Student Lending Probes and Lawsuits

What we know about student loan debt is sobering enough.

"The average student loan debt for a U.S. graduate of the Class of 2013 was $28,400, according to the Project on Student Debt," said Deborah Figart of the School of Education, at The Richard Stockton College of New Jersey. "Each month, young adults are burdened with 25% to 30% or more of their net pay dedicated to student loan debt."

The total outstanding student loan debt in the U.S. has now surpassed $1.2 trillion. A September 2014 report by the credit bureau Experian found student loans in the U.S. had surged 84% since the Great Recession, with more than 40 million consumers having at least 1 student loan.

It's a debt burden that many recent graduates – and especially those who left school before graduating – cannot easily bear. In its Project on Student Debt, the Institute for College Access & Success reports that more than 650,000 federal student loan borrowers who began repaying their loans in 2011 had defaulted by 2013. The institute reported that students who attended for-profit colleges had a much higher average default rate than other types of schools: 19.1%, compared to 7.2% at nonprofit colleges.

Horror stories

Behind those statistics are specific horror stories. Figart says she has heard from graduates with tens of thousands of dollars in interest-accruing debt but are earning minimal wages. She's heard from law school graduates who can't get a license to practice, despite passing the necessary bar exams, because of a bad credit record.

She says there are restaurant school graduates hoping to become chefs but earning a fraction of what they owe for their degree peeling potatoes.

While the Experian report shows 40 million consumers with at least 1 student loan, Figart says the reality is actually worse. She says the average student has around 8 to 10 loans and the total student debt far outweighs the nation's total credit card bills.

Solution?

The answer, Figart says, is giving prospective college students full and transparent advice before they take out loans for an education that will follow them from campus to the workplace. She says the federal "Know Before You Owe Private Student Loan Act" does not go far enough in several ways and so also fails to protect students from debt.

Figart has taught financial and economic literacy to students and teachers, covering subjects related to budgeting and consumer debt. And, while some states require courses to include a component related to budgeting and finance, she contends too many students are "falling through the cracks."

The solution? Figart says students must be counseled in topics like loan repayment options, average salaries for a wide range of jobs, suggested debt-to-income ratios, and the likely consequences of defaulting on loan repayments.

"In an economy where job security and job quality are increasingly elusive, students pursue higher education as an investment, not simply a means of personal fulfillment," she said. While financial counseling may dash the dreams of some or at least postpone those dreams, it could nevertheless save thousands of students from a fate worse than debt.”

There is more than $1 trillion in student loan debt in the U.S. By and large, the young consumers carrying this load are doing so at the most vulnerable point in their financial lives.

They are just starting their careers. If they are lucky, they have a job. In most cases, however, their salaries are on the low end. Yet a big chunk of their paycheck goes to making payments on their student loans.

President Obama took this concern to Georgia Tech this week, where he told students that, as valuable as a college education is, paying for it has become a crushing burden.

“The average undergrad who borrows money to pay for college graduates with about $28,000 in student loan debt,” Obama said. “That’s just the average; some students end up with a lot more than that.”

Student aid bill of rights

Obama signed a “student aid bill of rights” designed to make the student loan repayment process easier to understand and manage.

“We're going to require that the businesses that service your loans provide clear information about how much you owe, what your options are for repaying it, and if you're falling behind, help you get back in good standing with reasonable fees on a reasonable timeline,” Obama told the students.

Just as with any other loan, such as a car payment or mortgage, you need to make payments to your loan servicer, the entity that loaned the money. Each servicer has its own payment process, so you should check with your servicer if you aren’t sure how or when to make a payment.

Remember, it's your responsibility to stay in touch with your servicer and make your payments, even if you do not receive a bill.

When payments begin

You don’t have to begin repaying most federal student loans until after you leave college or drop below the minimum requirement of half-time enrollment. The exception is PLUS loans, whose repayment begins once you have received the full amount of your loan.

Your lender is required to provide you with a loan repayment schedule that details when your first payment is due, the number and frequency of payments, and the amount of each payment. Your loan may have a grace period that gives you a little extra time before starting the repayment process.

Grace period

The grace period gives you time to get your feet under you financially and to select your repayment plan. Not all federal student loans have a grace period and keep in mind, even during a grace period interest charges will accrue on most loans.

If you are called to active duty military service for more than 30 days before the end of your grace period, you will get the full 6-month grace period when you return from active duty.

Private student loans – obtained from a bank, credit union or university – have different terms that vary from lender to lender.

For example, Wells Fargo says payments begin 6 months after the borrower leaves school. However, some loans like Student Loan for Parents and the Wells Fargo Private Consolidation loan, payments begin once the loan funds have been received.

Regardless of the source of the loan, Obama said students need clearer instructions on the repayment process.

You wouldn't agree to buy a new car without knowing what it was going to cost to drive it off the lot. Yet when it comes to selecting a college, many students enroll without knowing what a degree will ultimately cost.

It's no surprise that millions of students end their 4 years with delayed sticker shock and thousands of dollars in student loans.

Fortunately, colleges in recent years have become more transparent when it comes to letting prospective students know how much their education will cost. But it took a little prodding from the federal government.

Know before you owe

In 2011 the Consumer Financial Protection Bureau (CFPB) introduced its “Know Before You Owe” campaign for student loans.

In a joint venture with the U.S. Department of Education, the CFPB produced a financial aid shopping sheet for use by colleges to help prospective students better understand the financial aid they might qualify for. Students can also use it to compare aid packages offered by different schools. By April 2014, thousands of schools were using it.

The Department of Education has an online tool to help students select a college or university based on cost. Using the tool a student can generate a report on the highest and lowest cost per academic year, focusing either on tuition or net costs.

Tuition reports include tuition and required fees. Net price is cost of attendance minus grant and scholarship aid. Data are reported by institutions and are for full-time beginning students.

Where costs are accelerating

The tool will also select the schools whose costs are rising at the fastest rate. That can be important if a student is a year or two away from enrolling. It lets them know that costs might be higher when they actually enroll and go up significantly over the 4 years they are in school.

