Friday, August 23, 2013

Ripping Off Young America: The College-Loan Scandal

Matt Taibbi

The federal government has made it easier than ever to borrow money for higher education - saddling a generation with crushing debts and inflating a bubble that could bring down the economy

In the early 2000s, a thirtysomething scientist named Alan Collinge seemed to be going places. He had graduated from USC in 1999 with a degree in aerospace engineering and landed a research job at Caltech. Then he made a mistake: He asked for a raise, didn't get it, lost his job and soon found himself underemployed and with no way to repay the roughly $38,000 in loans he'd taken out to get his degree.

Collinge's creditor, Sallie Mae, which originally had been a quasi-public institution but, in the late Nineties, had begun transforming into a wholly private lender, didn't answer his requests for a forbearance or a restructuring. So in 2001, he went into default. Soon enough, his original $38,000 loan had ballooned to more than $100,000 in debt, thanks to fees, penalties and accrued interest. He had a job as a military contractor, but he lost it when his employer ran a credit check on him. His whole life was now about his student debt.

Collinge became so upset that, while sitting on a buddy's couch in Tacoma, Washington, one night in 2005 and nursing a bottle of Jack Daniel's, he swore that he'd see Sallie Mae on 60 Minutes if it was the last thing he did. In what has to be a first in the history of drunken bullshitting, it actually happened. "Lo and behold, I ended up being featured on 60 Minutes within about a year," he says. In 2006, he got to tell his debt story to Lesley Stahl for a piece on Sallie Mae's draconian lending tactics that, curiously enough, Sallie Mae itself refused to be interviewed for.

From that point forward, Collinge – who founded the website – became what he calls "a complaint box for the industry." He heard thousands of horror stories from people like himself, and over the course of many years began to wonder more and more about one particular recurring theme, what he calls "the really significant thing – the sticker price." Why was college so expensive?

Tuition costs at public and private colleges were, are and have been rising faster than just about anything in American society – health care, energy, even housing. Between 1950 and 1970, sending a kid to a public university cost about four percent of an American family's annual income. Forty years later, in 2010, it accounted for 11 percent. Moody's released statistics showing tuition and fees rising 300 percent versus the Consumer Price Index between 1990 and 2011.

After the mortgage crash of 2008, for instance, many states pushed through deep cuts to their higher-education systems, but all that did was motivate schools to raise tuition prices and seek to recoup lost state subsidies in the form of more federal-loan money. The one thing they didn't do was cut costs. "College spending has been going up at the same time as prices have been going up," says Kevin Carey of the nonpartisan New America Foundation.

This is why the issue of student-loan interest rates pales in comparison with the larger problem of how anyone can repay such a huge debt – the average student now leaves school owing $27,000 – by entering an economy sluggishly jogging uphill at a fraction of the speed of climbing education costs. "It's the unending, gratuitous, punitive increase in prices that is driving all of this," says Carey.

As Collinge worked to figure out the cause of those cost increases, he became focused on several highly disturbing, little-discussed quirks in the student-lending industry. For instance: A 2005 Wall Street Journal story by John Hechinger showed that the Department of Education was projecting it would actually make money on students who defaulted on loans, and would collect on average 100 percent of the principal, plus an additional 20 percent in fees and payments.

Hechinger's reporting would continue over the years to be borne out in official documents. In 2010, for instance, the Obama White House projected the default recovery rate for all forms of federal Stafford loans (one of the most common federally backed loans for undergraduates and graduates) to be above 122 percent. The most recent White House projection was slightly less aggressive, predicting a recovery rate of between 104 percent and 109 percent for Stafford loans.

When Rolling Stone reached out to the DOE to ask for an explanation of those numbers, we got no answer. In the past, however, the federal government has responded to such criticisms by insisting that it doesn't make a profit on defaults, arguing that the government incurs costs farming out negligent accounts to collectors, and also loses even more thanks to the opportunity cost of lost time. For instance, the government claimed its projected recovery rate for one type of defaulted Stafford loans in 2013 to be 109.8 percent, but after factoring in collection costs, that number drops to 95.7 percent. Factor in the additional cost of lost time, and the "net" projected recovery rate for these Stafford loans is 81.8 percent.

Still, those recovery numbers are extremely high, compared with, say, credit-card debt, where recovery rates of 15 percent are not uncommon. Whether the recovery rate is 110 percent or 80 percent, it seems doubtful that losses from defaults come close to impacting the government's bottom line, since the state continues to project massive earnings from its student-loan program. After the latest compromise, the 10-year revenue projection for the DOE's lending programs is $184,715,000,000, or $715 million higher than the old projection – underscoring the fact that the latest deal, while perhaps rescuing students this coming year from high rates, still expects to ding them hard down the road.

But the main question is, how is the idea that the government might make profits on defaulted loans even up for debate? The answer lies in the uniquely blood-draining legal framework in which federal student loans are issued. First of all, a high percentage of student borrowers enter into their loans having no idea that they're signing up for a relationship as unbreakable as herpes. Not only has Congress almost completely stripped students of their right to disgorge their debts through bankruptcy (amazing, when one considers that even gamblers can declare bankruptcy!), it has also restricted the students' ability to refinance loans. Even Truth in Lending Act requirements – which normally require lenders to fully disclose future costs to would-be customers – don't cover certain student loans. That student lenders can escape from such requirements is especially pernicious, given that their pool of borrowers are typically one step removed from being children, but the law goes further than that and tacitly permits lenders to deceive their teenage clients.

