Caught in Loan Hell

May, 2016

Washington -- How is it that consumers, especially borrowers, can get caught up in run-arounds from which there is apparently no exit? How can this happen even when consumers have done nothing wrong, but have explicitly followed the directions they were given to resolve issues?

It's not as if such situations are mere nuisances. They can result in bad consequences, such as having one's credit score lowered for a loan mix-up, or in the case of student loans, being defenseless while education is interrupted, income tax refunds taken, wages garnisheed, and bankruptcy options eliminated. Student loans can be the most problematic, not only because consumers have so few rights, but loan snafus affect borrowers at a most vulnerable time in life, when they are first trying to make successful futures for themselves.

It does not help that many student loans are still handled through an inefficient, antiquated, often uncaring system filled with players concerned more about their own profits and paychecks than solving borrower problems. This includes some people and offices in the U.S. Department of Education itself.

Consider the case of Charles Stewart, who has given me permission to write about his situation. I have seen all the paperwork.

Mr. Stewart has been trying for over twenty years to get his life back from student loan hell, to no avail. He first took out loans (a Stafford and an SLS) at Fisk University where he was a student in the mid-1990s for three semesters before transferring to Edward Waters College for a fourth. The financial aid office at Edward Waters, however, did not file in-school deferment papers on the loans correctly, and the loans went into repayment status and then into default. A school administrator admitted they had made a mistake by confusing Charles Stewart with another student.

These being loans guaranteed by the federal government, Chemical Bank, holder of the loans, filed to recoup their losses with USA Funds, a non-profit guaranty agency. USA Funds paid.

Soon thereafter, however, Chemical Bank realized that Charles Stewart was eligible for hardship deferral/forbearance and issued a reprieve retroactively on both loans.

The U.S. Department of Education determined that it was not within Chemical Bank's authority to issue the retroactive actions after it had already been reimbursed by the guaranty agency. The Department then pursued repayment of the loans from Charles Stewart. But Mr. Stewart was not able to continue his education and not able to repay the loans.

This dragged on for years while Mr. Stewart tried to clear up the paperwork with the Department of Education so he could go back to school. At first he found a sympathetic loan analyst at the Department who tried to undo the mistakes and restore Charles Stewart's eligibility for federal student aid.

It didn't happen. USA Funds did not cooperate with the analyst's suggestion that they take back the loans as a first step in unravelling the situation. This was a reasonable approach by the analyst inasmuch as guaranty agencies like USA Funds charge borrowers fees and get federal subsidies in order to see that the loan programs are correctly administered.

The analyst told Charles Stewart to be patient. In the meantime, he provided him with a letter of eligibility for student financial aid, an appropriate action under the circumstances. But as the Department analyst ran out of solutions, he told Mr. Stewart that perhaps only a lawsuit by him against the Department would resolve the issue. Things went from bad to worse when the analyst discovered that collection letters, which were supposed to have been suspended until a solution was found, were going out from the Department. He told Charles Stewart to ignore them.

(Many consumers are all too familar with this nightmare: being told one thing on the phone or email but being told something else by letter. Not to mention being advised to file a lawsuit as the best solution.)

The sympathetic Department loan analyst was never able to solve the problem. He was transferred; on his way elsewhere he wished Charles Stewart "good luck."

Mr. Stewart retained counsel and for a time, it appeared as if progress was being made toward resolution. Then his lawyer failed to follow through on what he had set in motion and had to give up Mr. Stewart as a client because the lawyer took employment with a firm that represented student loan lenders, a conflict of interest. He referred Mr. Stewart to Legal Aid.

This is the kind of situation that calls out for someone to take responsibility. The Secretary has powers under the statute governing student loan programs to compromise loans when it is in the best interest of the government to do so. Secretary Margaret Spellings in January, 2007, used her powers to write off over $700 million of federal taxpayer dollars due from lenders. One would think there might be a process somewhere through which a borrower such as Charles Stewart might be given relief. If the Department cannot get USA Funds to do the right thing, it should cancel the loans itself and use the case as a cautionary tale. It would be worth more than the cost of cancellation to impress on all how important it is to have colleges capable of administering federal programs; how guaranty agencies need to keep borrowers' interests in mind, not just banks' interests; and how the credibility of the Department can be hurt when these kinds of situations occur.

When I worked in the Department of Education's Office of Legislation and Congressional Affairs in the 1990s, these kinds of cases sometimes landed on my desk. Often they came through congressional offices as a result of irate constituents demanding action. Some dedicated caseworkers on the Hill knew how to get problems solved by escalating them, even to the point of demanding the Secretary appear before a Senator or Congressman in person to apologize for the Department's incompetence or complicity. At this point I would customarily call the bank, the guaranty agency, the college, or whoever had been a part of the foul-up and ask them to be present at any such meeting. Give us twenty-four hours, they would often ask. More times than not, a day later they would call and say "problem solved, no need for a meeting."

That remedy may also exist for Charles Stewart, but increasingly, it seems to me there are fewer caseworkers on the Hill or anywhere who can solve consumer and constituent problems. Good caseworkers on the Hill are hard to find. Staff want to play politics, not help constituents with knotty problems. The creation of the Consumer Finance Protection Bureau has been a breath of fresh air, and that agency may also be a remedy for Charles Stewart. But nothing would be more appropriate than for the Department of Education to set things right itself, with no further prompting. Enough with the finger-pointing. There's so much blame to go around that this case should be turned into a training exercise. Talk about a teachable moment.