Student Loans: Teacher Horror Story a Reminder of Failure to Fix Broken Servicing Model

Any reader who has been with this site for a few years knows that the severity of the post-crisis housing bust was in no small measure due to the refusal of the officialdom to crack down on pervasive mortgage servicing abuses.

We are seeing a repeat of this failure with student loan servicing, via a New York Times story, A Student Loan Nightmare: The Teacher in the Wrong Payment Plan. This teacher, Jed Shafer, thought he had enrolled in a debt forgiveness program but after making ten years of payments, found he wan’t. Many people in the comments recounted their own horror stories.

Background: The Failed Servicing Model

Despite all the “You’ll be on this bus or under the bus” charts that McKinsey produced in the 1980s showing banks that securitization had fundamental cost advantages over originating loans and holding them to maturity, I was a skeptic. I couldn’t articulate well that I didn’t like the idea that this was regulatory arbitrage: that the cost savings were due to the reduction of the use of high cost bank equity. But that equity cost was meant to reflect the cost of bearing risk. Why should banks, who were the ones who evaluated the credit and would normally manage that risk over the life of the loan, not be the right party to price and manage that risk? In other words, even if investors were willing and able to take on these risks at lower costs, why should one believe that was due to some magical better capital allocation and distribution of risk to parties best able to eat it? Why was this not, instead, a story of information asymmetry and occasional bigger fools?

The fact that the US has has repeated crises in its non-government guaranteed mortgage securitizatoin sector (there was a bust in the relatively small subprime market of the 1990s) suggests this theory is not crazy.

But a second reason for skepticism is the relatively high cost and complexity of creating securitizations. Yes, investors value having a more liquid asset. But is the cost of creating that asset too high relative to what investors willing to pay for it?

The answer for years appeared to be no, that there was finance magic in turning illiquid loans into liquid securities.

But this appears to be less and less true once you look further. The dirty secret is that the donkey work of servicing, as in dealing with the borrowers, collecting, recording, and remitting payments to investors, is done poorly. That is in turn due to the fact that the securitization deals price servicing as a high-volume, low-margin commodity business. It’s also managed that way. That means when anything non-standard comes up, the servicer isn’t set up to do that, plus often has the point of view that it’s not paid to do that.

The classic example was after the crisis. More than 9 million homes were foreclosed upon. I guarantee that well over half of those could have been prevented through mortgage modifications that would have not only been better for borrowers, but for investors too. 1

But the servicers, despite their puny size, sat at an operational choke point. The securitization agreements paid them to foreclose. Servicers figured out how to do that on a high volume basis. The agreements did not pay servicers to modify mortgages, which is a high-touch, bespoke activity. So not only did they not do that, they were very clever about trying to weasel out of requirements to consider modifications even when required to do so (recall how banks would insist that borrowers fax information in, and then repeatedly say they never received it?)

There was a way to have brought the entire mortgage securitization complex to heel. As we chronicled, starting in 2003, more and more originators failed to take the steps necessary to transfer mortgages to securitization trusts. About 80% of the securitizations had elected New York law to govern the trust. New York trust law is ancient and well settled. It is also rigid. An asset has to be conveyed specifically to the trust; endorsements in blank don’t cut it. Separately, the securitizations had also required that the mortgages be transferred to the trust by a specific date for tax law reasons.

Normally, when something is screwed up in a contract, you simply write a lot of waivers and maybe someone has to pay for the waivers. But these contracts were rigid. You couldn’t write waivers to fix these problems. Instead, a mini-industry of document back-dating, forgeries, and fabrication grew up to create a paper trail covering up the original sin of the failed securitization.

That means the Obama Administration held a nuclear weapon which it refused to use. It could have called in all the servicers, the big dogs at the banks that owned them (to the extent they had banks as parents; some didn’t), and the big names among the investors, like Pimco and Blackrock. They could have sat all, say, 50 of them in a room and said,:

We know that legally, most of the securitizatons post 2003 are empty bags. The mortgages never got to the trust. And that can’t be fixed now.

So you have two choices. Either we sit back and allow or maybe even help the parties that are exposing this massive securitization failure. That will lead massive losses and litigation on a scale that will destroy a lot of wealth and almost certainly a lot of institutions.

Or you will give principal modifications to qualified borrowers. You figure it out but if you don’t do this we will blow you all up. It is not acceptable to have millions of unnecessary foreclosures because your servicers can’t be bothered to do them. You staff up and eat the costs. They are trivial compared to the alternatives.

It used to be routine for government to have chats like that (usually a bit more coded but the bottom line was clear) when businesses rode roughshod over the public interest. So don’t pretend it couldn’t have been done. The Obama Administration chose not to do it.

