Cuomo's Financial Aid Probe Continues

Chronicle says:
"New York State’s attorney general, Andrew M. Cuomo, has sent settlement agreements to dozens of colleges across the country that he has accused of accepting kickbacks from student-loan companies.Colleges in New York State had until noon today to sign the agreements. If they did not, they faced the possibility of being served with subpoenas from Mr. Cuomo’s office. Colleges in other states were reportedly given a later deadline."

The settlement agreements included promises to disclose relationships with preferred lenders, stop taking kickbacks, and tell students they have a right to borrow from anyone, and--get this--a promise to reimburse students who took out private loans.

Young and Uninsured

New York Magazine, better known for its lists of the best plastic surgeons, devotes a cover story this week to the largest and fastest-growing group in the country without health insurance: Young people. Some good anecdotes in here.
"Those coming of age today are entering an economy where many of the old rules no longer apply. The paternalistic corporate culture of the past (full-time staff members supported for the long haul) has been largely replaced by a frenetic “permalance” model, the strivers and thrivers encouraged to jump from one company to the next as needed. There was a time when a health plan symbolized something—you were making it—but now benefits are scarce at many levels."

Generation Debt column from Bob Herbert

TimesSelect: One of the weirder things at work these days is the fact that we’re making it more difficult for American youngsters to afford college at a time when a college education is a virtual prerequisite for establishing and maintaining a middle-class standard of living.
...

This is a wonderful example of extreme stupidity. America will pony up a trillion or two for a president who goes to war on a whim, but can’t find the money to adequately educate its young. History has shown that these kinds of destructive trade-offs are early clues to a society in decline.

PS> Anne Thompson at The Campaign for America's Future at Tompaine.com :

While UCLA is leading the pack as a number two seed in the NCAA tournament, it is not faring nearly as well when it comes to tuition increases. Tuition at UCLA has increased from $3,683 in 2000-2001 to $6,522 this school year, close to doubling in just six years. That’s well above the sizeable 41 percent average increase in tuition at public colleges nationwide since 2001. How do those numbers affect the odds that hardworking students will earn college degrees and succeed in the competitive global economy?

The Philosophy of Debt

An interesting article in the Times today about Americans' love-hate relationship with debt.
Leonhardt argues:
"When somebody comes up with an innovation, be it consumer loans, credit cards or creative mortgages, it inevitably leads to an explosion of borrowing that includes a good amount of excess and downright abuse. After the abuse is cleaned up, though, most families end up better off." The mortgage crisis, he says, will eventually bring more of the same.

As a journalist, I'm obviously part of the century-old media tendency he describes, to "focus on the economic risks" of new forms of debt and higher debt. I see my role as being a necessary corrective to the prevailing mentality, which is no-big-deal, borrow now, pay later.

I agree that the debt liberalization-and-regulation thing is a cycle, but I'm not so sure about Leonhardts' argument that extravagantly easy money has improved Americans' lives. He says it would be much harder to buy a house or pay for college without low-interest loans. But many (including conservatives) argue houses and tuition wouldn't be so expensive without those loans.

Leonhardt also argues that credit cards have become a kind of safety net. "Just a generation ago, a temporary setback, like illness, divorce or job loss, was much more likely to force a family to take drastic measures than it is today. That’s in large measure because of debt, which allows families to smooth out the rough edges of their financial lives."
Progressive analysts also see credit cards as a safety net, but a pretty crappy one. As in the Demos report, The Plastic Safety Net. A generation ago, a family's "drastic measures" may have included actually spending less money, or Mom going to work. Now, those same setbacks--illness, divorce, job loss--are far more likely to lead to credit card debt, followed by bankruptcy. Is this progress?

Consolidation Borrowers Overcharged

Thanks to the commenter who pointed this out. According to a lawsuit filed today, a very stupid error in the regulations has caused 3 million holders of Department of Education consolidation loans to be overcharged by capitalization of interest, to the tune of hundreds of millions. The most frustrating part is the lack of communication and accountability in the system, says the lead plaintiff:

"Pfeiffer said she notified officials about the overbilling mistake at least 15 times over the phone and in writing. "Most of the time I was told that, yes, we realize that this isn't right, but that's the way the system is," she said."

Buying a House With Help from Your Parents

The Times looks at a common-enough Generation Debt experience (if your parents have the dough), and one a good friend of mine is going through right now (snip):

"A decade ago, younger New Yorkers were able to buy their own apartments. That’s because studios and one-bedrooms cost $150,000 or so. Now, first-time buyers are paying nearly four times that for the same apartments, according to data from the Real Estate Board of New York. Brokers say they see more buyers turning to their parents for help...

