Student Loan Bubble Forces Yale, Penn To Sue Their Own Students

Tyler Durden's picture

We have not been shy about exposing the massive (and unsustainable) bubble of credit being blown into the economy via Student Loans from the government. We have not been afraid to note the dramatic rise in delinquencies among these loans - and the implications for the government. However, as Bloomberg reports, it appears the impact of this exuberance has come back to bite the colleges themselves. In what can only be described as a vendor-financing model, the so-called Perkins loans (for students with extraordinary financial hardships) have seen defaults surging more than 20%. The vicious circle, though, has begun as the ponzi of using these revolving loan funds to 'fund' the next round of students is collapsing thanks to the rise in delinquencies. Schools such as Yale, Penn, and George Washington are becoming very aggressive at going after delinquent student borrowers. While financially hard-up graduates complain of no jobs, the schools are not impressed: "You could take a job at Subway or wherever to pay the bills ... It seems like basic responsibility to me," but perhaps that is the point - avoiding responsibility is seemingly rewarded in the new normal.


Via Bloomberg,

Yale Suing Former Students Shows Crisis in Loans to Poor


Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates.


The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship.


Yale, Penn and George Washington University have all sued former students over nonpayment, court records show. While no one tracks the number of lawsuits, students defaulted on $964 million in Perkins loans in the year ended June 2011, 20 percent more than five years earlier, government data show. Unlike most student loans -- distributed and collected by the federal government -- Perkins loans are administered by colleges, which use repayment money to lend to other poor students.


“If you borrow to go to school, it may not be just the government that ends up coming after you if you can’t pay,” said Deanne Loonin, an attorney with the National Consumer Law Center, a nonprofit advocacy group in Boston. “We offer credit very easily.” If the student doesn’t benefit financially from the education, “the government or the school comes after them very aggressively.”


Perkins Pot


The increase in the amount of defaulted loans among poor students comes as President Barack Obama says he wants to expand access to college for working-class families and increase funding for the Perkins program. Under his proposal, the pot for Perkins loans would increase to $8.5 billion from about $1 billion. The Education Department would service the loans instead of colleges.


Aaron Graff, a farmer’s son from Denver, graduated from George Washington in 2010 with the help of $62,500 in scholarships over two years, according to his financial-aid award letters. He defaulted on $4,000 in Perkins loans.


Graff, 30, said he hasn’t been able to find a full-time job. He earns $800 a month from teaching high-school equivalency courses and restores basements for extra money. He said he is trying to pay off other student loans first because they were co-signed by his parents.


“I live on the bare minimum,” he said. “It’s not like I’m defaulting on my student loans to live the lavish life. I’m defaulting on my loans because I really don’t have it.”




Student Obligations


“Perkins loans are issued from a revolving fund, so any monies recovered through litigation increase universities’ ability to help other students with education costs,” Candace Smith, a spokeswoman for George Washington, said in an e-mail. The university doesn’t comment on specific lawsuits, she said.




“You could take a job at Subway or wherever to pay the bills and that’s something you need to do if you have agreed in taking a loan to pay it back,” McCluskey said. “It seems like basic responsibility to me.”


The interest rate on Perkins loans is 5 percent, and students get a nine-month grace period after leaving school or graduating. In the 2007-2008 academic year, 64 percent of Perkins loan recipients reported parental income of less than $50,000, according to Mark Kantrowitz, who runs, a website on educational lending.


College Costs


With college costs climbing faster than the rate of inflation over the past four decades, students have taken out more loans, swelling outstanding education debt to $1 trillion, more than what Americans owe on their credit cards.


The University of Pennsylvania filed at least a dozen Perkins lawsuits last year, according to court records. Penn, based in Philadelphia, gave out more than $8 million in Perkins loans in the year ending June 2012, according to the school.




Promissory Note




Penn refers loans to a collection agency when they have been delinquent for 120 days. Michelle Brown-Nevers, an associate vice president, declined to discuss thresholds because she said she didn’t want to reveal collection practices.




Yale is suing Elizabeth M. Triggs, who studied there between 2001 and 2006 and signed five promissory notes totaling $8,255 under the Perkins program, according to a filing in Superior Court of New Haven last year.