The Obama Administration similarly went out of its way to protect abusive student loan servicers. From a 2014 post:

As a new story by Shahien Nasiripour in the Huffington Post tells us, the Administration is now giving student loan servicers the “too big to fail” kid gloves treatment. The apparent justification is that correcting the records of borrowers who may have gone into default through not fault of their own would lead schools with bad servicers to lose access to Federal student aid, which could prove to be crippling to them.

So understand what that means: the law was set up to inflict draconian punishments on schools that used servicers that screw up and/or cheat on a regular basis, presumably because the consequences to borrowers were so serious. But rather than enforce the law, which would have such dire consequences for bad actors as to serve as a wake-up call for everyone else, the Administration has thrown its weight fully behind the education-extraction complex.

Servicing as a Big Part of the Student Loan Train Wreck

It is bad enough that student loans have turned colleges into predators. It has been widely reported that college admissions offices give unduly thin information about loan terms and also give graduate earnings forecasts that may not be at all germane to a particular student (particularly in light of the fact that many students don’t finish college).

A partial list of some other negative consequences of student loans, from a 2017 post:

Access to student debt keeps inflating the cost of education. This may seem obvious but it can’t be said often enough. Per the [Financial Times]  article:

While the headline consumer price index is 2.7 per cent, between 2016 and 2017 published tuition and fee prices rose by 9 per cent at four-year state institutions, and 13 per cent at posher private colleges.

It wasn’t all that long ago that the cost of a year at an Ivy League college was $50,000 per year. Author Rana Foroohar was warned by high school counselors that the price tag for her daughter to attend one of them or a liberal arts college would be around $72,000 a year.

Spending increases are not going into improving education. As we’ve pointed out before, adjuncts are being squeezed into penury while the adminisphere bloat continues, as MBAs have swarmed in like locusts. Another waste of money is over-investment in plant. Again from the story:

A large chunk of the hike was due to schools hiring more administrators (who “brand build” and recruit wealthy donors) and building expensive facilities designed to lure wealthier, full-fee-paying students. This not only leads to excess borrowing on the part of universities — a number of them are caught up in dicey bond deals like the sort that sunk the city of Detroit — but higher tuition for students.

But let’s return to the focus of this post, how lousy servicing makes this sorry situation worse.

The New York Times’ story describes long form how Orgeon school teacher Jed Shafer enrolled in 2007 in a program that would allow public servants to discharge their student debt if they made ten years of on-time payments. Here is the guts of his problem:

In 2015, he discovered that he was enrolled in a particular type of ineligible payment plan and would need to start his decade of payments all over again, even though he had been paying more each month than he would have if he had been in an eligible plan. Because of his 8.25 percent interest rate, which he could not refinance due to loan rules, even those higher payments weren’t putting a dent in his principal. So the $70,000 or so that he did pay over the period amounted to nothing, and he’ll most likely pay at least that much going forward.

Mind you, Shafer made concerted efforts to do the right thing. He asked his servicer in 2007 about enrolling in the public service forgiveness program. That same servicer could have seen that Shafer was not eligible by virtue of having consolidated his loans in 2002 (why that should disqualify is another indictment of the program) and failed to advise him that he would still qualify for an income-based plan. The fact that his servicing was transferred two times (once involuntarily, once to get the loan forgiven) appears to have made matters worse.

One of many corroborations in the New York Times comments section:

I worry about this all the time. I’ve heard the horror stories!

I am a primary care physician at a marginalized clinic. I make a comfortable living, but there’s so much worry as I’m about halfway through payments, and yearly check in to see my status.

FedLoan, like most loan companies, is horrible. I’ve called multiple times about ensuring the right payment plan. They have failed to renew my payment plan in the past so there have been months where I couldn’t make payments and interest accrued. I have made multiple complaints and asked for management to intervene. I have even contacted a lawyer about their business practices.

Medical school debt is insane. I pay 1200 a month and that keeps the interest at bay. I sit on 260K of loans and if things don’t go smoothly I will have wasted ten years just like the gentleman in this piece. I can’t afford a house and even if I could, I would feel mired down in debt.

I’m not sure how we can fight school debt and these companies, but it’s become an epidemic that plagues too many.

A Consumer Financial Protection Bureau report from June describes the cost of student loan servicing failures. It found that complaints had increased 325% in a mere 12 months. It gave top billing to problems with the public service debt relief program but recommended only thin gruel remedies, like providing for “additional flexibility” so that borrowers who were given bad information about eligibility could still receive program benefits. But how is someone like Shafer going to prove what a servicer that has since exited the business told him ten years ago?

These recommendations from a Forbes story give an idea of how terrible student loan servicing is:

1. Don’t rely on your student loan servicer for all the answers

It may sound counter-intuitive, but your student loan servicer may have interests that are contrary to your best interest.

Translation: Your servicer may not just be incompetent. Assume you are his lunch.

