New Taxpayer Burdens from Student Loan Deceptions

July, 2022

Washington — Deceptions of borrowers by lenders, accompanied by loan servicer misrepresentations, have long plagued federal student loan programs.  The extent of the abuse is becoming more apparent as the nation attempts to find solutions to its $1.7 trillion (and growing) student loan crisis.  

At what point should deceptions and misrepresentations be investigated as fraud against both borrowers and taxpayers, who wind up paying for it?  That is a question raised by looking at an actual case, brought to my attention earlier this year by an Oregon borrower who has shared her extensive loan paperwork with me.  

The borrower first took out bank-based federal guaranteed loans (FFEL) in 1989.  She obtained a four-year degree from a reputable college and did additional graduate study, borrowing a total loan principal of $78,096.  Over the following years, like many borrowers, she experienced occasions when she could not afford her monthly payments and was placed by her loan servicers into deferments, then into forbearances, which capitalized interest.  She was conscientious and never went into delinquency or default.

To be able to handle payments of principal, interest, and rapidly growing capitalized interest, she asked her servicers for an affordable repayment plan based on her income, but was turned down on grounds that she was not eligible.  Her servicers offered more forbearances instead, which drove her more deeply into debt.

She then undertook a close examination of her loan history to determine why servicers would not place her into an affordable repayment plan, for which she rightly thought she was eligible.  She was perplexed at what she found.

She had consolidated her loans in 2002 with Vermont Student Assistance Corporation (VSAC), which was also her loan servicer, then re-consolidated in 2004 with the federal Education Department's Direct Loan (DL) program, with servicing contracted to Affiliated Computer Services (ACS).  But that consolidation was never finalized.  Although DL paid off VSAC for the consolidated loan, she never received a DL repayment schedule.  Instead of a DL schedule, on which she was to begin paying, she was contacted by Goal Financial, a private direct-marketing consolidator, which sent its own consolidation paperwork to her.  Because Goal Financial clearly knew about her DL consolidation — just how is a key question — and advised her how to complete its own paperwork referencing it, she was deceived into thinking that what she got from them was still part of the DL process.  But what she signed actually terminated her DL consolidation and put her back into the FFEL program with Goal Financial as her lender.  

Goal Financial, which paid off DL, then began receiving her payments along with lucrative federal taxpayer special allowance payments that supplemented them.  

Goal Financial contracted with ACS and Great Lakes as servicers but after a few years the servicing of her loan was moved to AES/PHEAA.  That servicer, notorious for mismanaging federal contracts, misrepresented her eligibility for an affordable repayment plan, telling her incorrectly that FFEL borrowers could not participate.  In 2020, the Oregon borrower re-consolidated into DL to take advantage of a repayment pause due to the Covid pandemic.  DL paid off Goal Financial fully for the loan, including all the interest capitalization the borrower incurred because she had been denied benefits to which she was entitled.  The payoff amount to Goal Financial was $89,711, despite her payments of $68,239 over thirty years.  In other words, compared to the principal she borrowed, she was $11,615 worse off despite paying $68,239 toward the original debt.  

Thanks to a recent (and wise) decision by the Education Department, borrowers illegally denied their benefits have been offered "income driven repayment waivers" so that they can be placed back into the programs they could have participated in, but for deception and misrepresentation.  In the Oregon borrower's case, the balance of her loans will be cancelled to the extent she has been in repayment for more than the number of years required under the plans she was eligible for, but denied.  

But why, federal taxpayers might ask, shouldn't the payoff to Goal Financial be reduced to take out the illicit profit it made from its original deception and its servicer's misrepresentation?  Why shouldn't Goal Financial be investigated for the deception through which it received federal special allowance subsidies during the period from 2005-2020, and for how much the servicer illegally added to the borrower's principal that was paid to Goal Financial in 2020? 