Unpaid Perkins




Students who take out Perkins loans aren’t eligible for government income-based repayment plans when they run into financial trouble, unlike borrowers from the more popular Stafford loan program used by many middle-income families. Such repayment plans let students with high debt relative to their paychecks make smaller payments over time. Colleges can work with Perkins students to develop individual plans.


Financial Counseling




The federal government also lets universities and debt collectors charge higher collection fees than Stafford when they pursue a Perkins debtor.


On the first attempt, schools can charge 30 percent of loan principal, along with interest and late fees. They can charge 40 percent for the second effort and an additional 40 percent on litigation, according to the Education Department.


The fees are higher than the 25 percent allowed for government-backed Stafford loans because the lower value of the Perkins ones makes them less appealing to collection agencies in terms of commissions, said Dan Madzelan, a former Education Department official.


Not Practical


The University of California system tries to use its own personnel before suing Perkins debtors because balances are relatively small, said Coolidge. When borrowers don’t have assets or income, winning a judgment doesn’t actually result in collecting the money, she said.


“It’s not that we wouldn’t do it,” she said. “It’s not that practical.”



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SilverTree's picture

Fucking brilliant. 

redpill's picture

You get penniless students to borrow a hundred grand from you to take your overrated, overpriced college courses.  Student graduates and can't find a job even with a fancy piece of paper proclaiming he's brilliant.  He has no money to pay you back.  Does he have a problem?  No, overpriced "higher education" school, YOU have a problem!

fourchan's picture

one kind of education leads to another. lol debt slaves

Peter Pan's picture

Perhaps the students need to sue Yale for accepting them into courses for which there are no real job prospects.

francis_sawyer's picture

Hey MDB... Is it 'doomer libertarians' fault that your IVY LEAGUE heroes are deadbeats?

dwayne elizando's picture

Why don't they just sign the graduates up for disability and EBT before they leave college. Problem solved.

Pure Evil's picture

Just think, if these hallowed Ivy League graduates were to take jobs at Subway or whatever, they would be putting some poor undocumented illegal alien out of work.

If that were to happen, they'd have to return to their home countries, and then who'd vote for Obama and the Democrats.

yogibear's picture

Subway seems appropriate for a number of those PhDs in the Federal Reserve.

MilleniumJane's picture

I wouldn't trust those bastards to make a sammich for me.

mr_T's picture

Univ colleges are greedy leeches.
200 usd for a text book... What a scam the laws of physics or math etc. has not changed in centuries yet you are forced to constantly buy new books. Then they preach about conservation and environment.
You get a degree in worthlessness. I know a Harvard MBA that can't get a job..crazy

mr_T's picture

Univ colleges are greedy leeches. 200 usd for a text book... What a scam the laws of physics or math etc. has not changed in centuries yet you are forced to constantly buy new books. Then they preach about conservation and environment. You get a degree in worthlessness. I know a Harvard MBA that can't get a job..crazy

Freddie's picture

Hope & Change.  Loads of idiots from Yale and the Ivy League would vote for him even as he was having them shot.

Jay_Son's picture

"avoiding responsibility is seemingly rewarded in the new normal."  Ya, well, fuck you.

I didn't go to school to become a slave at a fast-food restaraunt.  If the government wants to subsidize schools and degrees with no economic value, or lenders want to make loans that can never be repaid, then non-payment of loans is EXACTLY what they, and you, should expect.

LasVegasDave's picture

slave at a fast food restaraunt? 

Did you major in PE or sociology? 

Did you borrow money for your degree?

stupid slaves like you are grist for the mill. 

hamstercheese's picture

Is this one generation speaking to another? Shame on the WWII and subsequent generations that believed they should have been given everything.  Free health care. Social Security. Pensions, civil or private. Their votes were bought with borrowed money, and the debt gets transferred to their children..and the slinkly continues down, step by step, all the way the generation above tells the generation below 'get a college education, buy the biggest house you can buy' - brainwashed, all brainwashed, and now these students of today are stuck with all this debt they were told was 'good' debt - "Think education is expensive? Try ignorance." Debt injecting institutions don't have a monopoly on can get one on your own, debt free.  Read, write, converse, study, travel.  There is an awakening of the silent young masses here and they will be endorsed by people in my generation (baby boomer/Gen X cross over).  Student loans are not forgivable, the banks got Clinton to pass this in the late 90's.  Serfdom by design through debt ignorance and delusional ideals enjoyed by their parents and grand parents. Shame on us, we told these kids what to do through the power of suggestion and as they awake into adulthood they are realizing they have been lied to by the institutions they trusted the most.  I can only hope they overthrow this social structure addicted to the heroin of a debt based currency.