More buyers are turning to therapists to help them work through how they feel about depending financially on their parents when they have carved out independent careers and lives. Dr. Richard Shadick, a Manhattan psychologist who works mainly with 20- and 30-something New Yorkers, said that “a good portion” of his cases focus on the problems of seeking financial help from parents to pay for housing."

Hm. Maybe a case of psychologizing yourself to fit into a messed-up society?

New York Next State to Ask for Student Loan Sunshine

Attorney General Andrew Cuomo warned schools to immediately disclose their conflicts of interest in choosing preferred lenders:

“There is an unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest. The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law.”
Among the offenses catalogued are
Kickbacks, free trips to Pebble Beach, lines of credit, outright payments , and call centers so that when you call up the school's financial aid office, you actually get the lender.
Similar to stuff that's been unfolding recently in Pennsylvania.

Debt - The Moral Values issue of 2008

I had a piece on Tom Paine today relating the subprime mortgages crash to credit card and student loan industry practices.

"America is at another Enron moment. Rather than shedding a tear for the traders who pumped up this market, we are now required as a country to reexamine the responsibility that creditors have to borrowers—to make a sane assessment of the ability to repay, not merely to make as much money as they can out of the risk. It is high time to block predatory lending of all kinds by reinstating usury laws, limiting interest rates, penalties and fees that creditors can charge."

It's possible , with the range of reforms now cooking, that student loans might even lead the way. That would be a victory for the members Generation Debt!

Update: today the Times covered the angle I was looking for: the homeowners.

Lenders Seeking New Ways to Access Borrowers

Over the past week InsideHigherEd has detailed the relationship between MyRichUncle and Princeton Review as well as MRU's purchase of a company called Embark. Most of the buzz around the story has to do with Princeton Review's placement of MyRichUncle as the "preferred lender" on individual college pages. This elicited an angry response from some financial aid administrators who dislike the aggressive charges leveled by MRU on financial aid practices.

InsideHigherEd went on in a subsequent article to detail the purchase of Embark and how the companies seem to have gone out of their way to hide the relationship.

Of greater interest than the back and forth between banks and schools is why a private lender is purchasing a company with such a different institutional mission. One suggestion is that it provides them access to potential borrowers. This type of "synergy" is increasingly common in the world of student lending. Nelnet owns Peterson's a test prep company, Sallie Mae owns a company the does similar application and enrollment management work to Embark.

This type of vertical integration is aimed at identifying students earlier in the college process, gaining information and even building relationships to secure their lucrative loan business.

Did you hear the one about the student lender and the playboy playmate?

Well according to the AP it goes something like this. Andrew Yao, who is currently on trial for bankruptcy fraud, used to run Student Finance Corp., a student lender that specialized in making loans to students at trucking schools. They are being sued by Royal Indemnity, the company that financed SFC's loans. The AP writes,

In civil lawsuits, Royal has alleged that Yao operated SFC, which specialized in loans to students at truck driving schools, as a Ponzi-type scheme in which he conspired with schools to generate as many loans as possible, then fraudulently obtained new loans from Wilmington Trust (nyse: WL - news - people ), Wells Fargo (nyse: WFC - news - people ) and other institutions to pay down older loans that had gone into default.

All told Royal was left holding the bag for $380 million in SFC loans. In the process of pursing Mr. Yao, Royal Indemnity uncovered $669,000 in questionable payments by SFC to "A. Karlsen" for "aviation services." Turns out that A. Karlsen is actually Alexandra "Lexie" Karlsen Wolfe, Yao's mistress and former playboy playmate.

Yao's attorney claims that the obfuscation had nothing to do with an attempt to hide questionable SFC payments to Karlsen or two Las Vegas casinos where Yao had run up considerable debt. Rather he offers the heartening explanation that Yao was simply trying to hide his affair from his wife.

Lovely.

Update: Mr. Yao was convicted on Tuesday March 14th.

What do Ted Kennedy and President Bush have in common?

The Cleveland Plain Dealer's Steve Koff did a big piece this week on the changing political landscape for student lenders. Koff wrote another excellent story in 2005 about Sallie Mae and then House Education Committee Chairman John Boehner that's worth a reread.

Koff writes:

What do Ted Kennedy and President Bush have in common?

Both are making the multibillion-dollar student loan industry incredibly nervous.

Both want to slice the taxpayer subsidies the industry enjoys - subsidies that make student loans "the second most profitable business for banks, after credit cards," says Kennedy.