2. Always communicate in writing

How many times have you called your student loan servicer and been assured that your request was processed, only to find out later that this was not the case?

You get the picture…..

The problem is yours truly can propose all sorts of nice-sounding solutions, like making servicers liable for the cost of bad advice, and having them bear the cost of servicing errors. Their margins are so thin that exposure like that would force them to shape up. You could give this provision even more teeth by making it permissible for borrowers to record calls to servicers without notifying them (most reps are instructed to disconnect when given a warning but some states like New York allow for recording your own calls without informing the other party. Making that legal for all interactions with servicers and financial services providers generally would be salutary). But you can expect the servicers to whinge that they can’t expect to be made responsible for actions that do more damage than their businesses are worth.

But the Democrats are determined not to touch the student loan indebtedness machine. It keeps the higher educational complex, a Democratic party stronghold, growing faster than GDP. Notice how Elizabeth Warren, who more than any other person in the US, knows that allowing student loans to be discharged in bankruptcy would make a huge difference to borrowers, both for some by being able to wipe out debt and others by having better bargaining leverage, has never once mentioned the idea? All Warren has ever proposed is rearranging-deck-chairs-on-the-Titanic-level interest relief.

So the only remedy is to make clear to the Democrats that this is unacceptable. Go full Sanders or Democratic Socialists on them. If the party is not willing to deliver concrete material benefits to its voters, most important young and even middle aged people carrying a student loan millstone, they need to pay for their negligence.

____

1 While servicers were far and away the big obstacle to modifications, there was often a second impediment, which was in theory that the lowest performing tranche in a subprime securitization would lost out in a mod. That is because by the post-crisis period, they were often bought by hedge funds on an interest-only basis, as in they expected that they would get no principal payments but were still getting interest payments. Without belaboring the details, principal modifications would have wiped out those tranches or at least reduced their interest payments. However, by the post-crisis period, most if not all of the original investors had bailed out of these tranches, and I don’t see any policy argument for protecting sophisticated speculators.

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58 comments

  1. Karen

    This is a brilliant piece, one that anyone who cares about our collective future should read. On the Archdruid Report, JM Greer wrote a couple of years ago that the nature of capitalism is to seek and exploit externalities–i.e., moving the cost of various activities onto the public, while internalizing the benefits. One might say that we are close to “Peak Externality”, now destroying the vibrancy and goodwill of the talent that sustains us.

    Reply
    1. Sid Finster

      Sooner or later, there’s surely a Minsky moment to arrive in the exploitation of externalities, as the long hanging fruit (to use a dot.com era buzzword) get picked and the public’s ability to shoulder the burden of more externalities shrinks.

      Reply
    2. Dave

      I would argue all “ism’s” are doomed to failure due to human nature. This includes capitalism, communism, socialism and others as well as religious movements too. Communists eventually succumb to this as well as capitalists. In religion look at the sex abuse issues in the Catholic faith as well as the horrendous works of ISIS….. all in the name of their beliefs.

      So argue all you want about which is the best ” ____ism” you like, we (humans) will burn it down.

      Reply
      1. Karen

        This is the message eloquently delivered in Rob O’Grady’s 150 Strong. I would apply the same critique to collectivism–but there’s some evidence that collective effort, when limited to small groups (i.e., no more than Dunbar’s number of 150) can accomplish a great deal while minimizing the effect of externalities. It’s not as “efficient” as capitalism, but has more to offer the human race, considering all dimensions that matter to people. That’s our best hope, I think.

        Reply
  2. Larry

    It’s really another case of class warfare. There is no alternative to the college degree and we have financialized it to ensure the chosen few can draw reliable rents on it. The fact that these debts cannot be discharged in bankruptcy is shameful. I won’t hold my breath for any change.

    Reply
    1. BillC

      I’m not holding my breath for change, either, but there is exactly one thing we can try to do about it: follow the advice in the last paragraph. Sure, it hurts (a lot, as the current Prez, congresscritters, and state govs and legislatures show), but if we want to end the 0.1%’s TINA enforcement … for us, too, TINA.

      Reply
    2. Wisdom Seeker

      “The fact that these debts cannot be discharged in bankruptcy is shameful.”

      The alternative is to have much higher interest rates on loans that are essentially just personal or credit-card type unsecured loans. Without the “no-bankruptcy”, student-as-collateral “loan slave” approach, no rational lender would be making loans at the current low rates. If default-via-bankruptcy is allowed, that option will be very tempting for a lot of students, who leave school with little in tangible assets and thus have nothing to lose.

      Note that academia will resist any shift to higher-interest-rate dischargeable loans, because higher rates would mean less student “purchasing power”, and totally reprice the supply/demand curve for college degrees.