Individual colleges are also now required to provide online tools that increase cost transparency. Wellesley College has a cost estimator called My inTuition.

The tool asks just 6 basic questions before generating a personalized estimate of an student's cost to attend Wellesley. The recently-updated version provides a breakdown of the cost paid by the family, work-study, and loan estimates, in addition to grant assistance provided by the college.

"We got a highly positive response when we released the cost estimator last year, and with the provision of more detailed information, we hope to continue and expand on that," said Wellesley economics professor Phillip B. Levine, who invented My inTuition.

Alleviating worry

Levine says the new detailed breakdown provided by the tool may help alleviate some of the concerns around student debt.

"Many families worry that their children will need to take out tens of thousands in loans to cover what they aren't paying out of pocket,” he said. “My inTuition helps them understand that is not the case at Wellesley."

The Department of Education calculator is especially helpful for students trying to narrow their school choices to private non-profit, private for-profit or a state-supported college or university.

For example, when searching for the lowest tuition, it shows the average tuition of the lowest state-supported public colleges is $7,407 per academic year. But among the lowest-cost for-profit schools, the average tuition is more than $15,000.

In the last decade more people have sought a college education and paid more for it. Tuition costs have skyrocketed and so has the amount of money students owe for college loans.

Mark Cuban, billionaire investor and entrepreneur, says rising student loan debt is crushing the U.S. economy, preventing recent graduates from buying the things that normally stimulate the economy. Cuban has offered a rather simple fix.

In an interview with CNBC this week, Cuban called for a cap on the amount of federally-guaranteed student loan money any individual can borrow in a year. With a loan cap, he argues, colleges will have no choice but to reduce tuition.

His comments this week were, in fact, a repeat of those made over the summer at a business conference sponsored by Inc. Magazine.

Educational arms race

Cuban's comments reflect many of the same views we uncovered when we reported on skyrocketing college costs back in 2007. At the time, economist Joel Naroff, of Naroff Economic Advisors, pointed to an educational arms race, with elite private schools pushing the tuition enveloping and public universities scrambling to catch up.

"There is very little pressure of any kind to keep costs down at private schools," Naroff told ConsumerAffairs at the time. "For most of the private schools, especially the better and elite schools, the more expensive it is, the more elite it is, and the more having a degree from that school is a perceived value."

Cuban is now saying that the U.S. government can end this arms race – and perhaps help the U.S. economy – by reducing the money flow to higher education. He suggests limiting the amount of student loan debt to $10,000 per student per year.

Easy money

The current system, he argues, has created an “easy money” mentality among college administrators, who don't always use the money wisely, or in ways that benefit the economy. He uses the example of a college “building a better fitness center” to attract students.

Because there is plenty of money coming in – through higher tuition paid for with student loans – spending just increases, and so does tuition, in a classic inflationary spiral.

“Anytime you create easy money, you're gonna create a bubble or inflation and that's what's happening with college tuition,” Cuban said.

Regulators are concerned

Cuban isn't the only one worried about surging college loan balances, though not everyone may agree with his prescription. The Consumer Financial Protection Bureau (CFPB) first raised the alarm when student loan balances went over the $1 trillion mark in 2013. The total has only risen since then and is currently north of $1.2 trillion.

CFPB has launched a “Know Before You Owe” program to educated students about the dangers of too much student loan debt before they take it on.

College loan debt has become a hot button issue in America. The Consumer Financial Protection Bureau (CFPB) puts the outstanding loan balance well beyond $1 trillion, miring millions of consumers in debt.

The conventional wisdom is that all these people struggling to pay off student loans are young people – recent college graduates. They're not.

A report by the New York Federal Reserve showed that in 2012, the last year for which there are records, 4.7 million people who owe money on student loans are between and ages of 50 and 59. Perhaps more of a surprise, 2.2 million are age 60 and older.

The numbers raise questions

Is it possible that it just takes a long time to pay off these loans? Despite the large number of borrowers, maybe the balances on their loans is very small.

The numbers suggest otherwise. In the 50 to 59 age group, the average 2012 student loan balance was $23,820. For those 60 and up, the balance was $19,521.

By comparison, former students under age 30 owed an average $21,402. Those between 30 and 39 owed $29,364.

The New York Fed report also suggests Baby Boomers are having a hard time paying off those loans. Among former students age 50 to 59, 12% were 90 days delinquent in 2012. Among those 60 and other the delinquency rate was slightly higher, at 12.5%.

Something to worry about

The numbers are worrying to financial planners, who believe Boomers should be reducing debt as they head into retirement. Having to make college loan payments each month vastly reduces the amount of savings they can put away in retirement funds.

The Fed report notes student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have risen beyond both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.

The report does not address why consumers would still be paying on loans up to 4 decades after attending college. Some may have found themselves in the position of Charles, of Orlando, Fla., who recently wrote in a ConsumerAffairs post that he is being haunted by an old student loan debt.

“In 1988 I attended a fly-by-night business school (I didn't know it then). My student loan was $2,000. I didn't complete the course, the school went out of business,” Charles writes. “For years I've been trying to get the loan waived only to be told there's nothing to be done. The loan has been sold to various lenders, now Salle Mae has it. I am being charged $50,000.”

One feature of many student loan programs is the ability to postpone repayment. Maybe many people who took out loans in the 1980s thought they would have plenty of time to repay them, but just waited too long to start.

What's more likely is that many of these loan balances are fairly recent, taken out by parents to pay for a child's education. After all, there has always been a strong belief that a college degree is essential to a prosperous life.

Is it worth it?

The Fed recently examined this belief in a report, “Do the Benefits of College Still Outweigh the Costs?” The report concluded that they do, but not for everyone.

Economists Jaison Abel and Richard Deitz looked at the economic costs, benefits, and return on an associate’s degree and a bachelor’s degree. They found that even with increased tuition and falling wages, the return to both degrees has held at about 15% for more than a decade.

But that's primarily because of the comparison to non-degree wages. In the last 10 years workers without a college degree have seen their wages fall.

Students whose chose technical areas of study, such as engineering or math and computers, are getting the best return on invesment – 18% to 21%. Liberal arts majors, on the other hand, are getting below average returns.

