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.