Biden's Student Loan Dilemma

February, 2022

Washington — The Biden administration is coming under much criticism for not following through on the president's pledge to cancel up to $10,000 of student loan borrowers' debt.  Inevitably, there is also much criticism from those who oppose any such cancellation whenever the subject is broached.

Complicating the situation is the looming date of May 1, when a repayment pause (due to the pandemic) expires.  Polls show a majority of borrowers unable to resume repayment and thousands or even millions more borrowers may go into default.  Those who wish the president ill are delighting in his dilemma:  extend the pause at taxpayer expense to aid borrowers indiscriminately, regardless of need, or enforce repayment for forty million borrowers in an election year, putting many individuals and families into financial distress.  

A solution is possible if it is better understood why so many borrowers are in trouble.  They might not be in trouble if they were only paying principal and interest on their loans.  Many borrowers are saddled with debt added by their loan servicers, often under dubious circumstances.  According to a multitude of audits, reviews, and investigations over the years, servicer misinformation, ineptitude, and outright deception are the sources of significant borrower debt.* 

Although servicers have been required in some cases to repay the federal government for their failures, there has been little effort to make borrowers themselves whole, to remediate throughout all federal student loan programs for borrower benefits denied.   

The Secretary of Education has the statutory power to modify loans for the good of the federal student loan program, in the nation's interest.  He should do so as remediation to borrowers for debts they should not have incurred, had the programs been conducted with statutorily required "sound management and accountability."  

He also has the statutory power to provide incentives to repayment, which he should use to help struggling borrowers, especially those whose debts could be reduced back to principal and interest.  Cancellation of servicer-added debt plus an interest rate cut could make enormous difference to millions of borrowers. 

The following three actions by the Secretary, or something similar, would de-fuse the situation and bring a significant measure of justice to aggrieved borrowers.  None requires congressional authorization or appropriation.    

1.  Modify federal loans by cancelling debt that has been added to principal and interest by loan servicers. 

2.  As the pandemic repayment pause ends, offer borrowers an incentive to get back into repayment by reducing their interest rates henceforth to the government's cost of money.  

3.  Give borrowers not in repayment up to one year of administrative forbearance to request a repayment option that they can afford with no loss of earned benefits, with interest set at the government's cost of money from the date of entering repayment. 

I've been looking closely at one individual borrower's problems with multiple servicers over the years.  ACS did not provide her with required documents; Great Lakes did not exercise due diligence over a consolidation; AES denied her requests for a repayment plan she could afford and gave her misinformation.  The complaints, so far, have fallen on deaf ears, despite clear evidence of what went wrong.  She would now be close to paying off her loans, had it not been for the servicers' errors of commission and omission.  

Recently, CFPB issued a statement warning against servicer "deception," which is exactly the right word.  The Bureau is right to do so, but warnings can only go so far.  Borrowers need and deserve remediation when they have been deceived.  This should not be done on a borrower-by-borrower or state-by-state basis, but across the board by the Secretary, because it is a widespread problem.    

Now is the time to do it, while the nation awaits a decision on what the Biden administration is going to do about the student loan crisis.  Targeted remediation, already authorized by law, will do much to move the discussion from repayment deadlines toward justice for abused borrowers.    

*Recent example from a January 14, 2022, settlement approved by the Department of Justice:  "...during the period from January 2006 through December 2016, CES knowingly submitted, or caused to be submitted, false claims to the Department of Education resulting from CES’s failure to make required financial adjustments to borrower accounts or packets of borrower accounts, following a request by a borrower to enter into a deferment or forbearance, [or] participate in an income-based repayment plan...." 



Why the Nebraska Environmental Trust Lawsuit

February, 2022

Lincoln — In early 2020, the Nebraska Environmental Trust (NET) board, a state agency, took several unusual actions that caught my attention.  

The board was preparing to make millions of dollars of infrastructure grants to for-profit companies in the ethanol industry, violating statutory prohibitions.  The board was coming up with the funds by cancelling grants for conservation easements, a proper, popular, and traditionally funded purpose.  It was proceeding to do this with fewer votes than necessary under its own bylaws.  According to a newspaper account, one of the board members cautioned his colleagues about private communications among board members prior to the vote, raising a possibility that these actions were being taken in violation of the state's open meetings laws.  

Those four red flags made me think back to my own work in Nebraska government many years ago, which involved making certain all payments that went through the fiscal machinery of the state were properly vetted, through the pre-audit process.  I wondered if in 2020 there were still such checks and balances, given recent, multiple findings of mismanagement in state government.  No one I talked to had any confidence that these grants would be stopped, as the board's plan clearly was developed with the governor's imprimatur.   His department heads and appointees were pushing it; he had previously replaced a board member to get another vote on the board against conservation easements, which he openly and vociferously opposed.    

That left a lawsuit by citizens and taxpayers as the only remedy.  W. Don Nelson, a friend and colleague of mine for many years and former publisher of the conservation-oriented, good government newspaper Prairie Fire, came to the same conclusion.  Together, we filed a lawsuit in 2020 against the Trust board. 

From the outset, I was also concerned that the proposal looked like a pay-to-play arrangement, at least with the ethanol industry and perhaps with opponents of conservation easements.  Ethanol interests had made large political contributions to the governor's campaign fund and would, under these grants to the ethanol industry, be getting back their investments many times over.  