Even so, someone contemplating college should carefully consider the cost to benefit equation before taking out tens of thousands of dollars in student loans, which they might be still paying 30 or 40 years in the future.

The Democratically-controlled U.S. Senate has turned aside a proposal by fellow Democrat Sen. Elizabeth Warren's that would have allowed consumers with high-interest student loans to refinance them at today's lower rates.

The reason? The measure needed 60 votes to move forward and the balloting broke cleanly along party lines, with Republicans opposing the measure.

President Obama, who this week signed an executive order capping payments on government student loans, had voiced support for the Massachusetts Democrat's bill. It didn't matter – it failed on a vote of 56-38, 4 short of what it needed.

The key stumbling block, most agree, is the way Warren proposed to pay for the measure. Since there is a cost to the government in lost interest revenue in allowing high-interest student loans to be renegotiated, there has to be an offsetting source of revenue.

Warren proposed implementing the so-called “Buffet Rule,” a minimum tax to be applied to high-income taxpayers. That's a non-starter for Republicans.

Election year issue?

That prompted Jon Healey, editorial writer for the Los Angeles Times, to speculate Warren included that provision as a poison pill, knowing it would cause GOP senators to vote against the measure.

“You have to wonder whether Warren sees student loan debt as a problem to be solved or a campaign issue to be seized,” he writes.

That was certainly the take offered up by the GOP leadership in the wake of the vote. Warren, meanwhile, dismissed those claims and vowed to keep pushing for ways to allow graduates to relieve some of the pressure of their student loan debt.

Not backing off

Warren says the legislation, which she introduced in May, would allow many of the 40 million borrowers with student loan debt to refinance. Similar legislation has been introduced in the GOP-controlled House of Representatives, where no action is expected.

In her speech introducing the proposal, Warren called student loan debt “an emergency” and said it threatens the stability of the U.S. economy. Total student loan debt is now estimated at $1.2 trillion.

Costs

The Congressional Budget Office (CBO) estimates that about half of the outstanding loan volume for federal student loans and loan guarantees – some $460 billion -- would be refinanced under the bill.

Because of the lower interest rates on the refinanced loans, the CBO says the federal government would receive less interest income over the life of the new loans, which would make those loans and loan guarantees more costly for the federal government.

So to pay for the refinancing plan, CBO estimates Congress would increase direct spending for federal loans that are currently outstanding by $55.6 billion in 2015.  

It is often said that co-signing someone's loan is risky business. It makes you equally liable for the repayment of the loan, and if the borrower defaults, the lender then looks to you for repayment.

But there is also a case in which having someone co-sign for you can be a risk to you. This risk is highlighted in a new report from the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman.

Let's suppose you need a co-signer in order to get a private student loan. Maybe a grandparent volunteers. You receive the loan and start making payments.

But then your co-signer dies. Many private college lenders have a provision in their loan documents that allows them to demand full repayment if the co-signer dies, even if the borrower is making on-time payments. It's called auto-default.

“Students often rely on parents or grandparents to co-sign their private student loans to achieve the dream of higher education,” said CFPB Director Richard Cordray. “When tragedy triggers an automatic default, responsible borrowers are thrown into financial distress with demands of immediate repayment.”

Bankruptcy will trigger it too

And it doesn't take a death to trigger an auto-default. If the co-signer declares bankruptcy, many private college lenders reserve the right to immediately call the loan, regardless of the payment history.

How often does this happen? The report cites no specific numbers, saying only that since accepting complaints about student loans, this issue has emerged.

“Some consumers assume that death of a co-signer will result in a release of the co-signer’s obligation to repay,” the report states. “Consumers describe their confusion when they receive notices to pay in full since they believed their loan to be in good standing and current.”

The Ombudsman's report says it is based on more than 2,300 private loan complaints and more than 1,300 debt collection complaints. It doesn't mention how many of those complaints come from co-signers themselves, but chances are many of them did.

Co-signers' complaints

A number of private student loan co-signers have posted complaints on the pages of ConsumerAffairs, usually for the touchy issues routinely associated with taking responsibility for someone else's debt. Dave, of Alameda, Calif., recently told us that Citibank does not give the co-signer much information about the loan.

“There may be lawyer double speak in some papers they send with the form, but the student is the only one who receives them,” Dave wrote. “The co-signer is left in the dark, for years, not even aware of the loan. Also, after sending in the application, Citi lets the student know how much they are eligible for and that figure is THEN added onto the app that the co signer has signed.”

Removing a co-signer

One way young borrowers can avoid this auto-default is removing their co-signer from the loan. However, the Ombudsman's report says that can be very difficult to do under the terms of the loan and that being allowed to release a co-signer from the loan is a frustrating process.

The report cites an example in which a student was told his co-signer would be released after he made 28 on-time payments. But after the 28th payment he was told the number was now 36. After the the 36th payment, he was told the magic number was now 48.

“Lenders should have clear and accessible processes in place to enable borrowers to release co-signers from loans,” Cordray said. “A borrower should not have to go through an obstacle course.”

Federal vs. private loans

There is a distinction here and it has to do with the difference between a federal student loan and one from a private lender. According to CFPB, a federal lender only rarely requires the borrower to have a co-signer, but the loan is not called if the co-signer dies or declares bankruptcy.

It is only some private student loan lenders that have this policy but it's not clear how you might know this, unless you ask. A better course of action might be to bypass private lenders altogether, something recommended by the Center for Responsible Lending (CRL).

In fact, CLR has proposed the CFPB require colleges to ensure that students have taken advantage of all the federal loans they are eligible for before allowing them to do business with a private lender.

“Federal loans are almost always preferable to federal loans because of more favorable repayment and forgiveness options,” the group says.

What to do

In the meantime, if you need help in removing a co-signer from a loan – or having yourself removed as a co-signer, here are some links that might prove helpful:

Cosigner Release Advisory

Sample letter on how a borrower can release a co-signer

Sample letter on how to be released as a co-signer

The rising total of student loan debt has been well documented. At last count it is more than $1.2 trillion, according to the Consumer Financial Protection Bureau (CFPB).

