Consumer Law & Policy Blog

A Bit More on the Times Article on Student Loans

by Jeff Sovern

Brian posted a link over the weekend to the excellent Times article on student loans.  Here's one part that really caught my eye:

A quick reading of an award letter from Drexel University, received by a New Jersey applicant in March, implied that the student would owe nothing and might actually walk away with money. The expected payment to Drexel, it said in highlighted bright yellow, would be a negative $5,900. The calculation presumed grants, student loans and a $42,120 loan taken out by the parents toward the $63,620 estimated cost — figures also included in the letter but not highlighted.

In other words, if your parents borrow $5,900 more than you need to pay Drexel, you will have $5,900 more than you have to pay Drexel.  The article continues:

A Drexel spokeswoman said that the letter was not misleading and that it had not received complaints about it.

If they didn't intend to mislead, why did they highlight the parts that they did?  Of course, we don't have the text of the letter to read, but this certainly sounds reminiscent of predatory lending. 

Jeff Gelles Column: How Arbitration Clauses Enable Businesses to Thumb Their Noses at Consumer Protections

Here.  A very interesting illustration. 

FOLLOW UP: Privatization (or not?) of federal student loans

Seeking to learn more about the subject of my earlier post, I called the Direct Loan Servicing Center. The lady who answered confirmed that it's not a scam, my loans have been transferred to EdFinancial.

I asked her why loan servicing has been privatized, and to my surprise, she said EdFinancial is not a private corporation but (as I understood her) part of the Department of Education. That seems odd to me (EdFinancial's web address is .com, I note). The lady I spoke to said they simply created more loan servicers because of the quantity of direct loans. That didn't add up either -- if the problem is that the agency needs more capacity to do a job they are already doing, why not expand their existing capacity instead of creating some new entity to do the same thing? Strange. And unnecessarily bureaucratic. And confusing for consumers. I wonder if the CFPB has a division to advise government providers of consumer servicers how to be more consumer-friendly.

Privatization of federal student loans

Most of the time the contributors to this blog are writing as legal practitioners and academics, describing trends we see in the law or issues we encounter in our work. This one is a little more personal, so I'm blogging this one as a consumer as well as a Public Citizen lawyer.

Last week, I -- along with many other borrowers, to judge by the internet traffic on this issue -- received notification both from the federal Direct Loan program and from a company called EdFinancial that my student loans under the federal Direct Loan program have been transferred to, and will henceforth be serviced by, EdFinancial.

I have a number of concerns here.

First, at the broadest level, this is yet another troubling extension of the trend toward privatization, with its attendant risks and injection of the profit motive into public services.

Second, and on more of a personal note, I found the whole transfer process rather jarring, since the first thing I have to do on the EdFinancial website to set up my new account is give them my SSN. I think this is actually a legitimate site, but it sure feels like a scam. Which leads me to...

Third, once again on a more general level, I'm sure I'm not the only person to whom this feels like a scam. I fear other borrowers will probably ignore it for that reason and might miss a payment as a result. I note that all correspondence I received from Direct Loans and EdFinancial was via email; I never received a letter or anything on official Department of Education letterhead that might lend a little more credibility here.

According to the blog DL Insider, this privatization is a broader trend and implicates more companies than EdFinancial. See here for their understanding, as of January.

Fellow bloggers, any reactions, or advice?

Skin Cancer, Indoor Tanning, and (Little) Regulation

This AP story describes the views of medical experts that indoor tanning is linked to skin cancer. The story then discusses a new Center for Disease Control study reporting on the significant use of indoor tanning salons. The study reports that about 21% of women aged 18–25 used a tanning salon in the last 12 months. Among white women, the figure was about 30%. Moreover, it's not as if these are once-a-year visits. White women who use salons reported going about 20 times per year (nearly 28 times per year for women in the 18 to 21 year old category). The tanning salon industry is not heavily regulated. There are some restrictions on use of tanning salons by minors in some states. But even with respect to minors, the industry is not highly regulated, according to this 2009 Time magazine article. Go here for a discussion of the 2010 recommendations of an FDA advisory panel urging stricter regulation.

Staggering Student Loan Debt

Read this comprehensive piece in Sunday's New York Times. There's more than $1 trillion in outstanding student loan debt. In 1993, 45% of college students were financing their education. Today it's 94%. A lifetime of debt for millions of people perhaps.

Pittsburgh Post-Gazette Op-ed on Subprime Borrowers

Here.

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. 

FTC Affirms Consumer Rights Under "Holder" Rule

On May 10, 2012, the Federal Trade Commission (FTC) issued an advisory opinion affirming that consumers retain certain important rights under the FTC Rule on the Preservation of Consumers’ Claims and Defenses (16 CFR § 433).  The opinion was requested by the National Consumer Law Center (NCLC), and joined by Public Citizen, U.S. PIRG, the Center for Responsible Lending, and the National Association of Consumer Advocates.

The Rule allows consumers to raise their seller-related claims against the holder of their loan agreements.  Such claims can offset the remaining indebtedness, but some courts had found, despite the Rule’s clear language, that consumers could not utilize such claims to recover amounts already paid to the lender.  The FTC staff in 1999 had provided an informal opinion to NCLC rejecting such a limiting interpretation of the Rule, but some courts continued to misapply the Rule. 

Now that the full Commission has issued a formal advisory opinion interpreting its own rule, it is hoped that this issue will be laid to rest, so that consumers who have already made substantial payments on a loan are not treated worse than those who have not. By insuring that the Rule is properly applied, the FTC has strengthened one of the most important pieces of consumer protection in the United States.

The FTC Rule on the Preservation of Consumers’ Claims and Defenses is a cornerstone of consumer protection. It makes it far more practical for consumers to raise claims against sellers, even when the seller is insolvent or skipped town, and it encourages lenders to scrutinize the sellers with whom they form business relations.

For example, it is far more practical when a car dealer sells a defective vehicle to raise that claim as a reason not to repay a car loan than for the consumer to have to bring a separate affirmative action against the dealer, while at the same time having to continue making car payments.  The lender is in a far better position to recover any loss from the dealer.  Moreover, the Rule encourages the lender to police its related sellers to insure that they treat consumers fairly so that consumers are not raising seller-related claims on the loan.  

Fraud Center Network—An unregulated consumer-reporting agency?

I recently received a complaint from a consumer about the Fraud Center. He told me that he had a problem with a company he was dealing with not performing as promised, so he reported it to PayPal and it reversed the charge. In response, the company reported him to the Fraud Center, which as promised, essentially blacklisted him.

The Fraud Center’s website states: Make Sure You Get Paid. When you add a record to the Fraud Center Network database, the system will send an email out to the persons email address in the record. The person can then visit the Fraud Center Network website to learn how dispute or remove themselves from the system. In 99% of all cases, people who have received notice has worked with the provider and the Fraud Center Network staff to resolve the issues.

According to the person who contacted me, the only way to work things out and resolve the dispute it to pay. Fraud Alert will not remove the entry unless directed to do so by the person who filed it. The information is also available to subscribes to the Fraud Alert, regardless of its accuracy. To me, this looks a lot like a credit-reporting agency, and it should be subject to the Fair Credit Reporting Act. There also seems to be real privacy problems. According to the person who contacted me, his private information has been made public on this website, with little concern for security.

I must note that I have not been able to verify anything I have been told, beyond reviewing the Fraud Center website. I tried to register for the company’s services but do not qualify. If others know more about this, please add a comment.