CL&P Blog

CNN Money: Student Loans Can Carry 25% "Hidden Penalty"

by Jeff Sovern

Here.  An excerpt:

If you default on your student loan, you're subject to a penalty up to 25% of the amount in default.

Remarkably, according to a DOE spokesperson, one in six students in default are assessed the 25% penalty after collection efforts of more than 14 months. In practice, given DOE leniency, most borrowers won't ever have to pay the 25% penalty. But some will and, in theory, most might have to pay at least some part of the penalty.

* * *

Perhaps the most significant problem with the 25% penalty is that it isn't particularly well-disclosed. Though borrowers receive ample warning about the general perils of default -- getting sued, getting wages garnished, getting income-tax refunds intercepted, paying collection fees, having your credit rating pummeled -- there apparently is only one Web page at the Department of Education that mentions the 25% penalty. "The amount needed to satisfy a student loan debt collected" by the DOE's third-party collection agents "will be up to 25% more than the principal and interest repaid by the borrower," states a Federal Student Aid page that's one of six tabs available on the FSA's introductory default page.

That contrasts dramatically with the rules for disclosure of credit card penalty fees, which must be conspicuously disclosed in the "Shumer box" accompanying soliciations. 

Disclosure Issues Continue

by Jeff Sovern

It seems as if we have constant reminders that consumer disclosures work poorly. The latest: Kiplinger reports on an interview with the CFPB's student loan ombudsman, Rohit Chopra, in which Chopra said:

We’re finding that borrowers often don’t understand the difference between federal and private student loans, that many didn’t realize the difference between variable and fixed interest rates, and that many did not know that income-based repayment protections do not extend to private loans.

And yet, disclosure continues to be a standard--and all too often the chief--remedy for consumer confusion. Only yesterday a New York Times editorial on overdraft issues stated that the CFPB "should require financial institutions to clearly explain their overdraft programs and include complete pricing information about different overdraft options."  That's true, and disclosures are important, but there is ample reason to believe that disclosures alone are not enough to help many consumers make decisions.  More is needed.  I've written in the past about requring the use of mortgage counselors, and I hope to blog about another thing that might help in the near future.

Two Bloomberg Pieces on Disclosure Issues

Robert H. Gertner of Chicago's Booth School of Business has a particularly interesting piece, Consumer Protection Bureau Can Teach Financial Self-Help, on the limits of disclosures, the need for financial counselors, and how to make such counseling better and more accessible.  Here's an excerpt:

The only regulatory regime that has a chance of making substantial progress is one that helps the market-based solution for advice work better. Structuring disclosure regulation to make advice markets more efficient rather than to make disclosure more understandable to consumers should be a goal. For example, my Chicago Booth colleague Richard Thaler has recommended requiring standard machine-readable disclosure of all financial terms to reduce the costs of comparisons across offerings. In a world of individualized offerings, the savings could be huge.

A second policy is for the government to develop an effective certification program for consumer financial advisers. In addition to knowledge requirements, the government would require that advisers have no financial incentives to prefer some products to others. Rather than teaching financial literacy, outreach programs could focus on educating consumers on the need for a competent, unbiased, certified financial adviser.

In another piece, Bloomberg reports Senators Introduce Bill for Counseling on Private Student Loans.

 

Study: Student Borrowers Lack Understanding of Loan Terms

Bloomberg coverage here. The evidence continues to mount that written disclosures of loan terms have not been effective to inform borrowers.

Student Loans and the CFPB: Know Before You Owe

Americans now owe more in student loans than in credit cards. While consumer advocates were pushing for credit card reform, lenders managed to get hefty subsidies and guarantees, made student loans non-dischargeable in bankruptcy, and started handing out piles of cash to anyone with a high school diploma.

This played an important part in the inflation of the cost of education because, hey, you can pay for it with those piles of cash. But how much good is an educated workforce that is saddled with mountains of debt and that can't work because there aren't any jobs?

Today in Minneapolis, the Consumer Financial Protection Bureau's Raj Date launched the CFPB's "Know Before You Owe" for student loans and outlined how the CFPB will take on student loans. First, the CFPB has published a model student loan disclosure sheet (PDF) for colleges to use. Current students can also visit the CFPB's website to find out more about student loan repayment options. Date said the CFPB would also work to bring transparency to the student loan sector.

To what end? Is the goal to deter people from getting higher education? Because disclosures are as likely to deter students from taking out loans as the threat of prison time is likely to deter a thief from robbing a bank. Neither expects to get caught—the student by unemployment (or underemployment), and the thief by the police.

That is probably a good thing. We want an educated citizenry. We just can't afford one at current prices.

The real issue lying at the heart of the student loan problem is this: Americans have been overpaying for higher education. There's plenty more to education than job training, but it's also true that if we can't pay back our student loans, our education isn't worth what it cost.

The CFPB doesn't have the authority to regulate schools (nor should it, really), so the best it can do is try to make sure students know what they are getting into when they finance an education. But that won't strike anywhere near the heart of the problem.