Once used mostly to offset the high costs of medical and law school, student loans have now become a routine tool used to finance many undergraduate degrees. Students who don't carefully plan their financing and follow a strict budget can end up with tens of thousands of dollars in loan liabilities, limiting what they can spend on other things as they begin their careers.

Set priorities

One area where students make a mistake, early in their college careers, is in the way they use the money they have borrowed. Eric Adamowsky, co-founder of CreditCardInsider.com, says students should only spend borrowed money on things directly related to education.

“A lot of students end up taking out additional loans for room and board, so they can live in a nicer place or to have spending money,” he said. “But the basics -- tuition, room and board and books -- that's where student loans should be used.

It's also a good idea to set a “ceiling” for student loans. Most experts recommend borrowing no more than you expect to make in your first year on the job after graduation.

Cost effective option

Another mistake sometimes occurs before students even arrive on campus. They simply select a school they can't really afford. Sometimes students eager for “the college experience” pass up their most cost-effective option.

“I know the community college route isn't terribly sexy but coming from someone who has spent the last 22 years in the corporate world I can tell you the no employer cares where you took English 101,” Adamowsky said. “Taking it at Dekalb Community College is going to be considerably cheaper than taking it at Duke.”

As long as the school where you want to end up accepts the credits, a community college or in-state university can be an ideal place to take your required courses, at a much lower cost per credit hour. Averaged over four years, it lowers the cost of a college education.

Also, you're more likely to get into the college of your choice if you wait and transfer in for the last year or two. Some states even guarantee that in-state students who complete two years of community college can attend the state university of their choice for the last two years.

January is an important month

Because schools have different deadlines for financial aid and processing takes time, completing your Free Application for Federal Student Aid (FAFSA) is a crucial first step when you need to borrow for college. Adamowsky says it should be done in January, the earlier the better.

“Many schools have different deadlines but more importantly, there are actually a number of states that serve FAFSA applicants on a first-come, first-served basis, so the faster you can complete and submit the application, the better,” he said.

Adamowsky says federal-backed student loans are the best you’ll find in terms of interest rate, grace period, and flexible repayment plans. Because who qualifies and how doesn't can be a complicated matter, he says everyone should apply, rather than just assuming their family makes too much money.

Serious business

Finally, students err by underestimating the longterm effects of student loan debt. Borrowing over a four-year period, it is easy to lose sight of your total debt, leaving you with a debt the size of a small mortgage at graduation.

“Guidance counselors and parents can be more proactive in helping students understand what it means to run up a large student loan debt and how that debt will measure up against what potential jobs pay,” Adamowsky said.

Before beginning the student loan process students should determine the total amount they will need to obtain a degree. Your repayment plan for student loans should be as strategic and aggressive as for any debt you carry—especially if you have income left at the end of the month to put towards it.

The genesis of the 2008 financial crisis is pretty clear. Mortgage companies eagerly made loans to homeowners without thoroughly checking whether they could really afford the payments.

When over-extended consumers began to default in large numbers it sent a devastating shock wave through the international financial industry, which had purchased trillions of dollars worth of these mortgages in the form of securities. The housing market has begun to finally recover but the economy is still feeling the effects of this meltdown.

Some economists are worried the same thing could happen with student loans, with equally-devastating results. Consider the numbers: in 2012 the Consumer Financial Protection Bureau (CFPB) reported total student loan debt in the U.S. had passed the $1 trillion mark – it's now surpassed $1.2 trillion. The CFPB expressed the concern this level of debt might not be manageable in a tight job market where debt-burdened graduates have difficulty finding employment.

Number 2 after mortgages

After mortgages, student loan debt, from both federal and private loans, now represents the biggest aggregate debt balance. A 2013 report by the Congressional Joint Economic Committee showed the steady increase in student loan debt over the last decade has been driven by an increase in both the number of student borrowers and the average debt of those borrowers.

Two-thirds of recent graduates have student loan debt, the report found. Those borrowers had an average balance of $27,200, which is 60% of the annualized average weekly earnings of young college graduates. In other words, they have little money to pay for rent, much less a mortgage.

While cash-strapped youth are a drag on the economy an equal concern is whether they can pay back the money they owe. On that score there's plenty to worry about. Federal data shows that more than 600,000 federal student loan borrowers who began a repayment program in 2010 had defaulted on their loans by 2012. Nearly half – 46% – of those students attended for-profit institutions. The latest default figures, released last September, show a rise in the default rate for the sixth straight year.

Sitting this one out

While investment banks and hedge funds rushed in to purchase mortgage back securities during the heyday of the housing bubble, they aren't the ones holding student debt. At least not as much as they were. JP Morgan Chase announced in October it was get getting out of the student loan business altogether.

Instead, it's largely the U.S. taxpayer that's on the hook. Over the last year or so the U.S. government has been buying up student loans, with the objective of encouraging lenders to stay in the student loan market. If the loans eventually go bad, it probably won't trigger a financial meltdown like the foreclosure tsunami did.

“There's just not the leverage and derivatives tied to the student loan market that was tied to the housing market, that got us into the mess we're in today,” said John Canally, investment strategist at LPL Financial, in an inview with Yahoo Finance. “From that perspective, a half-trillion dollars in student loan debt isn't the worst thing in the world.”

Rather, many economists fret on the economic drag caused by millions of young consumers – those lucky enough to find full time jobs – unable to buy a home or new car, spending their earnings to stimulate the economy.

Student loans have become the nation's second largest consumer debt market and, in a weak job market, there has been a rapid rise in borrower delinquency in recent years. 

The Consumer Financial Protection Bureau (CFPB) is bringing new oversight to nonbank student loan serviers, issuing new rules intended to protect borrowers from unscrupulous lenders.

“Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules,” said CFPB Director Richard Cordray. “This rule brings new oversight to those large student loan servicers that touch tens of millions of borrowers.”

More than 40 million Americans with student debt depend on student loan servicers to serve as their primary point of contact about their loans. Student loan servicers’ duties typically include managing borrowers’ accounts, processing monthly payments, and communicating directly with borrowers.

