Student Loan Racket in the USA

THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% 11% $50 - $44.6B. 13% 10% 11% 12% $40 9% " 9% 10% 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower х,хXх < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NM AZ AR 15,144 3,217 DE 3,422 968 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... w. !! 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% 8% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% $50 - $44.6B. 11% 11% 13% 10% 12% 9% 9% " 9% 10% $40 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower X,XXX < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NC 3,217 NM AZ AR 15,144 DE 968 3,422 GA 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... w. !! 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% 8% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% $50 - $44.6B. 11% 11% 13% 10% 12% 9% 9% " 9% 10% $40 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower X,XXX < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NC 3,217 NM AZ AR 15,144 DE 968 3,422 GA 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... w. !! 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% 8% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% $50 - $44.6B. 11% 11% 13% 10% 12% 9% 9% " 9% 10% $40 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower X,XXX < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NC 3,217 NM AZ AR 15,144 DE 968 3,422 GA 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... w. !! 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% 8% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% $50 - $44.6B. 11% 11% 13% 10% 12% 9% 9% " 9% 10% $40 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower X,XXX < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NC 3,217 NM AZ AR 15,144 DE 968 3,422 GA 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... w. !! 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% 8% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% $50 - $44.6B. 11% 11% 13% 10% 12% 9% 9% " 9% 10% $40 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower X,XXX < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NC 3,217 NM AZ AR 15,144 DE 968 3,422 GA 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education THE STUDENT LOAN RACKET The Beginning Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees. Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. In the 2008-2009 academic year, students and their families took out more than The Story so far $95 billion 1965 in loans, both federally guaranteed and private Lyndon Johnson signs the Higher Education Act (HEA): millions of students are now able to afford college with Federally guaranteed loans and scholarships. Some doctors and lawyers discharge their student loan debt by declaring bankruptcy immediately after graduation. 1978 The Bankruptcy Reform Act disallow discharge for 5 years after first payment. The actual discharge rate was less than 19%. BANKRUPT Removed protections till today Discharge of the debt via bankruptcy Statute of limitations on collections Truth in Lending Act The non-discharge period is extended to 7 years. 1990 • Fair Debt Collection Practices Act • The right to refiance • Adherance to state usury laws ..... w. !! 10% of people who graduated in 2007-8 with student loans had borrowed $40,000 or more Congress eliminate the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause. The median debt for bachelor's degree recipients who borrowed while attending private, nonprofit colleges was $22,380 1998 Amendments to the Bankruptcy Code provide the same non-discharge protection to private student loan lenders Now all student loans, government and private are almost impossible to discharge. SallieMae 2005 Salle Mae loans the student let's say Sallie Mae is the largest originator of student loans How students are victimized by predatory loans $20,000 with a 12 year term The federal government guarantees the loan: no risk for Sallie Mae The student gets the loan The student has to pay off the loan at 8.8% interest over 12 years: total finance charges: $23,376 The student fails to pay the monthly loan payments of $293 The federal govemment pays Sallie Mae the loan amount plus interest GRC is owned by Sallie Mae GRC is the nation's largest collector GENERAL REVEN UE After 270 days, the loan is in default agency Let's say the debt was $23,376 the amount to repay will be $35,765.28 (153% of the initial debt) GRC adds: 25% as a collection fee 28% as commission on the loan, which the student has to pay for The govermment needs to get money back so it sends the debt to a collections agency GRC take money from the student's paycheck and tax refund until they are fully paid back. There's no statute of limitations on the student loan debts. debtor will pay, even if it has to be deducted from your social secunity checks SallieMae Sallie Mae get huge returns (over $400 million in ten years) The Federal Government eventually get back its money with interest, and has no gain to moderate school prices, because high prices means higher loans Borrowers who default on their student loans face significant personal and financial burdens They become inelegible for additional federal aid They may have their wages and tax refunds seized by the government. When they get loans, they pay higher interest rates Their negative credit make harder for them to obtain: • car loans • mortgages • credit cards • apartment Ojobs Types of Loan for undergraduated Students PRIVATE LOANS from banks or other private lenders that carry no government guarantee • The Education Department or the private lender send the loan funds to the student's school FEDERAL LOANS interest rate capped at a fixed rate Stafford Loans O The school use the loan money first to pay the student's tuition, fees, room and board. If any funds remain, the parent receive the amount as a check, that must be used for education expenses Perkins Loans O Plus Loans Interest rate from 5% to 7,9% Rates are basically free from limits, almost always higher than those on federal loans Interest rates can change over time The lately rise of Non-Federal Loans Total education borrowing increased 5% from 2007-08 to 2008-09 - a slight decline after adjusting for inflation. An increase of $14.7 billion in federal loans was accompanied by an estimated decline of about $10.6 billion in nonfederal loans. Subsidized Stafford Loans Unsubsidized Stafford Loans Parent PLUS LOANS Grand PLUS LOANS NON FEDERAL LOANS total loans (2008$) $94.5B Loans in Billions (2008 Dollars) $90 13% total loans (2008$) $69.3B 21% $80 26% 4% 23% 8% $70 total loans $60- (2008$) 3% 17% 3% 9% 16% 11% 11% 10% $50 - $44.6B. 11% 11% 13% 10% 12% 9% 9% " 9% 10% $40 10% 31% 41% $30 34% 33% 32% 30% 35% 33% 34% 35% 35% $20 $10 44% 45% 43% 42% 40% 38% 36% 33% 31% 32% 34% $0 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 The plague of Loan Defaults National Student Loan Default Rates 8% 7.2% 6.9% 6.7% 7% 5.9% 5.6% 5.4% 5.2% 6% 5.1% 5.2% 4.5% 4.6% 5% 4% 3% 2% 1% 0% 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Source: Collegeboard.com 2009 Rate of student loans gone default within 15 years of entering repayment Two out of every five loans made to students who attended TWO-YEAR FOR-PROFIT COLLEGES are in default 25 % government loans 30 % 40 % at 2-year collegese (almost alway for-profit) One in at community colleges every five GOVERNMENT LOANS that entered repayment in 1995 has gone into default The difference are smaller at two-year level % of loans gone default within 15 years of entering repayment FOR PROFIT educate less than 10% of students, but received around 25% of Pell Grant and federal-student-loan dollarsin 2008 They accounted for 44% of defaults 31,3 % of loans made of loans made to community- college students 40,0 % 29,3 % of loans made to students attending non-profit to students attending for-profit among borrowers who entered repayment in 2007 Source: College Board Loan Defaults by Sector For - profit colleges Two-year Private Nonprofit colleges Public colleges 40%- Two-year Two-year 30% 20% Four-year Four-year 10%- Four-year 0%- 10 15 10 15 10 15 Percent years of loans since borrowers began repaying in default Source: U.S. Department of Education Official Cohort Default Rates by State On August 1st, 2009 Number of Borrowers in Default Borrower X,XXX < 5% 5-7% 7-8% 8-9% > 9% Default Rate (%) WA 694 NH 1,031 2.994 MT 282 341 2,960 403 VR 7,006 OR ID 557 504 3,029 929 1,728 13,089 3,043 5,942 986 IN OH 1,399 9,690 5,496 8,711 wy 2,332 3,599 CA NV UT MO 11,695 4,617 co ..CT 782 1,245 6,576 2,809 1,894 KY 4.283 TN 5338 2,602 MS AL NJ h OK 3.905 NC 3,217 NM AZ AR 15,144 DE 968 3,422 GA 506 TX 2,167 MD LA 2,752 4,403 4,828 2,856 ..DC 1,059 20,781 18,756 AK 4,396 13,848 354 HI 334 Source: U.S. Department of Education