I contacted the Nebraska Accountability and Disclosure Commission (NADC) to ask if Nebraska law requires disclosures in cases like this, which give the appearance of pay-to-play, especially since the political contributions continued well after the 2018 elections.  The answer:  yes, if in doubt, public officials are required to make potential conflicts-of-interest filings for the commission to review.  There had been no filings, however, despite two five-figure ethanol industry contributions to the governor during the very time he and his appointees on the Trust board were developing their proposal for millions of dollars in grants to the ethanol industry at the expense of NET conservation grants. 

By 2021, the lawsuit proceeded to a stage in which depositions and discovery could soon be taking place, to determine where the ethanol grant proposal had come from and how much it had been discussed by the Trust board and others privately, before the public became aware of it.  Because the proposal had been advanced most prominently by Jim Macy, director of the Nebraska Department of Environment and Energy, he would have been a primary focus.  

His department, however, became embroiled in 2021 in a massive environmental catastrophe involving pesticide-treated grain at the AltEn ethanol plant in Mead.  The Trust board quickly and quietly dropped the ethanol grant proposal — bad optics was likely a factor — but in so doing it prevented us from getting to the bottom of who and what was behind the proposal. 

Dropping the ethanol grant proposal also deflected obvious questions as to why the NDEE director had been spending his time advancing ethanol industry interests rather than properly regulating them.  And AltEn was an unmitigated environmental disaster involving not only NDEE's failure to protect the public, but failures by other agencies represented on the Trust board as well.  Steven Wellman, the director of the Department of Agriculture, and Gary Anthone, director of Public Health, both had separate regulatory authority over AltEn but did little to explore how their respective departments could face up honestly to the dimensions of the disaster.   

Because the Trust board had dropped the ethanol grant proposal, we had our day in court only on questions of board compliance with its own bylaws and with the state's Open Meetings Act.  When the judge's rulings soon pointed toward our ultimate victory at trial, settlement talks began.  When the board finally demonstrated it would henceforth follow the rule of law procedurally, we settled for reimbursement of attorneys fees pertaining to those issues. 

Although the lawsuit succeeded in that it stopped the illegal ethanol grants, enforced the Trust board's compliance with the Open Meetings Act, and required reimbursement of attorney's fees in settlement, it did not resolve the question of why it took citizen action to bring this about.  Citizens should not have to step into the breach to see that state government functions properly.

Going forward, the success of the lawsuit should encourage others to do the same to protect public interests and enforce the rule of law.  Ideally, agencies will take note before that becomes necessary.  

In other words, Trust board members got caught.  Will they now go straight?  

There's not much indication that they will.  A dark cloud hangs over Nebraska state government in that no parties so far have acknowledged an understanding that they must be held accountable for the lows to which the state has sunk both substantively and procedurally in these matters of public health and protection of our natural resources.   

Moreover, it is not encouraging that bills have been introduced in the legislature to place even more state government boards under greater control by the governor.  It is likewise not encouraging that there have been no investigations of linkages between political contributions and favorable government treatment of the industries from which they came, both in terms of look-the-other-way regulation and outright paybacks in subsidies.  The NDAC's growing reputation as toothless seems well-deserved.  

Finally, there has been no adequate explanation as to why state agencies have repeatedly tried to excuse themselves from responsibility for an environmental disaster by claiming lack of authority, only to find they indeed had the authority because their own records show they actually, affirmatively permitted it all to happen.  Conversely, the very same agencies had no hesitation to grasp at expansive authority in the contemporaneous scheme to fund millions in ethanol grants from termination of conservation grants. 

The hypothesis waiting to be investigated is that the state agencies have all along been oriented toward reciprocating political favors, rather than doing the job expected and required of them by citizens and taxpayers, under law.  



Loan Servicer Victims

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.  


*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.  



"Thank You for Your (Pandemic) Service"

February, 2022

Washington — Knowing I am a veteran, occasionally people say to me "thank you for your service."  My reaction is always a mixture, in roughly equal parts, of acknowledgement and temptation to reply, "You don't know the half of it."  

My service is what a citizen can be called upon to do for his country.  It involved putting aside some of my rights and beliefs for a cause my country was trying to achieve.  It involved putting myself repeatedly into danger in a combat zone, on a sea-tossed powder keg of a ship, one of several named after active volcanoes for their tendency to blow up.   

These days, the people who should be thanked for their service are hospital workers, for the deadly dangers they encounter treating Covid patients.  We can all do our part to help them by making small sacrifices — vaccinations, masks, distancing — to beat back the disease and keep it from mutating into endless variants.  I view such sacrifices in the same sense as my naval service: a citizen's obligation when called upon.  And in a doubtless better cause.  

That's not how a sizable number of my fellow citizens see it, however, asserting that it is somehow more honorable to place ill-defined individuals' rights over individuals' responsibilities, even if it endangers hospital workers and many others.  The assertion of these rights, whatever they are imagined to be (it's often hard to tell on what they are based), is being manifest in ways that are endangering our health care systems and even the cohesiveness of our country itself.   

So when anyone thanks me for my service, I hope that they are giving of themselves in the service of fighting the pandemic, in the here and now.  If so, I'll thank them back for it, many times over.  They may be saving my life and the lives of my loved ones, not to mention protecting our whole society.