Earlier this year, the CFPB announced that outstanding student debt totals approximately $1.2 trillion. The Bureau also estimates that 7 million student loan borrowers are now in default on their debt. 

When facing unemployment or other financial hardship, borrowers contact student loan servicers in order to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms.

A servicer is often different than the lender itself, and a borrower typically has no control or choice over which company services a loan. When problems arise because of servicing concerns, student loan borrowers may end up in trouble. They may miss a payment, owe more money because of additional interest on principal, or face future difficulties with credit because of a poor payment history.

Supervision expanded

The Bureau currently oversees student loan servicing at the largest banks. Today’s rule expands that supervision to any nonbank student loan servicer that handles more than one million borrower accounts, regardless of whether they service federal or private loans.

Under the rule, those servicers will be considered “larger participants,” and the Bureau may oversee their activity to ensure they are complying with federal consumer financial laws. 

Under today’s final rule, which was proposed in March, the Bureau estimates that it will have authority to supervise the seven largest student loan servicers. Combined, those seven service the loans of more than 49 million borrower accounts, representing most of the activity in the student loan servicing market.

Many student loan servicers perform their functions well. But the recent annual report by the Bureau’s Student Loan Ombudsman identified a broad range of concerns voiced by student loan borrowers in complaints to the CFPB. Borrowers submitted complaints to the Bureau highlighting:

• Prepayment Stumbling Blocks: Since options to refinance high-rate private student loans are limited, many consumers attempt to pay off their loans in order to reduce the amount of interest owed over the life of the loan. But many consumers express confusion about how to pay off their loans early. For example, borrowers complained that servicers applied their payments in excess of the amount due across all their loans, not to the highest-interest rate loan that they would prefer to pay off first.
• Partial Payment Snags: When borrowers have multiple loans with one servicer and are unable to pay their bill in full, many servicers instruct borrowers to make whatever payment they can afford. Many complaints described how servicers often divide up the partial payment and apply it evenly across all of the loans in their account. This maximizes the late fees charged to the consumer, and it can exacerbate the negative credit impact of a single late payment.
• Servicing Transfer Surprises: When borrowers’ loans are transferred between servicers, borrowers say they experience lost paperwork, processing errors that result in late fees, and interruptions of routine communication, such as billing statements. Consumers complained that payment-processing policies can vary depending on the servicer. And, consumers said when they make decisions on the previous servicer’s practices, they can get penalized.

The toll of student loan debt in the U.S. now exceeds $1.2 trillion, according to the Consumer Financial Protection Bureau (CFPB), and is a growing cause for concern among economists and policymakers.

The concern is potential default, creating a wave of repercussions that could set off a new credit crisis, potentially worse than the one created by the foreclosure tsunami. Many former students still paying off their student loan balances work in public service jobs that typically have low salaries. Congress has approved measures to forgive some debt for these consumers but the programs have not been well publicized.

The CFPB is trying to raise awareness, creating a toolkit to offer practical advice to public sector employers and employees, advising that an early start can make the difference of thousands of dollars. 

By CFPB estimates, as many as 25% of U.S. workers may be eligible for some form of student debt forgiveness. Eligible employees work for government agencies or non-profits and include teachers, librarians, first responders and some healthcare professionals.

Mired in debt

“Our young people should not be mired in debt because they stir themselves to the call of public service. They deserve to know all their options,” said CFPB Director Richard Cordray. “Our toolkit and pledge can be a win-win for employers, the public they serve, and their employees who are facing student debt loads that are imposing unprecedented burdens upon this generation.”

To qualify for the forgiveness program, your loans much be federal, and a certain kind of federal, and cannot be private. Second, you must make 120 qualifying payments on those loans while employed full time by certain public service employers. That's 10 years of payments while working in the public sector.

According to the U.S. Department of Education, only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for this program. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible.

Consolidation possible

However, your FFEL or Perkins loans may be consolidated into a Direct Consolidation Loan to gain eligibility. But only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for loan forgiveness. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count.

Even with these limitations, the CFPB believes millions could benefit if they only were aware of the program. It's reaching out to public sector employers first, urging them to inform their employees about their options.

The toolkit provides a guide for employers to assist their employees with verifying their eligibility and steps they need to take to qualify. Meanwhile, some in Congress are promoting additional legislation to ease the debt burden on college graduates.

Something more?

Rep. Karen Bass (D-CA) is calling for a new federal student loan repayment system that would alleviate the financial burden on college graduates as they begin their careers.

“By creating an equitable system to ease student loan debt we can lessen the financial impact on the next generation while jumpstarting the economy, creating jobs and promoting financial responsibility for higher education,” Bass said in a post on her website. 

She's backing the Student Loan Fairness Act. a combination of two bills that died in the 112th Congress – The Student Loan Forgiveness Act (H.R. 4170) and The Graduate Success Act (H.R. 5895). The new bill would establish a new 10-10 standard for student loan repayment. In the “10-10” plan, an individual would be required to make ten years of payments at 10% of their discretionary income, after which, their remaining federal student loan debt would be forgiven.

American Student Assistance, a non-profit, is also heavily involved in promoting ways for graduates to shed some of their student loan debt. The group recently published “60 Ways to Get Rid of Your Students Loans Without Paying Them,” a title that may stir more interest than the CFPB's toolkit.

There's a lot of hand-wringing over rising levels of student debt but Congress, so far, has been unable to figure out a way to keep new loans from becoming more expensive.

A law subsidizing the Stafford Loan rate at 3.4% expires at the end of June. Starting July 1, 2013 the rate jumps to 6.8% on new loans – much higher than the interest rate on a home or car purchase. There's a measure in Congress to extend the subsidized rate for two years. Democrats generally support it but Republicans generally oppose it as too costly. Its backers concede the stalemate.

“The federal government provides subsidized student loans to increase the number of Americans who can attain a college degree -- not to generate revenue,” said Sen. Jack Reed (D-RI), a co-sponsor of legislation to extend the lower rate. “We do this because a college education is a means of empowerment. It helps individuals build a better life and helps our nation build a stronger economy -- generating more jobs and opportunity and strengthening the middle class.”