Both say students will benefit.

The President's call for a cut to the subsidies of private student banks in his 2008 Budget may well be the most significant proposal in his entire budget.

"It's a different game today," said Michael Dannenberg, director of education policy at a Washington think tank, the New America Foundation, and a former education adviser to Kennedy, who chairs the Senate education committee. "Not just because there's a Democratically controlled Congress, but because they've been triangulated by the president."

It is no secret that the federal government could more efficiently use its education tax dollars to help students. The lenders are gearing up for a major fight this year, likely retaining new lobby firms, media spokespeople and preparing for a new onslaught of campaign contributions. 2007 could look a lot like 1993 when then President Clinton proposed major reform to the loan programs that created Direct Student Lending.

Credit Card Practices to Make your Blood Boil

Senator Carl Levin (who kinda looks like a senator in a movie) is holding hearings on credit card billing practices :

“The credit card industry thrives on the confusion and powerlessness of consumers to both nickel and dime the average card-holder and to commit highway robbery of anyone who slips up even in the slightest,” said Levin.

The committee heard testimony from the CEOs of the top three credit card issuers in the U.S., as well an Ohio consumer, Wesley Wannemacher, who used a Chase Bank credit card in 2001 and 2002 to pay for approximately $3,200 in expenses for his wedding. These expenses exceeded the credit card limit of $3,000 by about $200. Over the next six years, he made payments toward the debt averaging about $1,000 per year, and as of February 2007, he had paid about $6,300 on his $3,200 debt. However, his statement showed that he still owed $4,400 – a total of $10,900 in charges for $3,200 in purchases.

Maxed Out in theaters now

Finally, a "Super Size Me" for the credit card industry. (The companion book is subtitled " Hard Times, Easy Credit and the Era of Predatory Lenders.") I am planning to catch this this week and I'll come back with a review; check out if it's playing near you.
Salon liked it:

"..."entertaining" in a dark, paranoid, confirming-your-worst-fears sort of way. The subject in question is credit-card debt, and by interviewing scores of experts and ordinary citizens Scurlock builds a damning incremental case that the old-fashioned banking system, in which credit was extended to those who were actually likely to pay the money back, belongs to the era of cave paintings and WordStar. In case the hair-raising interest rates and oh-so-clever hidden fees on your monthly hadn't clued you in, Scurlock argues that the U.S. economy is now based on ever-increasing and unsustainable levels of debt. "

9.5% Loophole Rises Again

Today a bunch of democratic lawmakers sent a strongly worded letter
to the department of Ed asking for more details about "the egregious misuse of a 1980 provision in the HEA by Nelnet, Inc., one of the nation's largest student loan lenders, resulting in hundreds of millions of dollars in overpayments to Nelnet by the federal government."

Apparently Spellings' department settled with Nelnet (and allowed it to keep $278 million in overpayments) without looking into exploitation of the loophole by other lenders, which has been going on for 10 years (!).

Oversight is good, but some actual ass-kicking would be even better.

ps. New York Times weighs in. "Advocates for students hope the letters may be the first step in a broader review of the loan industry, and hailed the pressure on the department."

Unpaid Internships in the Christian Science Monitor

Smart story. Tom Peter opens with a young woman who goes on food stamps to pursue an unpaid internship at a high-end, Harper's or New Yorker-esque magazine; in my very first Generation Debt column, I used a similar example.

Op-Ed on Mitch McConnell, the Pro-Creditor Senator

I was really flattered to be approached by David Donnelly at the Public Campaign Action Fund to co-write this op-ed.
Donnelly's group is all about following the money in politics, an exhausting, disgusting, yet exhilarating pursuit. In this case:

... the bankruptcy bill is one of the most egregious examples of pay-to-play politics in recent memory. According to the Center for Responsive Politics, the credit card and commercial banking industries have given $224 million to federal candidates and political parties since 1989, contributing 62 percent percent to Republicans and 38 percent percent to Democrats. The industry greased the skids for over a decade to be able to write preferential legislation into law.

Senator McConnell managed the floor fight to pass the bill, and he has received more than $535,000 in campaign contributions from the credit card and commercial banking industries. Just a few months before the bill's passage, McConnell raked in $60,000 from executives at two financial giants, UBS and Citigroup, at a New York City fundraiser. He was served well by his chief fundraiser, former banking lobbyist Alison Crombie Kinnahan.

Senator McConnell contends the bill was necessary to stop bankruptcy fraud. Yet bankruptcy lawyers and judges call it a "monumental failure,"adding red tape without limiting fraud.