,000 grievances – 17,000 about credit cards alone – through June 1, 2012.

“By making our data publicly available, initially in the area of credit cards, we hope to improve the transparency and efficiency of this essential consumer market,” Cordray said in a statement. ‘‘Each and every time we hear from American consumers about their troublesome transactions with financial products, it gives us important insight.”

The public database includes complaints made since June1. Working with the credit card issuers, the CFPB created a number of response categories that show how each complaint has been dealt with and how quickly.

For each category, companies can respond to a consumer in one of four ways. Once the complaint is routed to a company, it has 15 days to respond and 60 days to resolve the complaint. Consumers should expect to receive a refund, an explanation, a correction, a change in account terms, or simply have the case closed.

If you have a complaint against a bank, mortgage lender, student loan provider, or credit card issuer, take it to http://www.consumerfinance.gov/complaintdatabase.

For the time being, you will also be able to see the recent record concerning credit card complaints. The other categories should come online by the end of the year.

 

 

Will the new Federal Consumer Protection Agency be Protected?

Elizabeth Warren - photo courtesy Harvard School of Law

The first time I saw Elizabeth Warren being interviewed – by Jon Stewart on The Daily Show – I was stricken by her unique ability to combine a soft-spoken approach and a stereotypical schoolmarm appearance on the one hand, with a tough-as-nails, coherent delivery on the other.

President Obama has selected Warren as his special adviser to get the new CFPB, or Consumer Financial Protection Bureau (do government agencies get funding based on how many syllables they have in their names?). The bureau was established by the Dodd-Frank financial regulation legislation that became law at the end of last year, before so many Democratic representatives packed their bags.

In Warren’s January 26, 2010 Daily Show interview she described how there are seven different federal agencies that supervise consumer lending, as in credit cards, mortgages, consumer loans, and the like. It will be her agency’s job to coordinate those agencies, get the fine print out of the loan agreements, summarize almost everything a consumer needs to know on one page of the loan agreement, and, overall, protect consumers from nefarious practices on the part of the financial big boys.

Do you know why there is so little illegal graft in Congress? It’s because Congress legalized it. And who is “donating” to all those congressional election campaigns? You? I? Please! It’s he big corporations. Warren, a Harvard Law School professor and former chair of the Congressional Oversight Panel on TARP (the Troubled Asset Relief Program), is quick to remind banks, “What part of ‘we bailed you out’ do you not get?” as she so pithily remarked on that January 2010 show.  If you remember, mortgage backed securities are the mortgages that were sliced, diced, and minced twice mortgages that were divided up and distributed into various securities that were then sold and resold until no one could figure out who homeowners actually owned money to.

            The banks apparently don’t like Elizabeth Warren because she is on the side of consumers (you know, the people whose grandchildren will be carrying the burden of our national debt, including the money paid to the banks by TARP) who should never get screwed again if the economy tanks and foreclosers move in.

            In an interview with Kiplinger’s Personal Finance magazine (January 2011), Warren gives an example of how her agency, which will not officially open for business until next July 21st, is already operating. Two years ago Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act of 2009 (another example of a long title just so they can come up with a clever acronym) that eliminated some bad practices aimed at milking as much moolah out of unwary consumers as possible. The industry has modified its practices in order to comply, but sometimes in order to evade the spirit of the CARD Act. “What usually happens . . . is the industry then shifts slightly and the agency is called upon to write a new round of regulations. Thus grows a regulatory thicket that couldn’t be penetrated with a howitzer.”*

Warren’s agency has contacted the Federal Reserve, which currently has jurisdiction over credit card issuers, to seek redress. The Fed, in turn, added some rules under its powers to correct the shortfalls in the CARD Act.

            The CARD Act bans or curtails certain bad practices. But if you have ever read your credit card agreement – and it amazes me how many cardholders are clueless – you know it can be difficult to decipher their complexities. That’s where CFPB has a mission to boil it down to plain English that can be read in a few minutes.

            Warren wants to boil down the actual price of the card, usually buried in the fine print, to a list or table showing the interest rate, penalties and explanation of any bonuses that would enable the consumer to compare offers simply.

            As for mortgages, CFPB is aiming to condense the information borrowers need early in the process – not just before closing – to one page in order to understand the costs and the risks, and to make comparisons. It also aims to get rid of some of the documents now required by law. The one-page sheet would include the down payment, monthly payments, closing costs, cash at payment and length of the loan.

            Warren says she is hearing from people in both the credit card and mortgage industries that they are willing to try the reforms.

            She sees a day in the near future when technology will allow consumers to report things that need fixing a sort of rapid-response policing – and to give input for ideas on reform.

Her best advice to credit consumers? Pay off your credit cards. If you are carrying a balance month to month, you are in financial trouble.

I’m a big fan of Elizabeth Warren. I suspect anyone in Congress who is hostile to her goals is a fear-big-government or a “free market must prevail” hypocrite. While it’s okay to fear big government, we must also fear unrestrained corporate power. Three years of America on its financial knees is enough. To reiterate to the banks, whose officers are raking in obscene bonuses, , “What part of ‘we bailed you out’ do you not get?”

Please visit the CFPB web site at www.consumerfinance.gov. They’d love your input.


* Kiplinger’s Personal Finance, p.62, January 2011