      BTW, there’s a term used for goods and services in which demand has been inflated unsustainably: overpriced. The horrific choices made to enlarge student lending have led to massive overpricing in college educations. I read often that much of what goes on in today’s universities does little to better educate the students and could be “done without” (and was, in days gone by). But putting college loans back on humane terms would destroy demand for today’s massively overpriced college educations and decimate the academic job market.

      Reply
      1. Bill Carson

        I don’t know how you could decimate the academic jobs market much worse than it is now. What you could decimate (several times) is the administrative jobs market. Good riddance to the administrative class.

        Reply
      2. Andrew Dodds

        Indeed..

        And if student loans could be discharged through bankruptcy, then it would be a perfectly reasonable option for many new graduates to declare bankruptcy and ditch the loans. Which would make the interest rates even higher to cover that risk, leading to more bankruptcy and.. you get the picture.

        Funding university through fully commercial, free-market terms means a smalerl sector with up-front payment – which would be terrible for meritocracy. The kind of thing you might have seen in the 1800s, where only a wealthy elite would have the chance to go. Better is the approach of funding through general taxation – graduates pay more tax, on average, and the government is less liable to pay inflated fees. The government has to be involved one way or another for a large higher education sector to exist, might as well make it explicit.

        Reply
        1. Yves Smith Post author

          A study by the Philadelphia Fed showed your theory re bankruptcy to be nonsense. They looked pre and post the BK reform bill. The disincentives against BK are large, among them difficulty in getting employment. I clearly need to write up that study.

          Reply
  3. perpetualPOOR

    No one cared about the homeowners.
    Why should I care about the students?
    This is a serious question, not snark.

    Reply
    1. jrs

      I haven’t seen much indication that everyone cares so much about renters either as rents shoot through the roof, I mean I can’t imagine anyone making the argument that they are getting so much more public concern than homeowners (occasionally there is some rent control, it’s rare and isn’t doing enough). Both homeowners and students may be relativity privileged depending (the majority of people still don’t have a college degree and some do ok with that, but what exactly do we imagine many of their work and economic lives are like?). The wages of the vast majority of the people where I live will never be able to afford a mortgage where I live, still I don’t see everyone fretting about the renters. As far as people noone care about their are bigger victims of this economic system that isn’t working too well for almost anyone any more.

      Reply
      1. perpetualPOOR

        My care for homeowners and renters was the same argument: If you get rid of 9+ million homeowners, where do you think these people will go? They will have to RENT! What do you think that is going to do to the rents? Supply and demand. Demand goes up…..the market reacts.

        This entire decade of pain and uncertainty was caused by the Democrats. I will never vote again because I refuse to vote Republican.

        I tried very hard to make TPTB pay attention. But Obama had already communicated that “Wall Street did nothing illegal, perhaps immoral, but nothing illegal.” B***Sh**, Obama. The homeowners unearthed a massive crime spree…..and nothing happened.

        Reply
        1. nycTerrierist

          Agreed. The Democrats own this – this massive spike in inequality happened on their watch.
          It’s a crime scene all right.

          Obama: ‘Yes we can’ have neo-feudalism.

          Reply
        2. joey

          You can vote something besides democrat or republican. That false dichotomy is the biggest hindrance to meaningful change.

          Reply
          1. perpetualPOOR

            Many times the ballot is just an (R) or a (D).
            And the races I really care about the judges are mainly running unopposed.
            So, again, what’s the use of voting?

            Reply
            1. sharonsj

              I keep on voting because I believe if you don’t vote you have no right to complain. Personally I will never vote for a Republican because their ideology is repugnant. I still vote Democrat but only because they still support civil rights. If we cannot get progressives into office–any office–we will have to seriously consider revolution.

              Reply
              1. CB

                if you vote, you own this mess. I sometimes vote, used to much more often, and I owned this mess until recently. no more!

                Reply
  4. Michael

    “But the Democrats are determined not to touch the student loan indebtedness machine. It keeps the higher educational complex, a Democratic party stronghold, growing faster than GDP. ”

    Good point.

    It also fuels local real estate markets where it causes distortions. Further, much of the loan money goes to pay rent, restaurant and cell phone bills. After all, you can’t have a part time job, party hearty and get an education.

    Reply
    1. jrs

      well it either goes to pay rent or else it’s really working full time and putting oneself through school. There is no other choice. Pay the rent just on a part time job, haha. Sure working full time and night school is one choice and maybe one without debt, just it will take about a decade before you can enter the market with a degree at that point, which will have a price in terms of lifetime earnings, and it actually is very near impossible with very difficult degrees like hard science etc..

      Reply
  5. Enrique Bermudez

    Quote: “Notice how Elizabeth Warren, who more than any other person in the US, knows that allowing student loans to be discharged in bankruptcy would make a huge difference to borrowers, both for some by being able to wipe out debt and others by having better bargaining leverage, has never once mentioned the idea?”