Clayton Bigsby's picture

This is an awesome idea actually.  I can all but guarantee you it happens...

yogibear's picture

Like the quote from the Good Will Hunnting movie,


Will: See, the sad thing about a guy like you is in 50 years you're gonna staht doin some thinkin on your own and you're gonna come up with the fact that there are two certaintees in life. One, don't do that. And Two, you dropped a hundred and fifty grand on a f***in education you coulda got for a dollah fifty in late chahges at the public library

SkottFree's picture

Do the offer Walmart Greeter/Burger Flipper PHD's?

smlbizman's picture

why would anyone think, that lending money to people, that are so stupid they are trying to borrow your money....will ever be smart enough to pay it back.......

Caveman93's picture

That's a high price to pay just to be an "Obediant Worker"


RIP George Carlin.

Titus's picture

True story:

Germany 10 years ago. 1 girl in a group of approx 15 students doesn't go to the university. She was sneered at by her educated friends because she wasn't part of the smart group. 

Fast forward to now. Everyone but this girl graduated from the university and now are slaving away as employees. The girl, however, opened up her own business (legally assisting farmers with growing plants hydroponically) and has her gross sales of over 1 million euro a year. 

Slaves are educated in how to be slaves. Education kept everyone in this group from being independent. 

ParkAveFlasher's picture

Nothing like a good Sandusky'ing for alumni that don't pay up.

I hear ham-slapping in the showers.  Whatever you do, don't peek!

Peter Pan's picture

As Mark Twain once famously said, "I never let my schooling to get in the way of my education."

Pareto's picture

big +1.  This is fast becoming the new normal.  The benefits of higher education aint what they used to be, but, the EXPECTATIONS sure are.  A colleague of mine teaches finance.  they just had a mid-term.  The test essentially cornered their knowledge on the time value of money sorts of questions.  One question was a very realistic all too common problem of estimating how much a person would have to save for a 10% down payment on a home that is inflating in price at 1.5% per annum, given that whatever annuity the person takes on, it will fetch them 9%.  Very real, tangible problems.

At any rate, 1 kid scored 93 (bravo).  His class average was 58.  Many of them failed (< 50).  The test was fair, but, students didn't think so.  Instead they elected to bitch and complain that "well, we thought we were just going to calculate questions" (i.e, he gives them the formula sheet and 3 of the four variables, they solve for the unknown).  So, forget about actually solving a problem, students instead are more interested in memorizing, doing and thinking as little as possible.  My colleague told them "we have spread sheets for that."  Good for him.  Don't apologize.  If these students are aiming to be next year's budget directors and finance ministers, then the wake-up call is probably the best thing they can get from you, I told him.  And for sure, I told him, "you can tell them that they are of no use to me.!"

If these same kids did a time value of money analysis on their expected return once they left school, they'd quickly learn that the present value of tomorrow's expected income < future value of their education costs instead invested at say 5%.  Maybe they would evaluate their prospects differently like the girl above did.  At any rate, I asked him whether its geting better or worse over the years.  "Definitely worse."  We both recalled when we flunked an exam (and god knows I flunked my share), the last thing I did, was blame somebody else, LIKE THE PROFESSOR!  You always knew that it was you, and only you, that fucked up.  Nobody else.

But, its like i told my wife the other day, when stuff is free (i.e when the government is paying for it and you are not), then you get what you pay for - a whole lot of nothing.

Ballin D's picture

I agree with your overall point but I just wanted to note that I doubt that example is representative of most finance students. Even the HR majors at the state school I went to have to do more convoluted TVM problems by the first test in intro to finance (all bus. majors must take some fin/econ/acc/mgmt, etc). A few sorostitutes cry to faculty but nothing gets done and they have to retake the class until they pass or go get a degree in art.

Snoopy the Economist's picture

Titus: That's great that she did well - but how is that going to solve the problem for millions? Bill Gates dropped out of college to start MSFT - is that the speech that guidance counselors should give in HS? The solution is much lower cost education - stop paying administrators ridiculous $ and start rewarding hard work again - destroy welfare to get ppl off their a$$es.