Stafford Loans

Stafford Loans are federal student loans to college students pursuing an undergraduate or graduate degree. They are intended to supplement personal and family resources, as well as aid from scholarships, grants and work-study. With the expiration of the law, the Stafford Loan will go from one of the cheaper college loans to one of the more expensive ones.

The Consumer Financial Protection Bureau (CFPB) has recently focused attention on the issue of student loans, warning they are burdening a generation with oppresive debt. The agency provides an online tool to help prospective students compare loans and find the best deal.

According to CFPB, most students will find federal loans to be the best option. When it comes time to pay back federal loans, the interest rate will be fixed, which will help you predict your payments after graduation. In some cases, the federal government will pay the interest on your loans while you are in school, with subsidized loans.

Private student loans

Other student loans are generally offered by private companies or entities. The most common private student loans are offered by banks. Their interest rates are often variable, which means it's hard to know what your interest rates and payments will be.

Private loans can also be more expensive. According to a report by CFPB, private loan rates have been as high as 16% over the past couple of years. When it is time to repay, private loans often don’t offer as many options to reduce or postpone payments.

Natasha, of Austin, Tex., completed work on her undergraduate degree in four years with the help of a $25,000 student loan from Wells Fargo. She says she was shocked by the interest charges.

“Today I call for my payoff amount and it is $29,300,” she wrote in a ConsumerAffairs post. “I'm paying 17.2% more money than I borrowed. If I paid it off over the next 20 years I would only have paid interest and still owe the entire loan when I'm 42 years old.”

Adds up fast

Chrystal, of Florence, S.C., says she got an associates degree from Strayer University that turned out to be much more costly than she thought.

“The only thing I’m not happy about is the amount of student loans I have racked up,” Chrystal writes. “In the five years since graduating I hadn’t put much of a dent in my student loans and the monthly payment is not small. Now, due to the economy I am being laid off from my job and as of June 4th will be unemployed. This is in no way Strayer University’s fault but just be careful when taking out student loans because they add up fast!”

They do, indeed, add up fast. The total student debt total in the U.S. is now well in excess of $1 trillion.  

A four-month investigation found that Clearwater, Florida-based Student Financial Services Inc. (SFS), which also operates under the banner of University Financial Services (UFS), had agreed to pay some of the nations top universities, school athletic departments, and sports marketing firms for generating loan applications, in a kickback scheme euphemistically known as revenue sharing.

The company had contracts at 63 colleges nationwide, 57 of which are National Collegiate Athletic Association (NCAA) Division I schools.

Under these agreements, the company also paid for the rights to use school names, team names, colors, mascots, and logos to advertise their loans directly to students. This practice, known as co-branding, was intended to imply that the company was the official lender of the school, or that it was actually a part of the school. Schools, athletic departments, and sports marketing firms made these agreements without evaluating the quality of the loans.

When lenders use deceptive techniques to advertise their loans, they are playing a dangerous game with a students future, said Cuomo. Student loan companies incorporate school insignia and colors into advertisements because they know students are more likely to trust a lender if its loan appears to be approved by their college.

"We cannot allow lenders to exploit this trust with deceptive, co-branded marketing. A student loan is a very serious financial commitment, and choosing the wrong loan can lead to devastating consequences, he said.

Under the settlement, which was joined by Florida Attorney General Bill McCollum, SFS has agreed to:

• End all lending-related agreements at a total of sixty-three schools including Georgetown University, Wake Forest University, University of Kansas, Central Michigan University, St. Johns University, University of Washington, University of Oregon, University of Texas El Paso, Rutgers University, Georgia Tech, Florida State University, Florida Atlantic University, the University of Central Florida, and the University of Pittsburgh. SFS has until December 31, 2007 to comply;

• End all lending-related agreements with five sports marketing companies that, in some instances, were sold the right to market the schools insignia, colors, and mascot, and in turn signed an agreement with SFS. These companies are ESPN Regional Television, Inc., International Sports Properties, Inc., Host Communications, Nelligan Sports Marketing, Inc., and Learfield Communications, Inc. SFS has until December 31, 2007, to comply;

• Launch a print advertising campaign at 63 schools alerting students through their top-circulating newspapers that they must protect themselves when shopping for a loan;

• End the practice of cash-based inducements, including paying students up to $50 to refer their peers to the company and encouraging students to apply for SFS loans by creating contests where they could win up to $1,000.

Also under the settlement, SFS has agreed to adopt a new Code of Conduct that prevents false and misleading direct loan marketing to students. The Code expressly prohibits lenders and marketers from buying rights to a college or universitys name, team name, colors, logo, and mascot for loan marketing purposes.

It also requires lenders and marketers to provide important disclosures to students in connection with loan transactions and prohibits a variety of misleading and deceptive practices identified by the investigation of the industry.

This settlement resulted from Cuomos findings that Ellen Frishberg, the director of student financial services at Johns Hopkins University, was improperly promoting a lender, Student Loan Xpress, after the company paid her more than $65,000 in consulting fees and tuition payments.

The agreement marks the latest fallout from Cuomos nationwide investigation into conflicts of interest in the $85 billion-a-year student loan industry.

Ellen Frishbergs conduct while leading the financial aid office of Johns Hopkins ranks among the worst we have seen at any school across the country. Her work was mired with conflicts of interest, deception, and unethical behavior, said Cuomo. Todays settlement brings to an end a sad chapter in Johns Hopkins history and sets in place a monitoring regimen to ensure this never happens again.

Under the terms of the agreement, Johns Hopkins will adopt Cuomos Code of Conduct, and pay $1.125 million. Of the $1.125 million, $562, 500 will be paid into the New York Attorney Generals national education fund.

The remaining $562,500 will be used to implement a similar program to be overseen by the Maryland Attorney Generals office. Johns Hopkins has also agreed to have its financial aid procedures monitored for a period of five years by both Attorney General Cuomo and the Maryland Attorney General.

The transactions involving Ellen Frishberg, the director of student financial services at Johns Hopkins University, and Student Loan Xpress (SLX), one of the largest student loan companies nationwide, were uncovered as part of Cuomos investigation.