    And this would be exhibit A as to why no politician within the current system can be trusted on any level whatsoever. It’s all just branding and Warren’s brand is “the one who’s on YOUR side against the evil banksters.”

    Reply
  6. Bill Carson

    I graduated from law school in 1995 with $54,000 in debt; consolidated a year later to drop my multiple payments totaling over $800 per month down to around $450. Locked in my interest rate at what seemed at the time to be a reasonable 9%. (I reflect now on the absurdity of this—paying 9% interest on a debt that cannot be forgiven in bankruptcy; cannot be refinanced; and that is fully guaranteed by U.S. government—the borrower carries close to ZERO RISK.)

    What I didn’t understand was that the rules prohibited me from ever refinancing to lower the interest rate. Back in the early 2000’s, there was a rush on refinancing and consolidating student loans. I had telemarketers calling every month, soliciting me to refinance with their company at 4 or 5% interest (I had good credit, and was a low risk), but since I had already consolidated, I was ineligible to refinance. And so I continued to pay.

    Oh, I paid extra for a while; then I went through a spell where I couldn’t make payments and so I gave up all the progress I had made. (Since I was so far ahead on my payment schedule, my loan was never delinquent or in default.)

    My balance is down to just under $12,000. I’ve got about 26 or 27 payments left and I can see light at the end of the tunnel. (But then I’ll have to start repaying the parent loans I have taken out for my daughter’s college, so there’s that. Education is the gift that keeps on taking.)

    For the past several years I have been regularly receiving a letter from my student loan servicer, asking me to verify the details of my loan and the balances of the loans that were consolidated twenty-one years ago. I just ignore these letters, as I presume that the servicer is in a better position to determine what loans were consolidated and whether the information is correct. But it has occurred to me recently that perhaps I should demand that my loan servicer produce the original documents to prove that the my loan details are correct. Perhaps they haven’t preserved the documents or didn’t take all of the steps that they should have. Perhaps, if push came to shove, my loan is uncollectible.

    Should I force their hand and see if they are bluffing, or just finish paying? What do you think?

    Reply
      1. Bill Carson

        Well, the financial aid system assumes that parents are paying the bulk of a child’s college education. For the child to even apply for financial aid, the parents are required to submit a FAFSA (Free Application for Federal Student Aid), and thus the child’s student aid award is linked to the parents’ incomes and assets. (There is another marriage penalty here, as divorced or never married parents get to submit and qualify based on the LOWER income parent’s financial situation, whereas married parents have to submit joint income.)

        And the child’s student loans are very limited for the first years of college ($5,500 for freshmen, $6,500 for sophomores, $7,500 for seniors, unlimited for graduate students), while college costs around $30,000 per year for in-state tuition, including room and board (freshmen are required to live on campus). So the federal government has arranged for parents to be able to borrow everything in excess of the student’s limit.

        I had not been able to save for college as I had always hoped and planned because I was still paying my own student loans and BECAUSE LIFE. So when my oldest went off to college, we were financially unprepared. Fortunately, she received a half-tuition merit scholarship, so the first year bill was only about $25,000. I borrowed $20,000 that year, but we have been paying as we go since then, and haven’t taken any additional loans.

        Reply
        1. perpetualPOOR

          I understand. But when does she become responsible for her student loans rather than you? You paid yours. Why doesn’t she pay hers? Just wondering.

          Reply
          1. Bill Carson

            And I very well may work out an arrangement for her to make “my” payments, depending on her ability to do so. However, I would prefer to spare my children the disadvantages I have suffered by being a student loan debtor.

            Reply
    1. perpetualPOOR

      Well, considering that the courts hate “deadbeats” and have screwed each and every homeowner that has walked through their courtroom with the very same argument……good luck with that.

      Reply
    2. Chris

      I was going to say emigrate, Bill, but that’s a bit sarcy.

      Sorry for your situation. I have experienced two times when my debts got out of hand and simply defaulted knowing how hard it is for a company to find me and compel me to pay.

      But then I only have to wait 7 years (with no contact) before statute of limitations say that I am free. My experience shows me that the banks sell the note after about 12 months trying for less than 10c and then the professionals start trying to find you. Debt collectors’re better at it than the banks, but still not enough to compel me to do something I don’t want to.

      Aussie student debt is also not able to be discharged in bankruptcy, but the govt holds the note and interest is a low one, so we don’t have the shenanigans that goes on over your way.

      Reply
      1. perpetualPOOR

        The courts, at least for mortgage debt, have consistently ruled that there is no statute of limitations on collection of mortgage debt. Just wait until students begin to try this one… whoo boy.

        Reply
    3. Jason Boxman

      At least for my loans, which were transferred often enough, I found that the new servicer has no knowledge of or documentation for prior payments. So if your servicer has changed in the past 20 years, some of the historical information may not be recoverable anymore.

