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Saturday, June 09, 2007

Ind. Law - "Student-loan practices at IU draw scrutiny"; bankruptcy law tie-in

The Louisville Courier Journal today is running a story by Maureen Groppe recounting New York Attorney General Andrew Cuomo's testimony to the Senate banking committee this week, and tying it back to Indiana universities. Some quotes:

WASHINGTON — Raymond McKean said he encountered countless problems when trying to get student loans for his daughter without going through Indiana University 's preferred loan provider.

"The very first thing out of anybody's mouth was, `It's so much easier if you use Sallie Mae,' " said McKean, of Terre Haute.

When McKean insisted on going a different route, he said he was told the forms he had faxed hadn't arrived and was charged late fees he was told wouldn't appear if he had used Sallie Mae. One semester, his daughter's loan application was automatically sent to Sallie Mae, even though she hadn't requested it.

"They were trying to force me to Sallie Mae," McKean said. "You can't lose that many confirmed faxes."

Schools' preferred-lender lists are being scrutinized by Congress and other investigators digging into whether lenders and schools have gotten too cozy at the expense of students.

"The benefits to the lenders of being included on these lists are considerable," New York Attorney General Andrew Cuomo told the Senate banking committee this week.

Because students trust their schools, most will follow the school's recommendation without comparison shopping, he said.

Cuomo's investigation has uncovered instances of illegal loan steering to preferred lenders; revenue-sharing agreements between schools and lenders; gifts, trips and stock given from lenders to school financial aid directors; and university call centers staffed by lender employees. * * *

Sallie Mae, which employs 2,300 people in Central Indiana, handles 98 percent of IU's loans. [Jim Kennedy, IU's associate vice president of student enrollment services] said IU does not discourage students from using other providers, and the 98 percent rate demonstrates students' satisfaction with Sallie Mae, not the difficulty of using someone else. * * *

Stephen Clinton, president of the nonprofit Indiana Secondary Market for Education Loans, which was created by the General Assembly in 1980 to provide secondary loans to Indiana students, said his ability to compete against preferred - list lenders varies by school.

Borrowers who want to use the nonprofit have the most problems at IU and, to a lesser extent, Purdue, he said.

"Some of the larger institutions really dig their heels in to the point where they are stalling, stalling, stalling," Clinton said. "We have situations where documentation was lost repeatedly or claimed not to be received , and we know it was."

When Margaret Gleason's son enrolled at Indiana University-Purdue University Indianapolis last year, Gleason wanted to use the nonprofit , the same lender the family was using for other student loans. When the loan got hung up, Gleason was told it was because she wasn't using the school's traditional lender.

Here is information from a sidebar to the story:
PREFERRED LENDERS. The federal government is considering requiring colleges and universities that use preferred-lender lists to recommend more than one lender to student borrowers. Here are what some Indiana schools do:

Indiana University: preferred lender is Sallie Mae.

Purdue University: preferred lender is Sallie Mae.

Ball State University: uses the government's direct lending program, has no preferred-lender list.

University of Notre Dame: preferred lenders are Citibank Student Loans, College Board Education Loans, Chase Bank, Nellie Mae, Notre Dame Federal Credit Union and Wells Fargo.

Indiana State University: preferred lenders are Chase, Citibank, College Board, College Loan Corp., Edamerica, Educaid, Fifth Third Bank, First Financial Bank, Indiana Secondary Market, ISU Federal Credit Union, KeyBank, National City Bank, Old National Bank, Student Loan Xpress and SunTrust.

Yesterday, NPR's All Things Consdiered had a very good report on the student loan scandal. Listen to it here. The Marketplace Report, referenced in the NPR description, is also informative.

Inside Higher Education has a story from June 7th headed "Taming the Student Loan ‘Wild West’". Some quotes:

The market for private student loans has exploded in recent years, fueled by the growing gap between the price of attending college and the availability of federal grant and subsidized loan funds. And the competition among student loan companies to provide those non-federal loans, occurring at a time of little or no federal regulation, created an environment in which some questionable (if not illegal) marketing practices flourished.

That has been one of the starkest conclusions of the student loan controversy that has unfolded over the last three months. And at a U.S. Senate hearing Wednesday, a slew of witnesses — led by New York Attorney General Andrew M. Cuomo, whose own investigation has spurred inquiries in Congress and elsewhere — discussed the private loan market and what if anything Congress should do to increase oversight of it. Among the issues debated: Looking back, is there more the federal government should have done to regulate the private loan industry? And going forward, should federal laws or rules be changed to give federal agencies more authority to regulate the market? * * *

Cuomo reiterated his belief that the government already had the authority to regulate private loans, but he endorsed applying to the private loan sector toughened standards that Congress and the Education Department have proposed imposing on lenders and college officials in the federal loan programs.

The New York attorney general also revealed that his office was widening its investigation into private loans by looking at whether the criteria lenders use to award private loans discriminate against students attending less-wealthy institutions, much as mortgage lenders are sometimes accused of refusing to give loans to, or gouging, borrowers in poor neighborhoods. “There are civil rights and legal ramifications,” Mr. Cuomo said.

The other panelists who spoke Wednesday – including student advocates and officials from Sallie Mae, Bank of America and First Marblehead, three dominant players in the private loan industry – took varying stances on how much new regulation or legislation they thought was necessary. Bank officials generally said they thought that the changes being considered by Congress now, and included in the code of conduct that Cuomo has promulgated, were more than sufficient, and that greater transparency and public information about loan rates and terms would go a long way toward protecting borrowers.

But Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group, called for much more extensive changes, including changing personal bankruptcy laws so that private loans are discharged when a borrower enters bankruptcy. [emphasis added]

The tie-in to the bankruptcy law is particularly interesting. Noted consumer law expert Elizabeth Warren asks on the blog, Credit Slips:
Among the many wonders of the 2005 bankruptcy amendments is the provision that for-profit student loan agencies would get the same protection of non-dischargeability as government lenders. No one seems to know where the amendment came from and no one seems to recall any evidence of abuse that would cause these for-profit lenders to get treatment usually reserved for domestic support recipients and the taxing authorities.

In the wake of the scandals over loan company payoffs to college officials, higher education experts are taking a closer look at BACPA. * * *

Ultimately the nondischargeability decisions boils down to two simple policy questions: Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling? And why should a for-profit lender should receive the kind of extraordinary protection that is usually reserved for domestic support recipients or the government?

Politicians are scrambling to distance themselves from student loan companies, so it is no surprise that no one wants to claim credit for insert the nice bonus for for-profit student lenders into the bankruptcy bill. But if Congress is serious about investigating student lenders, perhaps the first legislative challenge to BACPA could be in section 523.

A link points to this SSRN paper by John Pottow of the U of Michigan. The summary:
Student loans are not dischargeable in personal bankruptcy proceedings in the United States. Why is that so? The answer to that question has remained largely unexamined in bankruptcy scholarship to date. Doctrinal and empirical pieces have sprouted up here and there (some quite good), but theoretical treatment has been sparse. This article seeks to help fill that void. It assembles various defensible theories (some more defensible than others) under which student loans should be treated as nondischargeable debts. It then takes a comparative perspective by looking at how the laws in various jurisdictions square with these theories. The United States rates poorly; its laws tend toward implementation of the least defensible theories and only tangentially embrace the more compelling ones. By contrast, countries such as Australia and New Zealand, which take an income-contingent approach to student debt default, are on the right track.
See also this article by Robert Shireman that traces the history of changes to the bankruptcy law treatment of student loans.

Posted by Marcia Oddi on June 9, 2007 09:14 AM
Posted to Indiana Law