Not all student borrowers have access to the same information. A 2008 federal education law forced private lenders to disclose the Annual Percentage Rate (APR) to prospective borrowers; APR is a more complex number that often includes fees and other charges. But lenders of federally backed student loans do not have to make the same disclosures.

"Only a small minority of those who've been to college have been told very simple things, like what their interest rate was," says Collinge. "A lot of straight-up lies have been foisted on students."

Talk to any of the 38 million Americans who have outstanding student-loan debt, and he or she is likely to tell you a story about how a single moment in a financial-aid office at the age of 18 or 19 – an age when most people can barely do a load of laundry without help – ended up ruining his or her life. "I was 19 years old," says 24-year-old Lyndsay Green, a graduate of the University of Alabama, in a typical story. "I didn't understand what was going on, but my mother was there. She had signed, and now it was my turn. So I did." Six years later, she says, "I am nearly $45,000 in debt..... If I had known what I was doing, I would never have gone to college."


Daniel Boone Nixed by Educrats

To build the new utopian America, first the old America must be completely extirpated. That means erasing our heroes and cultural icons, so that they won’t remind us of who we used to be. Consequently, frontiersman Daniel Boone is now deemed offensive:

Is a cartoon-like college mascot reminiscent of Daniel Boone — right down to the legendary coonskin cap — racist, sexist or otherwise offensive?

Officials at the University of Denver seem to think so. They’ve announced they won’t reinstate “Denver Boone,” who was retired in 1998 as mascot for the UD Pioneers, despite calls to bring him back. …

“Boone was a polarizing figure that did not reflect the growing diversity of the UD community, but rather was an image that many women, persons of color, international students and faculty members found difficult to relate to as defining the pioneering spirit,” Chancellor Robert Coombe said in a March letter to the school community.

Numerous Facebook postings by students who wanted Daniel Boone back were ignored by PC educrats.

“It was really about moving forward,” Theresa Mueller, a spokeswoman for the University of Denver, told

Moving forward toward what? What kind of future does a society have if it lets itself be ruled by people who find it offensive?

Davy Crockett will be next to get airbrushed out of our culture; after all, he racistly shot Mexicans at the Alamo. Not long after will follow the Founding Fathers.


WH: Obama's College-Cost Proposals 'Not Going to Be Popular With Everybody'

President Obama is about to propose "fundamental reforms that would bring real change to the way that we pay for college education in this country," a White House spokesman said on Wednesday. 

Those reforms "are not going to be popular with everybody, but they are going to be in the best interests of middle-class families," White House spokesman Josh Earnest

But the White House refused to give details: "Well, you have to wait til Thursday," Earnest told reporters. "I don't want to give away the secret now."

President Obama's next bus tour begins on Thursday. He's traveling to New York and Pennsylvania to "talk about his vision for ensuring a better bargain for the middle class," Earnest said.

"He's going to talk a little bit this week about college affordability," the spokesman added, repeating President Obama's contention that a college education is essential to ensuring that middle-class families have access to economic opportunity.

Earnest noted that average tuition at a public four-year college has more than tripled over the last three decades, while family incomes have "barely increased," he said. "The average student today graduates with more than $26,000 in student debt,"  he said.

Data released Tuesday by the National Center for Education Statistics, part of the U.S. Education Department, shows that in-state tuition at community college jumped almost 6 percent, to an average of $3,131 last year; in-state tuition at a public, four-year college averaged $8,655, up 5 percent; and private, four-year school tuition and fees averaged $29,056, a 4 percent increase.

Add room, board and fees into the mix, and the numbers for four-year colleges are much higher. (According to one survey, Sarah Lawrence College in Bronxville, N.Y. is the most expensive college in the nation, costing a total of $61,236 for the 2012-2013 year. N New York University was second, at $59,337.)

The NCES found that 71 percent of all undergraduate students received some type of financial aid in the 2011-12 school year, up from 66 percent four years earlier.

"Increasing federal student aid alone will not control the cost of college," Education Secretary Arne Duncan said in a statement issued on Tuesday.  He urged "state policymakers and individual colleges and universities to do their part in taking action against rising college tuition. Together we can take collective action to help make college more accessible, affordable, and attainable for middle class Americans across the country."

At the White House on Tuesday, Earnest told reporters that Americans who are college-educated tend to earn more and find jobs more easily.

He also referred to NCES statistics showing that 42 percent of students received federal grants in 2011-2012, up from 28 percent from four years earlier, and 40 percent received federal loans, an increase of 5 percentage points.

"Now there's also a study that was published today that shows that the federal government is doing more than ever to open up the door to a college education to middle-class families, that the federal government is providing more assistance than ever before," Earnest said.

"But government assistance can't keep up with skyrocketing costs. So what the president believes that we need to do is we need to fundamentally rethink and reshape the college -- the higher education system and we need find a way to build on innovation.

"So the president on this bus tour will lay out some fundamental reforms that would bring real change to the way that we pay for college education in this country.

"Now, the proposals that the president is going to lay out are not going to be popular with everybody, but they are going to be in the best interests of middle-class families. And the president is looking forward to having that discussion over the course of Thursday and Friday, in addition to riding on a bus."


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