      If I’d known when I was younger, I would have made double or triple payments. I didn’t realize at the time how much the interest cost over the lifetime of a loan is, even at a low interest rate. I still have a few years left on a loan I took out almost 20 years ago…

      Reply
      1. Bill Carson

        “If I’d know when I was younger, I would have made double or triple payments.”

        That would have been nice if I could have afforded it. But LIFE. Three kids, one of whom suffers from a chronic health condition that costs lots of money out of pocket.

        Reply
    4. Di Modica's Dumb Steer

      *my suggestion has limited applicability, but whatever

      The student loan situation has gotten bad enough where, depending on the interest rate being paid and the amount of available credit one has at their disposal, I sometimes consider telling people to move their student loan balance to a credit card. Granted, this only works for people with good credit and a generous line from one of the bigs, but I have no shortage of 0% balance transfer offers flooding my mailbox. You end up having to juggle them around once a year after the offer rate ends, but if push comes to shove, you can walk away from a credit card without it screwing up your whole life. Plus, a lot of the servicers are owned by the same companies that hold your credit card, so any loss is usually borne by the same parties. Best part is that they can’t take away your degree, so if they want to rake the credit rating over the coals, that’s fine. Those same companies will be sending secured credit offers before bankruptcy proceedings are through.

      The only thing I’d like better than that is to be able to incorporate as an LLC, take out loans in the LLC’s name, and walk away from them, keeping the degree for myself. It seems to be the MO for many a company, so if it’s good for the goose…

      Who am I kidding, though? A mass of pitchforks will have to be marching down Park Avenue for things to start changing.

      Reply
      1. Joel

        Actually, even at 8% interest, the advantage of credit cards is that in the worst case, it can be discharged in bankruptcy.

        Reply
  7. Jason Boxman

    I was fortunate enough that I could actually refinance into a lower interest rate with a private lender, but I left the lowest interest loans with FedLoan Servicing. At the time — and maybe still today — they didn’t code the loans with any kind of identifier. So when my new lender sent in the pay-off check, FedLoan Servicing applied the payments in the least favorable way possible to me. They paid off my subsidized loans, while leaving the balance of my higher interest loans outstanding.

    Hardly a shock, eh?

    It took multiple calls over 3 months and finally a letter wherein I highlighted the specific loans that I wanted paid off. And a subsequent call referencing the letter, to get it resolved.

    So I’m not surprised by these stories.

    For what it’s worth, each person I spoke with and the supervisors were always quite friendly. But either incompetent, overworked, or otherwise prohibited from actually complying with my request.

    That I bought into the liberal lie that more education is the answer, well, that’s another story. I’m thankful I can at least make my payments, and at an accelerated rate. Nonetheless, many did very well off my tuition. I can mostly boast of having a master’s degree. Maybe I sound impressive at parties, I don’t know.

    And the wealth extraction stream roller goes ever forward.

    Reply
    1. mini

      This was essentially our experience. We had 12 seperate loans with rates ranging from 2% to 12%, and tried to specify that the money over the minimum payment was going towards the highest interest rate.

      I would say those are hours of my life that I can’t get back, but compound interest…it was probably worth it.

      Reply
  8. FiddlerHill

    Once again, Canada — so seemingly like the US and yet so different — provides a stark contrast. Tuition for Canadian students at the very best universities in the country is approximately $5,000 a year. For international students, it’s $25,000 a year — which suggests roughly the subsidy ($20,000) taxpayers are providing to keep a university education within the reach of most citizens: debt-free. As with Canada’s universal health care system, the cost is shared by the entire population and thus makes the entire society a more humane place to live. Of course, this is only possible when a society forces their representatives to value education and health care more highly than arms manufacturers.

    Reply
    1. Altandmain

      Disagree. Canadian graduate here. I paid about $15,000 CAD for my degree per year and another $8000 or so for my post graduate. I graduated with my Bachelor in 2012. At that time the CAD and USD were at parity.

      I do not know which province you are looking at, perhaps Quebec, where tuition is cheaper, but for many majors, it is more expensive. Engineering, professional programs, etc all tend to cost more.

      The situation is worse in America, but the sad thing is that Canada has been going in the wrong direction and following America’s footsteps.

      Reply
  9. Enquiring Mind

    Student loan volume and delinquency are large risk indicators both for borrowers and for lenders and their coven of servicers, attorneys and related parasite fellow travelers. Credit card debts also fit into that flashing beacon category. Either group of debtors represents the potential for another economic catastrophe similar to the mortgage disasters of 2007-08.

    The mortgage business represented a large systemic risk over the past decade and now that risk has been reduced as delinquencies have fallen. The bulk of the pain was felt by borrowers and now there is less overall pain. That keeps angry borrowers off the streets. I’m just cynical enough to think that keeping people sullen but not rebellious was a hidden agenda of the DC/Wall Street bailout discussions.