Credit Crisis Amnesia - Student Loan Version

In the early 1990s, Republicans and Democrats joined forces to crack down on federal loan backing for abusive for-profit trade schools, who were largely responsible for rapidly escalating student loan defaults in the 80s.  The 1992 Higher Education Act amendments and subsequent regulations tightened eligibilty rules for schools and students, and since then, the Education Department has kept a wary eye on the for-profit school sector. 

Now, having forgotten that history, a new bipartisan group of House members is trying to prevent the Education Department from protecting student borrowers and taxpayer money.  The Department is proposing to impose rather modest standards for graduate employment and loan repayment rates at for-profit schools, and the lawmakers want to block those rules from going into effect.  The for-profit schools and universities are lavishing lawmakers with lucre to persuade them to keep the student loan taps open. 

More on Credit Card Marketing to People Under 21

by Brian Wolfman

U.S. PIRG's Consumer Blog has this nice post concerning a series of related articles on credit card marketing on college campuses and student debt more generally. The new Credit CARD Act, which takes effect next February, limits credit card companies rights to market to these young adults. I blogged last May about Congress's unusual decision to treat this group of adults (18 to 21 year olds) differently from all other adults.  

Fed Proposes New Amendments to Regulation Z

The Fed's proposed regulations deal with student loans and can be found here, along with model forms.  They largely implement the 2008 Higher Education Opportunity Act (HEOA), which amended Truth in Lending, and add a new subpart F to Reg Z.  The regulations also prohibit creditors from co-branding their loan products with educational institutions.  Here's the Board's summary of HEOA's amendments to TILA (not the proposed amendments to Reg Z, but since we hadn't blogged about HEOA at the time, I thought I would include it):

 On August 14, 2008, the Higher Education Opportunity Act of 2008 (HEOA) was enacted. Title X of the HEOA, entitled the “Private Student Loan Transparency and Improvement Act of 2008,” adds new subsection 128(e) and section 140 to TILA. These TILA amendments add disclosure requirements and prohibit certain practices for creditors making “private education loans,” defined as loans made expressly for postsecondary educational expenses, but excluding open-end credit, real estate-secured loans, and federal loans under title IV of the Higher Education Act of 1965. The HEOA also amends TILA section 104(3) to expressly cover private education loans over $25,000.

1. Overview of the HEOA’s Amendments to TILA

Substantive Restrictions. The HEOA prohibits a creditor from using in its marketing materials a covered educational institution’s name, logo, mascot, or other words or symbols readily identified with the educational institution, to imply that the educational institution endorses the loans offered by the creditor.

With respect to private education loans, the HEOA also amends TILA in the following ways:

• Creditors must give the consumer 30 days after a private education loan application is approved to decide whether to accept the loan offered. During that time, the creditor may not change the rates or terms of the loan offered, except for rate changes based on changes in the index used for rate adjustments on the loan.

• The consumer has a right to cancel the loan for up to three business days after consummation. Creditors are prohibited from disbursing funds until the three day rescission period has run.

More Times Reports on Foreclosure Issues, Student Loans, and Target Marketing

More reports from the Times: yesterday's issue included "Another Student Loan Company Settles With New York," about the settlement struck by Attorney General Andrew M. Cuomo with Goal Financial; Goal will become the ninth lender to adopt a marketing code of conduct. 

Back on October 23, the Times ran a series of short but painful pieces under the headline "After the House Is Gone" about the impact of foreclosures on some families.  The day before, October 22, David Leonhardt wrote a column, "Life Preserver For Owners Under Water," in which he explained that the desire to help homeowners in danger of losing their homes also risks helping borrowers who can afford to make their payments but face a temptation to walk away from their underwater homes.  Which borrowers should be bailed out?  Here's what Leonhardt said:

Let’s start by acknowledging that morality cannot be the main criteria, unfortunately.

The government has already passed the point of drawing fine moral distinctions and is now in the business of stabilizing the economy by whatever means necessary. Someone might argue, then, for rescuing everyone who might end up in foreclosure, regardless of the reason.

The problem with this approach — and it’s the heart of the problem with any big-time homeowner rescue — is probably obvious. As soon as the government announces that it will help everyone at risk of foreclosure, a lot of people are suddenly going to decide they’re at risk of foreclosure.

Homeowners who are under water will have an incentive to think of their homes in cold economic terms and threaten to walk away, while those who can just barely afford their monthly payments will have reason to slide into delinquency. Multiply 19 million mortgages by a couple of hundred thousand dollars, and the government could be left with $4 trillion in obligations.

That same day, the Times ran "Drawing a Bead on Debtors" about how banks use databases to make loan offers to consumers who have recently emerged from bankruptcy, other distressed consumers and so forth.  The article reports on both target marketing and lending issues.

I don't know about you, but I'm ready for some good news about consumer law. 