The borrower has taken up these questions of deception and misrepresentation with the Oregon attorney general, who has established a consumer protection unit dedicated to student loan abuses.  When the Oregon AG looks into this case (and likely many, many more cases like it), here is what that office will find.

  • The story of Goal Financial goes back to the 1990s, when Marcus Katz defrauded federal student aid programs in Georgia and was debarred for it.  After the debarment was lifted, he and his sons Ryan and Cary Katz, along with former Congressional aide Mark Brenner and others, formed private loan consolidation companies in San Diego.  They used direct marketing techniques, including cold-calling telephone banks, to entice borrowers into consolidating their loans into Goal Financial and College Loan Corporation. They also used mail with letterheads strongly resembling the seal of the U.S. Department of Education. They were enormously successful, financially.  But their success was due in part to privacy breaches, through which they obtained the names of borrowers from credit rating agencies, loan servicers, and perhaps even the Education Department itself, which in 2005 shut off lender access of its student loan data files temporarily out of concern the access was being misused.  Goal Financial was cited for unspecified privacy breaches by the FTC in subsequent years.  
  • The direct-marketing lenders developed a process known as the "two-step consolidation" through which borrowers who thought they were getting one consolidation quickly wound up with another.  The "two-step" expression is still used guardedly among servicers and loan administrators as the suspected reason that documents are missing from paper trails.  The Oregon borrower who was deceived into a Goal Financial consolidation never received a DL payment schedule, most likely because it was never created, allowing time for the San Diego phone banks to call her first.  The servicer ACS may have been complicit, as it had access to DL records and a relationship with Goal Financial.  Or Education Department employees themselves may have been involved, actively or passively.  No one is eager to talk, other than to say that many records involving "two-step" have since been purged.  
  • The attempt by the Oregon borrower to follow paper trails in this case, often without success, raises questions in itself.  The Goal Financial loan was apparently owned at different times by one or more eligible lender trusts, but it is hard to determine, because trust names and numbers do not match.  The loan may have lost eligibility for its federal guaranty at one point, due to "marketing errors" as cited in SEC reports, but no information is available to the borrower as to what those marketing errors were, who committed them, who took away the federal guaranty, or who restored it.  

At both state and federal levels, student loan borrowers have consumer protections.  Oregon consumer protections are statutory, specifically citing student loan borrowers.  At the federal level, a presidential executive order gives borrowers a right to "actionable" information about their loans.  In this borrower's case, she has succeeded in achieving eventual cancellation of her remaining loan balances under the IDR waiver process, but too many questions remain unanswered to stop there.  

The Oregon AG in particular needs to investigate further what is already known about this case, because there may be thousands or even hundreds of thousands of cases just like it.  Time is of the essence, because there is a history of repeated attempts at the federal level to pre-empt state investigations of federal student loan programs, and more may be in the offing.

This is also a matter that should be taken up by the Inspector General at the U.S. Department of Education, not only from the consumer protection standpoint, but to determine if lender deceptions and servicer misrepresentations constitute fraud against taxpayers, who are paying lenders and servicers questionable sums likely in the billions of dollars when paying off loans through consolidations, federal guaranties, or under various loan cancellation efforts.  These are amounts that were never incurred by borrowers to pay for education, but were added to their loan balances by deception and misrepresentation, and absolutely should not be a liability of taxpayers. 


Brothers, Cousins, Friends, and Enemies in the Civil War

July, 2022

Washington — Climbing high into the branches of one's family tree and brushing aside foliage can reveal great surprises.  I did so recently and found hiding there more than I ever expected to know about the 14th Virginia Cavalry, a Confederate regiment in which two of my (time-removed) cousins served in the Civil War.
I knew my second great-grandfather Peter B. Wimer and his brothers Aaron and Ephraim Wimer had been Confederate infantry soldiers, but not that their first cousins Andrew J. Wimer and Cornelius T. Wimer had been soldiers in the ill-fated 14th Cavalry.  The cousins enlisted in 1862 from Highland County, Virginia, which, along with Augusta and Rockbridge counties, provided the men and horses for the regiment's Company C.*  