Ellen Frishberg accepted more than $65,000 in consulting fees and tuition payments from Student LoanXpress. Frishberg also took payments from other lenders as detailed in the settlement agreement. The transactions took place between 2002 and 2006. During these years, Frishberg failed to disclose these payments and activities, and actively provided marketing promotion and other support for SLX.

Lunches, Gifts, Entertainment

Cuomos ongoing nationwide probe has exposed, among other things, that lenders pay financial school aid advisors for entertainment, meals, holiday lunches and make office and individual gifts.

Lenders have also provided goods, services, or payments to the Universities related to the lending program, including certain office supplies, brochures, information in hard copy and available to students electronically, support for job fairs, workshops for students and employees, awards and promotions, and printing and distribution of brochures.

This agreement, together with the recent announcement that Columbia University agreed to adopt Cuomos Code of Conduct, and pay $1.125 million into a national education fund is tremendous progress in achieving solutions to the student lending crisis.

Twenty-six schools and the nations top-five lenders (seven lenders in all) have now reached agreements with Cuomo.

Earlier this week, California Attorney General Edmund G. Brown Jr. demanded two California student-loan businesses produce records concerning their financial relationships with public and private universities, and vocational schools in California as part of his ongoing probe into the student-loan industry.

In the New York probe, Education Finance Partners (EFP) agreed to Cuomo's College Loan Code of Conduct and will end revenue sharing agreements. Cuomo also announced settlement agreements with three more schools: Salve Regina in Rhode Island, Pace University and the New York Institute of Technology. Salve Regina and Molloy College both had revenue sharing agreements with EFP.

Previously, Fordham University, St. John's University, and Long Island University all agreed to cease their revenue sharing agreements with EFP and reimburse students on a pro rata basis for the money received through those agreements.

Drexel received over $124,000 from its revenue sharing agreements with EFP and accrued $126,000 more through March 2007 that has not been paid. Under Drexel's agreement with EFP, dated April 1, 2006, the school agreed to make EFP its "sole preferred private loan provider."

In return, Drexel was to receive 75 basis points (.75 percent) of the net value of referred loans between $1 and $24,999,999; and 100 basis point (1 percent) of all loan amounts of $25,000,000 or greater.

Drexel had an earlier revenue sharing agreement with EFP that began in May of 2005 under which Drexel received 75 basis points (75%) of all referred loans. EFP was a non-exclusive preferred lender under the earlier contract. Since 2005, Drexel University has sent over $16 million in loan volume to EFP.

Drexel solicits and corresponds with students from New York, and New York students and their families rely on Drexel's representations about preferred lenders; the New York Attorney General therefore has jurisdiction over Drexel in this matter.

"This investigation is a two-front battle: lenders and schools. We have proceeded against lenders and now we are proceeding against schools. There is no reason for a school not to adopt the Code of Conduct," Cuomo said. "This office has been clear to schools: settle or we will commence litigation. Either way we will get justice for students."

Salve Regina, Pace University, and NYIT agreed to the Attorney General's Code of Conduct, after the Attorney General's investigation that revealed various practices at each university could have potentially created conflicts of interest.

Salve Regina University: Salve Regina University is located in Newport, Rhode Island. The Attorney General's investigation found that during the period of 2005-2006, Salve Regina received over $7,800 pursuant to a form of revenue sharing with EFP, which was one of the Salve Regina's preferred lenders. Between January 2004 and March 2007, certain lenders, some of whom appeared on Salve Regina's preferred lender lists, provided printing costs or services to the university and/or paid for meals and lodging for university employees at loan workshops, conferences, and/or advisory board meetings. Salve Regina agrees to accept the OAG Code of Conduct and will reimburse the affected students $7,839.74.

Pace University: Pace University is in Westchester, New York. The Attorney General's investigation found that Pace hired Sallie Mae to staff financial aid call centers, and the Sallie Mae employees wrongfully identified themselves as Pace University employees. Additionally, a Pace administrator who oversaw student loans and advised Pace to drop the federal direct lending program and enter into contracts with Sallie Mae subsequently went to work for Sallie Mae after leaving Pace. This administrator may have had an inappropriate relationship with Sallie Mae while employed by Pace, Cuomo charged.

New York Institute of Technology: The New York Institute of Technology has three campuses, two on Long Island in Old Westbury, Central Islip, and one in New York City. The Attorney General's investigation found that NYIT accepted payment from certain lenders, some of whom were on NYIT's preferred lender lists, including payments for sponsorships of University events and scholarships. When composing its preferred lender list, NYIT considered whether or not lenders had made such contributions or offered Opportunity Loan funds as a criterion. Additionally, some preferred lenders including Sallie Mae, Citibank, College Loan Corporation and AFC paid for meals and trips to student loan conferences for financial aid officers.

Molloy College: Molloy College is in Rockville Centre, Long Island. The Attorney General's investigation found that Molloy had a revenue sharing agreement with EFP. Molloy received over $1600 from EFP as a result of this arrangement. Molloy has returned this money to EFP and requested that any future revenue due to it under the EFP agreement go towards reducing student loan payments.

California Probe

In the California investigation, Brown is probing Education Finance Partners Inc. of San Francisco and Student Loan Xpress Inc. of San Diego.

"Schools and universities in California must be above reproach, and no further burdens should be visited upon students who are already weighed down by escalating student-debt responsibilities," Brown said.

The Department of Justice is seeking the information to determine whether the lenders made unlawful payments to schools or university personnel.

Brown said he is investigating whether any schools have improperly chosen some lenders in preference to others, and whether unlawful payments have been made to schools from the student lending institutions.

Under the agreement, Sallie Mae agreed to discontinue call centers or other staffing for college financial aid offices, discontinue paying financial aid officers for appearing on advisory boards, and discontinue paying for any trips or travel for any financial aid officer.

Sallie Mae serves almost 10 million borrowers, manages a portfolio of over $142 billion in loans nationwide, and has relationships with over 5600 schools.