Times Reports on Responses to the Subprime Crisis, Student Loan Issues, Unauthorized Bank Account Transfers, and More

Bob Tedeschi's Mortgages column in today's Times, "Shying Away From N.Y. Loans," reports on a consequence of the new New York subprime law: making it even harder for subprime borrowers to obtain loans.  An excerpt:

Among other things, borrowers with high-cost loans can block being foreclosed on if they can prove they should not have been offered the loans in the first place.

Fannie Mae and Freddie Mac, the two government-sponsored companies that back most of the nation’s mortgages, have said that as of September they would not buy subprime loans from New York because the new law exposes them to too much risk and cost. “We’re simply not in position to monitor and enforce compliance with all these requirements,” said Brad German, a Freddie Mac spokesman.

Freddie Mac and Fannie Mae back few subprime loans anyway, mortgage industry executives and regulators said, but the announcement left mortgage brokers wondering whether any lenders would touch such mortgages — even community banks that tend to keep loans on their books, rather than sell them to Fannie or Freddie.

On the other hand, Ginnie Mae said it would continue to support such loans. 

Yesterday's Times included "Counseling Students on Loans," about the Education Department requirement for counseling of students when they first apply for a federal loan and what such counseling should entail.  It only we'd had a similar requirement for subprime lending.  It also contained an interview with Asheesh Advani, the president and CEO of Virgin Money, in "Making a Business of Family Loans."  Virgin has originated $350 million in loans since 2001--among family, friends, and business associates.  If a parent, say, wants to lend money to a child as a mortgage, Virgin, for a fee, sets up and administers the loan.  They do the same thing with reverse mortgages so that families can keep the home within the family and avoid paying bank fees.

Friday brought "New York Plans to Sue Student Loan Company."    An excerpt:

The attorney general of New York is preparing a lawsuit against a student loan company, Goal Financial, charging that the lender broke state and federal laws by luring borrowers with iPods, cash and other gifts and that it misled consumers about loan terms and benefits, The New York Times’s Jonathan D. Glater reported, citing a senior official in the office.

Last Saturday, August 30, the Times published "The Bank Account That Sprang a Leak," about $300,000 in unauthorized withdrawals from the JPMorgan Chase elite private banking operation account of Wall Street activist investor Guy Wyser-Pratte.  An accompanying article, "Making Automated Bill Payments is a Cinch (Wait, Not So Fast)," discusses the downside of such automated payments.  An excerpt about the frequency of errors in such payments:

* * * Nacha — the Electronic Payments Association, a nonprofit association that oversees the network that automated payments travel on, says the error rate is 38 for every 100,000 bill payments. This figure counts mistakes that banks report but doesn’t include problems that consumers solve directly through the billers.

And another excerpt about identity theft risks:

Are you risking identity theft or other problems by giving so many companies access to your credit card numbers or bank accounts each month? Some people still think so.

But Bruce Cundiff, director of payments research and consulting for Javelin Strategy and Research, says the nonautomated approach is more problematic. If you’re paying bills one by one each month via your bank’s Web site, you need to worry about whether anyone has installed software on your computer that would capture user names and passwords. And not having paper statements and checks floating around that could be stolen from the mail is a plus as well.

On August 26, the Times reported on another solution to the subprime crisis in "Hoping to Prevent Decay, Communities Are Becoming Home Buyers."  August 24 included a depressing article, Ruins of an American Dream," about Merced, California, which has one of the highest foreclosure rates in the country.  The article explores some of the consequences of the crisis:

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

* * *

Businesses in Merced are struggling. Downtown buildings are festooned with “for lease” signs. Unemployment, consistently high here, rose to 12.1 percent in July.

* * *

Another article published the same day, "That Student Loan, So Hard to Shake," covers some of the consequences of rules making it difficult to discharge student loans in bankruptcy.   Some excerpts:

Without a court order, lenders — or, more likely, collection agents — can garnish up to 15 percent of wages of borrowers who have defaulted on federally guaranteed loans, said Deanne Loonin, a lawyer at the National Consumer Law Center in Boston. Lenders and collection agents can also intercept tax refunds, Social Security payments and even this year’s stimulus checks from the government.

“It’s really unbelievable,” Ms. Loonin said.

DEBTORS can shed credit card debt and other unsecured obligations through bankruptcy but can get out of student loans only if they can show “undue hardship.” That term is not defined by the bankruptcy code and, lawyers said, judges often take a narrow view of its meaning.

* * *

There are some compelling reasons to make it difficult for student borrowers to get out of their debts. Lenders have no collateral, like a house or car, to seize. That makes them riskier.

* * *

“At the time that people graduate from school, almost everybody is technically eligible for bankruptcy because they have debts that exceed their assets,” said Shelly Repp, general counsel at the National Council for Higher Education Loan Programs, whose members include lenders, collection agencies and guarantors. “Why would anyone lend you money if you had the option to walk away?”

But even Sallie Mae, a major source of private loans, is not opposed to modifying the bankruptcy code’s treatment of them, said Mr. Joyce, perhaps by making it possible for students to dump debts in bankruptcy after trying for a specified number of years to pay them off.