February, 2022
Washington — Occasionally student loan borrowers in trouble track me down in the hope I can somehow help them. They know I have had success in court against lenders and servicers. In most cases, however, the borrowers are up against such formidable forces arrayed against them that there is no hope of resolution, even if the borrower has been denied proper servicing and consumer protections supposedly guaranteed by statutes and regulations.
Some servicers are not only unapologetic about their mistreatment of borrowers, they flaunt behaviors that put their own financial interest above all else. One servicer boldly stated, "there is no expectation that the servicer will act in the interest of the consumer." Another servicer called directives by a Secretary of Education a "joke," and called Department of Education employees "pathetic" and "weak-minded."
In recent days, however, I've been looking at a borrower's case because her experiences are so typical and it presents another opportunity to peer into the predatory lending and servicing world.
She first borrowed in 1989 and by 2002 had accumulated over $80,000 in student loans in the FFEL (bank-based, government subsidized) loan program. In 2005, she requested and was granted a Direct (government) loan consolidation, but within a few days she was contacted by a private finance company specializing in loan consolidation that re-consolidated her loan back into the FFEL subsidized system. The company was one of several that operated "boiler room" telephone banks to contact borrowers to get their lucrative taxpayer subsidies back into FFEL for their own benefit. She now thinks, based on the sequence of events, that the company improperly obtained inside information about her first consolidation before it was ever fully completed, putting her at an information disadvantage when cold-called. In the trade, this became known as "two-step" consolidation, which was indulged by the Department of Education until 2007.
The benefits of the FFEL re-consolidation were nil, but the borrower remained in FFEL until 2020, when she consolidated back to the Direct program to take advantage of the repayment pause implemented during the Covid pandemic. Over those fifteen years, her career as a physical therapist had good and bad times, as did her personal financial situation. When unable to make loan repayments, she contacted her FFEL servicer (as told to do by the Department of Education) and asked to be put into repayment plans that lowered her monthly bills. Invariably, the servicer put her into forbearance instead, during which interest accrued and was capitalized to add to her principal loan balance. Once she was advised, incorrectly, that her loan was private and not eligible for any lower repayment options. On other occasions, upon inquiring about various income-driven options offered in the Direct program, she was mis-advised that she would not qualify for any of those, because she was in FFEL.
To date, over three decades, the borrower has made payments on her loans totaling nearly $70,000, but her principal is now almost $90,000. She is now temporarily disabled and sees no clear way she will ever be able to pay off her loans. Had she been properly advised of programs that cancelled loans in exchange for public service, she could have moved to Direct consolidation and worked in healthcare's non-profit sector, but she was always told she was not eligible. Had she been properly advised by her servicers with an eye toward what was best for her, not for them, she likely would be completely out of debt.
There are thousands, if not millions, of similar stories among student loan borrowers. Multiple investigations, audits, and reviews have corroborated this sorry situation.
This all has come about not only as a cost to borrowers, but to taxpayers as well. Federal taxpayers have unnecessarily paid billions in subsidies to the boiler room companies, making some of the owners billionaires themselves.*
The Secretary of Education needs to step up and use his powers, expressly provided by law, to modify these loans. My suggestion is to reset the loans at the original principal, less amounts repaid to servicers for any purpose, plus interest at the government's cost of money as an incentive to repayment. Following this statutory path would target student loan relief to those who are most likely to need it, remediate damages done by unsound program management, and reestablish a modicum of trust and accountability going forward.
It's time for the Department of Education to be tough-minded for a change, and not cower before the challenge to set things right for exploited borrowers.
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*Robert DeRose, as an owner of Student Loan Xpress, was subsequently caught up in a scandal that brought about the firing of the financial aid directors at USC, UT Austin, Columbia University, and Johns Hopkins University. Xpress also gave company stock to a regulator at the Department of Education, who was dismissed but whose decisions favorable to the company were never reversed. Cary Katz, an owner at College Loan Corporation, became a Las Vegas poker institution and a major source of political contributions to extremist groups and candidates.