The 14th left a mostly dismal record fighting up and down the Shenandoah Valley, into West Virginia, Maryland, and Pennsylvania.  Hundreds of its men and horses were captured in 1862 at Sinking Creek in Greenbrier County, West Virginia, by a small Union force that did not fire a shot.  Some of the 14th escaped, but some died in a Union prison.  In 1863, at Gettysburg, the 14th provided each soldier only ten rounds, so the regiment soon retreated to the rear of the battle.  In 1864, the 14th was unable to prevent the burning of VMI at Lexington by General David Hunter's Union forces.  Their presence, however, led a confused Hunter to retreat deep into West Virginia, which opened the Valley to Confederate General Jubal Early's foray into Maryland, Pennsylvania, and almost into Washington, DC. But in the process, drunken soldiers of the 14th burned the town of Chambersburg, Pennsylvania, an act that was opposed by many in the regiment itself, who tried to put the fires out.  The 14th fought in 1865 at Appomattox until the cease-fire when Lee surrendered, but only one last soldier from Company C was present at the end. Death, disease, and desertion had greatly reduced the ranks.  

Elsewhere among the family tree branches appears another cousin, who actually fought against the 14th throughout the war.  David Hunter Strother, also known by his pen name, Porte Crayon, was a Union cartographer and eventually a brevet general, despite his Virginia roots.  He is a cousin to me through the Strother line, not the line of Wimers against whom he fought.  

But David Hunter Strother's own war record was not what he wanted it to be, according to his widely-read diary.  He deplored many of the Union army's actions in the Valley, even while chief of staff to the general who perpetrated them.  Although he favored the burning of VMI because it taught treason, he said, he often intervened to stop other burnings and hangings.  He was not alone; his Union army colleague General George Crook was of like mind in taking a dim view of General Hunter; both were pleased to see General Philip Sheridan take Hunter's place.  Strother spent the rest of the war in Baltimore, glad to be out of it.**

Military records give a glimpse of what brothers Andrew and Cornelius Wimer experienced in Company C of the 14th Cavalry, as privates.  In going through records, I came across names from another tree I've been researching, the Vess family, the branches of which overlap with the Wimers during the Civil War.  Brothers Samuel A., John T., and William A. Vess were also privates in Company C, from Rockbridge County.  Very likely the Wimer brothers and the Vess brothers were well-acquainted.

Apparently all five of them were at Sinking Creek in 1862, because records show that Andrew Wimer and John T. Vess were both captured by the enemy and sent to military prison in Alton, Illinois.  Andrew Wimer was later released as part of a prisoner exchange.  John T. Vess, however, did not survive a smallpox outbreak at the prison and is buried in the Confederate cemetery at Alton.  

Various accounts of the raid at Sinking Creek suggest that all five were captured at first, but twenty-two Union soldiers could not handle the hundreds of Confederates they had taken.  The Union tried to march the Confederates through extreme cold and a snow storm, stopping to light bonfires to warm men and horses.  All but about 100 escaped.  Escapees probably included Cornelius Wimer and Samuel and William Vess.  

What else these cavalry privates endured is unknown, except that four of the five survived the war.  Samuel and William Vess went back to Rockbridge County and raised families.  

Cornelius Wimer is recorded as being AWOL at one time during the war, and Andrew Wimer deserted before coming back.  This was not uncommon.  Both returned to Highland County after the war and had large families.  Cornelius Wimer's son Charles, nephew of my second great grandfather Peter B. Wimer, migrated to Nebraska before 1885, as did his uncle.  Charles lived in Ashland, his uncle lived southeast of Ceresco, according to the 1885 Nebraska census. 