    When people are struggling individually just to find and keep a place to live, and to manage that without recourse against a faceless distant bureaucracy, they are less likely to pick up pitchforks and torches. Student loans and credit cards represent new challenges for the best and brightest that DC /Wall Street employ. When a roof over one’s head is less at issue, then at least that existential problem is minimized.

    Student loan problems may operate at a slight remove from that aspect of day to day life, except for that ever-present threat to credit scores. “Hey, your score sucks but you still have a place to try to sleep, for now.” Credit cards fit into that scoring arsenal, and now your credit limit may be reduced or revoked at whim. Try to get a hearing, try to find a place to live, what with your 500ish score.

    Those escalating issues would seem to be enough to bring the rabble out marching, so why are there not more legislators thinking about how to keep the streets clear, or even maintaining some semblance of transparency and accountability? Or are they still counting on that sullen but not rebellious approach? That seems to work best on any and all denied agency.

    Reply
  10. Bill Carson

    FWIW, here is the letter from my SL service provider that I receive on nearly a monthly basis now, and which I have steadfastly ignored—-

    WHY WE ARE CONTACTING YOU
    This letter has been sent to you as part of our quality assurance effort that provides you with the opportunity to review the details of the underlying loans included in your Consolidation Loan. Please review the information below for accuracy.

    WHAT ACTIONS YOU NEED TO TAKE
    If you find discrepancies in the interest rates, amounts, or loans that were included in the consolidation process, then mail information to the address above that supports your claim. [Provider] will review your claim and make any necessary adjustments.

    If you agree that the information provided below is accurate, then we kindly ask that you affirm this information by signing, dating, and returning this affirmation letter in the enclosed envelope, fax or email.

    If you have any questions or need additional information….(blah, blah, blah).

    ADDITIONAL INFORMATION YOU MAY FIND HELPFUL.
    By signing this letter, you are not altering the terms or conditions of your promissory note. And, although you are not required to sign the document, your participation is appreciated.

    Affirmation of Consolidated Debt
    I, the undersigned, acknowledge that I completed and signed a Consolidation Loan Application and Promissory Note to consolidate my student loan debt into a Federal Consolidation Loan. In accordance with my request, the consolidation lender consolidated the following loans:
    [details of loans consolidated in 1996]
    My Federal Consolidation Loan is currently owned by [BANK]. By signing this document, I affirm that all the loans listed above were to be included in my Federal Consolidation Loan disbursement on [1996].

    Signed, dated.

    Reply
  11. flora

    Great post.

    Push all the risk onto the (18-22 year-old) borrower without notifying the borrower he is carrying all the risk. All the risk. How can any borrower requesting a student loan calculate and price that risk?

    Borrower probably believes if anything goes wrong then US laws will backstop him when sorting out loan problems. Nope. The US govt’s current defacto stance on enforcing lending laws meant to stop lenders’ defrauding and cheating the little guy is “sorry, can’t help. we only enforce law when it helps the TBTFs. you’re on your own.”

    Reply
    1. flora

      adding: In Milton Friedman’s view, this is as it should be.

      “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.”
      ― Milton Friedman

      and
      “There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”
      ― Milton Friedman

      And just how will deception and fraud be stopped if not by government action enforcing the rules to protect borrowers from predatory lenders? Milton doesn’t say.

      “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”
      ― Milton Friedman

      The results of the current student loan system is to cripple young people’s economic future with large debt loads at a time of poor employment prospects. This has a ripple effect on house sales and car sales, marriage rates and family formation – the things a govt ought to be encouraging and supporting instead of undermining with the markets/profits fetish extended into every sphere of life. I judge the current student loan system a failure.

      Reply
  12. urdsama

    The more one digs though the actions the Obama administration took, or failed to take, the more one is in amazement at how many people still sing his praises and make claims that he is one of the best presidents in our nation’s history.

    Yves, thank you for explaining this sordid mess in terms that made sense to a non-financial type.

    Reply
  13. Juliania

    “It’s bad enough that student loans have turned colleges into predators…”

    Without going into the tragic details, I’ll just say that my own college experience back in the early ’60’s was the gift of a lifetime, but how things have changed! The younger members of my family are burdened with unpayable debt for the limited number of college classes they trustfully made the attempt to take – which were nothing resembling the education I was so fortunate to receive back in the day.

    Something has gone terribly, terribly wrong.

    Reply
    1. flora

      And not just in education costs. Housing/mortgages, pharma costs, insurance costs, healthcare costs. The market fetish extends to almost every sphere in life. Compliant politicians are turning govt sponsored programs originally designed to help lower costs for the little guy into govt sponsored programs to help the TBTF, imo.

      As perpetualPOOR comments:

      “But Obama had already communicated that “Wall Street did nothing illegal, perhaps immoral, but nothing illegal.”