Just saying...

de3de8's picture

No, stop making the money so easily available, no different than the housing debacle.

MeelionDollerBogus's picture

It's more than just cost of education, it's quality. Many more should try to be innovators. If after some risk-balanced failure happens, then seek others who are innovators & work for them or invest in their projects.

Kaiser Sousa's picture

RP -
Always been a favorite of mine....
Cause u get it.....

blu's picture

The universities have become unsustainable. Nobody can afford their services. So they give vendor loans to the kids, and essentially are funding themselves that way via laundered money. The kids can and do walk away when they sense they have been taken for a ride. The real pay-off for the Universities will be later when Uncle Sam shows up with tax money to underwrite some or all of the losses.

In the end, as with the banks, these Universities are using the sheeple as a way to get some of Ben's funny money. Nothing more, nor less.

Won't help them. They are still going to die.

Chuck Walla's picture

BA, the new GED?
Forward Soviet!

Chuck Walla's picture

BA, the new GED?
Forward Soviet!

Buck Johnson's picture

Yep, this is going to end well.  Soon very soon this bubble will implode also along with others. 

killallthefiat's picture

I highly advise everyone to click on the don't drone me bro pic.  Thank you for the laugh!

hedgeless_horseman's picture



I worked my way through college (in-state tuition) and paid my loans.  I have little sympathy for Ivy League deadbeats. 

Don't blame the colleges...

...blame The Federal Reserve Bank and the co-dependent US Congress.

LawsofPhysics's picture

Likewise HH, but just to be the devil's advocate, I seem to remember seeing a graph recently showing an increase in administrators and management costs relative to the faculty (who actually perform the instruction).  Administrators are paid considerably more, for what exactly?

Seems to me, both sides have benefitted from the banking largesse, yet one is now required to live in slavery while the other is not.

For the most part I simply see the massive mis-allocation and mal-investment of resources and capital as the root of all the world's problems.  Investing in more stuffed shirts is certainly something most major Universities have ben doing for quite some time now.  Heck, Krugman has a nobel...

do we really need to say any more?  by the way, why not put up the same graph for a state school.  I think you will find them to be a considerably better bargin, even when priced in Gold.

Half_A_Billion_Hollow_Points's picture



Administrators are VERY crucial for civilization:

  • what if someone says something innapropriate?  
  • what if someone is politically incorrect?  
  • what if some professor terrorizes the children, saying some lie like "guys, the US is fucked, and you are fucked".  

The administrators are the only ones who can pepper spray these pedonazi terrorists thus protecting us all from this horrible unthinkable harm.

LawsofPhysics's picture

Indeed, of course the administrator does not actually do it themselves, but rather find the appropriate union thug to deliver the spray.

steve from virginia's picture




Administrators allocate the parking spaces.


Vital ...

Temporalist's picture

It is not just the salaries of administrators there are more administrators per teacher and student now.  Why?  Free money!  Print MOAR!  That usually solves everything.

Oh and Security is much more vital on campuses nowadays.  They are administrators too...of beatings, tazings and pepper sprayings.

Rick Blaine's picture

I've got the bowl of popcorn ready...

This should be quite a show.


Doomer's picture

Seen this show before.  I always throw my bowl of popcorn during the part where the dumb lenders get bailed out by the government.  Both groupls happen to be graduates of the fine institutions mentioned in the article.

Son of Loki's picture

"...basic responsibility..."

What's that?


So old hat.


I'm with the Horseman on this one. I worked all through college and then took 2 jobs after to pay the loan back in 4 years...I know, I old fashioned.

JonNadler's picture

they had at least four years to teach them responsibility and NOW they realize they don't know any? HA HAHA

Banksters's picture

I paid of my loans on the internet bubble.  Thank goodness.  Debt is slavery.



Clayton Bigsby's picture

Guess there's not so much demand for that Womens Underwater Basket Weaving Equality and Gender Studies degree after all.  Oh well...

Tim Brasco's picture

 Expert Trading Community - Traddr™   2,670 traders 1,277 charts  4,336 videos 846 discussions 48 Events  10,546 blog posts: What are you waiting for? It's free and always will be so join today. 

Poetic injustice's picture

I prefer offers of 87,000/week or whatever that spam was.
Yours is even crappier. Goodbye, and go somewhere else to pimp yourself out.