Some of the Strother family also moved to Nebraska, although spelling errors changed their names to Strawder.  Wimers and Strawders, once enemies, lived among each other in Cass and Lancaster counties for several years.  We know they socialized, and even intermarried, but we don't know what they talked about.  
* Knowledge of Peter B. Wimer's time in the Confederate army is based on an uncorroborated 1890 census of veterans, when he was living in Nebraska.  Documentation is better for Aaron Wimer, who fought in the 62nd Infantry and for Ephraim Wimer, who fought in the 25th Infantry.  The 14th Cavalry also attracted my cousins Robert and Jacob Phares from Pendleton County, WV, adjacent to Highland County, VA, but records of their fate with the 14th are too sketchy to draw any conclusions about their time in the cavalry.  

** After the war, Strother was adjutant general of Virginia and restored VMI.  Crook was sent to Nebraska where he helped the cause of Indian rights in Standing Bear v. Crook, and where his house still stands on the Fort Omaha campus.   


Constitutional Rights Riddle

June, 2022

Washington — It was a right not mentioned in the original Constitution or the Bill of Rights.  It was not considered when the Fourteenth Amendment was adopted in 1868.  There is no history and tradition behind it.  The Supreme Court's jurisprudence on the subject dates only from the 1970s.  What is it?

The answer is not abortion, the Court's ahistorical analysis in the Dobbs decision notwithstanding. 

The answer is unregulated corporate political contributions, determined in 2010 by the Court in the Citizens United case to be accorded the same free speech rights as human persons.   

If Dobbs overrules Roe on abortion, according to so-called originalist interpretations, then Citizens United on corporate contributions should likewise be overruled, because the originalist case for overturning it is actually stronger.  

Here is an academic treatise on the history of the dubious right of unregulated corporate political speech:

[W]hen the First Amendment was ratified in 1791, we find that business corporations were understood to have the exact opposite relationship to society as Lockean-Jeffersonian human beings. Whereas human beings were endowed with inalienable rights that society could not take away, corporations had only such rights as society chose to give them, as illustrated by Chief Justice Marshall’s iconic decision in Trustees of Dartmouth College v. Woodward. In 1791, corporations had to be specially charted by legislatures and were bound by the ultra vires doctrine to pursue only the ends for which they were chartered. Based on this history, we see no basis to contend that business corporations were thought to possess the same speech rights as human beings and that society could not restrict their ability to participate in the political process....

[W]hen the Fourteenth Amendment was ratified in 1868 to see if the understanding that corporations were fundamentally different from human beings had changed. Although by that time the movement toward general chartering of corporations had emerged, the historical understanding of the corporation’s relationship to society remained the same, and corporations were still subject to the ultra vires doctrine and other tight restrictions on their scope of operations. Though the law had recognized that corporations’ property rights had to be respected for them to function as intended, corporations were not accorded the liberty rights, such as speech, of individuals. And stockholders used the ultra vires doctrine to restrict corporate political and charitable spending. Likewise, as soon as corporations began to involve themselves in the political process, legislative regulation of the conduct emerged with no concern about whether those restrictions were inhibited by the First Amendment. As a result, we find no basis to conclude that the adoption of the Fourteenth Amendment represented a decision to accord corporations free speech rights akin to those of human persons...

[U]ntil the 1920’s, First Amendment law itself was largely undeveloped and it would not be until the 1970’s that the Supreme Court first examined the First Amendment implications of campaign finance laws.

The era of the drafting of the Fourteenth Amendment is of special interest.  When I was a graduate student in college, I gave a seminar presentation on Roscoe Conkling, a disreputable character of the second half of the 19th Century who represented corporate interests before the Supreme Court.  He told the Court an incredible lie about what happened at the drafting of the Fourteenth Amendment, how he personally saw to it that corporations would be given the same liberties as natural persons.   The story is well told in a 2018 article in The Atlantic.  

Conkling's legerdemain should become an exhibit in litigation to overturn Citizens United, a regrettable decision by a credulous Court that opened the floodgates of corporate money to political campaigns, the results of which are now apparent, even to the extent of threatening our nation's democratic governance.