"Sallie Mae is the largest student lender in the United Sates. Their adoption of this code of conduct will affect millions of students and thousands of schools around the country, and will help set a new industry standard that all lenders should adopt," Cuomo said.

"With Sallie Mae's $2 million contribution to an education fund, thousands of college bound students will now have more information on how to wisely choose the best student loan for them."

Congress has taken an interest in Cuomo's investigation. "With today's skyrocketing college costs, it is inexcusable for any financial institution to be collecting excess profits at the expense of students and parents," said U.S. Rep. George Miller, the chairman of the House Education and Labor Committee.

"Cuomo's settlement with Sallie Mae demonstrates the value of vigorous oversight, and is an important step towards ensuring that all student lenders abide by the highest ethical standards." Miller said, "The sole purpose of the federal student loan program is to help students pay for college, not to pad corporate profits."

Cuomo's nationwide investigation into the student lending industry has uncovered many questionable conflicts of interest including revenue sharing agreements, university call center staffing by lender employees, gifts and trips from lenders to financial aid directors, and even apparent stock tips to financial aid officers.

Last week, Cuomo announced landmark multi-million dollar settlements with eight universities and Citibank. In 2006, Sallie Mae and Citibank accounted for 22% of the private loans nationwide.

The Student Loan Code of Conduct adopted by Sallie Mae in its settlement with Cuomo includes the following provisions:

1. Ban on Financial Ties. Lenders are prohibited from giving anything of value to any college in exchange for any advantage sought by the lender. This severs any inappropriate financial arrangements between lenders and schools and specifically prohibits "revenue sharing" arrangements.

2. Ban on Payments for Preferred Lender Status. Lenders may not pay or give colleges any financial benefits whatsoever to get on a college's preferred lender list.

3. Gift and Trip Prohibition. Lenders are prohibited from giving college employees anything of more than nominal value. This includes a prohibition on trips for financial aid officers and other college officials paid for by lenders.

4. Advisory Board Rules. Lenders are prohibited from paying college employees anything of value for serving on the advisory boards of the lenders.

5. Call-Center and Staffing Prohibition. Lenders must ensure that employees of lenders never identify themselves to students as employees of the colleges. No employee of a lender may ever work in or providing staffing assistance a college financial aid office.

6. Disclosure of Range of Rates and Defaults. Lenders must disclose to any requesting school the range of rates they charge to students at the school, the number of borrowers at each rate at the school, and the lender's historic default rate at the school. This will ensure that schools will have the information they need to select preferred lenders who are best for students and parents.

7. Loan Resale Disclosure. Lenders shall fully and prominently disclose to students and their parents any agreements they have to sell loans to any other lender.

Cuomo's investigation has revealed that Education Finance Partners has repeatedly paid schools in exchange for steering loans to EFP and for putting EFP on "preferred lender" lists. Approximately 90% of students choose their lenders from their school's preferred lender lists.

Cuomo said his investigation has uncovered that neither the schools nor EFP adequately disclose to students that EFP is paying the schools to be promoted as a "preferred lender." Cuomo's legal action alleges that the relationship and financial arrangements between EFP and the schools constitute a deceptive business practice.

Cuomo also revealed that EFP made its financial kickback arrangements with schools through what are called revenue sharing agreements, which often were based on a tiered system that would give a higher percentage to the schools based on the amount of loans referred.

"EFP aggressively offered schools cash kickbacks in exchange for business," Cuomo said. "This kickback scheme was widespread and took place from coast to coast, at colleges large and small, public and private," Cuomo said. "This lawsuit is just the beginning of an investigation that will show that lenders put market share above fair play.

"A preferred lender ought to mean that the lender is preferred by students for its low rates, not by schools for its kickbacks. With the cost of college rising every day, the last thing students want to hear is that their lender may be muscling aside a more competitive loan package."

Big Bucks

This arrangement resulted in potentially large amounts of money paid by EFP to universities participating in the preferred lender program.

For example, EFP's agreement with Duquesne University gives the school 60 basis points (.6%) of the net value of all referred loans. The agreements are structured to encourage the schools to refer as much business as possible to EFP. For example, EFP's agreement with Boston University provides that BU will receive 25 basis points (.25 percent) of the net value of referred loans of at least $1,000,000 up to $5,000,000; 50 basis points (.5 percent) of value of referred loans between $5,000,000 and $10,000,000; and 75 basis points (.75 percent) of the net value of referred loans over $10,000,000.

Some schools such as Drexel University in Philadelphia received over $100,000 in kickbacks from EFP in a single year.

Under Drexel's agreement with EFP, dated April 1, 2006, Drexel has agreed to make EFP its "sole preferred private loan provider." In return, EFP has agreed that Drexel will receive 75 basis points (.75 percent) of the net value of referred loans between $1 and $24,999,999; and 100 basis point (1 percent) of all loan amounts of $25,000,000 or greater.

Among the schools with which EFP has had such revenue sharing agreements are: Baylor University, Boston University, Clemson University, Drexel University, Duquesne University, Fordham University, Long Island University, Pepperdine University, St. John's University, Texas Christian University, Washington University in St. Louis, and the University of Mississippi. In total, EFP has had such agreements with more than 60 schools across the nation.

EFP engaged further in deceptive marketing practices by using schools' logos, mascots, and names in EFP promotional materials to imply that EFP had the school's official endorsement.

"EFP's marketing practices were clearly intended to imply that the universities had endorsed EFP loan products for individual student borrowers," Cuomo said. "Deceptive marketing is just that and it limits the information available for students to get the best deal in their college loans."

According to the New York State Department of Education, two-thirds of all four year college graduates nationwide now have loan debt, compared with less than one-third of graduates in 1993. In New York State, 59 percent of undergraduates took out loans to finance their college education. The average student graduating from a four-year college in New York owes $17,594 on graduation day.

Cuomo has been leading an ongoing investigation into the $85 billion-per-year student loan industry. In February, he requested information from more than 60 public and private colleges and universities nationwide regarding the standards they use to determine which lending companies are included on their "preferred lender" lists. Financial aid administrators often produce such lists to direct their students toward the lenders that are most preferred by the schools but may not offer the best deals for students and parents.