      Reply
    1. Bill Carson

      That guy can kiss my grits. Just like primary and secondary education, higher education should be free (or at substantially reduced cost) for everyone, rich and poor alike.

      Let’s not forget that public college was next-to-free up through the 60’s. It increased 300% (adjusted for inflation) between when my parents graduated from college and when I attended in the 80’s, and it has increased another 300% (adjusted for inflation) from the 80’s to today.

      We need to reexamine the idea of the public good. If we can provide 13 years of free education through high school, then we can easily provide another four years for a bachelor’s degree. (And, btw, college needs to be reinvented. The free college model I have in mind would look less like State U and more like high school or community college. But that’s the subject of another article.)

      Reply
  14. Jonathan Holland Becnel

    I’d love to see Student Loan Debt Forgiveness.

    Then again, I have 100K worth of outstanding loans…

    Reply
  15. Scott

    Tricks & Traps at every turn.
    That the Government provides guarantees to loans given out by private banks gives every incentive to these institutions to engage in deceits as much short of the full definition of criminal malfeasance, that it grows.
    -and grows.
    Where it ends nobody knows.

    Reply
  16. RGR

    This is maddening. I have student loans and have consolidated them with FedLoan so that I can move into the PSLF program but reading this makes me stop and pause about these servicers. It’s becoming clear to me that you really can’t win, regardless of how careful and meticulous you are about following the steps. I don’t know, sometimes I think, “Hell, garnish the wages, take whatever you want!” I’m tired of worrying about this crap. You can’t take from me what I don’t have. You want the Social Security check? Take it! I’m with Michael Hudson: ‘Debts that can’t be paid won’t be paid.’ What a pathetic mess. I know this sounds horrible, but I pray for the day when the whole edifice collapses. But like with the mortgage crisis, nobody responsible for the student loan crisis will pay. Sorry folks, just venting! Take care.

    Reply
  17. Robert Murphy

    I did the FedLoan Dance of Duplicity about a year ago. I’ve been paying since my first full time high school math teaching job in 2005-2006. In 2006-’07 I started my current math teacher job in Seattle, at a high school of 1300+/- and 70% +/- FRL. I paid under Operation Agent Orange? instead of … Banana Pie?, so, my 10 years of on time payments do NOT qualify.
    I managed to eek it out on unemployment for the 26 weeks in 2003 after finally getting flushed in the dot.bomb / 9-11 wreckage, & then moved to student loans & wiping out my piddly shit 401(C)asino so I could turn my 1997 math b.a. into a math teaching certificate … the loans I’d taken out from 1995 -’97 were in deferment while getting the teaching cert.
    With money from risking my ass cooking on fishing boats in the Bering Sea, I had paid off the mess which had started in fall 1978, when I was 18 and a fresh from welfare freshmen at Boston College.
    I don’t vote fascist cuz they’re fascists. That doesn’t mean I have any love for programs which employ highly paid nitwits who couldn’t run a hot dog stand, never mind a program.
    BTW – 1978 – Prop 13 outta California – anyone old enough to remember that fiasco?
    When will Liberal Dweeb world learn that the point of the programs is to make stuff which works, instead of fuel the fantasies of relatively affluent, coddled blow hards who act like they’re part of FDR’s cabinet putting together the SEC, TVA, Social Security Administration …

    Reply
  18. CB

    when I was at Rutgers Camden in the late 90’s, there was a wonderful loan system that cost almost nothing. $25 per semester whatever you borrowed; had to be full time, which was 12 hrs; paid back per month over the semester: course hrs times per hr plus $25 divided by number of semester months, easy to know what it would cost you; if not paid back, semester grades withheld and no further monies until bill settled. period. no fuss, no muss, no gouging. loved it, always tried to get as much for my $25 as possible.

    I checked, this is no longer available. I do still have the paperwork, if anyone is interested. it seems pretty obvious that as rentier seams play out, others are found and exploited: can’t let any opportunities for extraction go unused. question is, are they, to mix metaphors, eating their seed corn?

    Reply
  19. Tyronius

    When I graduated from an amorphous public University with an amorphous business degree into an amorphous job market, I promptly defaulted on my student loans because I had few job prospects. At the time it was something like $30k total. I simply stopped paying. I knew it wrecked my credit rating, so I never made any effort to build one. I didn’t get credit cards. I never bought a house. In short, I became a mushroom and never contributed to the economy at large. Student debt destroyed my Economic life. Now I’m in my 50s and I have no other debt besides my old student loan debt- which has no doubt changed hands several times by now. The degree I got never made any contribution to my career or my income stream, let alone any retirement savings. My daughter is shockingly bright and has the world at her feet- but if she has to take on one thin dime in student debt I’d strongly advise her to run, not walk, away. Is this the result society wants?

    Reply

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