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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 finaid.org, 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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Tue, 02/05/2013 - 17:49 | 3217761 secret_sam
secret_sam's picture

I'm surprised no one's actually nailed this one yet: it's an obvious ploy to set the stage for future demands for gummit BAILOUT of the educational institutions.

The claim will be, "we made these loans because the laws required it, and they're not being paid, and we need taxpayer money to keep our schools operating."

None of this should be at all surprising.  The TARP payoff was proof of the real point of government. 

Why would anyone expect a business to try to run itself well when the Feds just hand out checks if ever placed under duress?

Tue, 02/05/2013 - 17:54 | 3217773 MeBizarro
MeBizarro's picture

For public institutions I buy that but it will be a much more difficult challenge for Democrats to push that through for private schools.  Schools like Penn or Yale will never have to worry about it either way.  This article is very misleading in regards to how it portrays the state of Penn/Yale fiscal status vs. George Washington.  Talking about apples and oranges.  

Tue, 02/05/2013 - 19:12 | 3218061 secret_sam
secret_sam's picture

It doesn't matter which PARTY is in power--I don't see why you'd bring up Democrats.

College education has been a poor financial investment for decades.  The ENTIRE US corporate economy is more interested in figuring out how to squeeze money out of government than it is in competing globally during a massive economic contraction.

State-schools will have a much easier time extorting the Feds, true, but that doesn't mean the private institutions won't TRY.

What choice will they have over the next decade? 

They have the same overpaid employees everyone else in the post-industrial world has, the same unserviceable pension obligations, and the same expected increased costs to worry about.

Declining revenues?  Yep.  That too.  This isn't rocket surgery.

Wed, 02/06/2013 - 02:18 | 3219151 Richard Head
Richard Head's picture

George Washington U. is private too.

Tue, 02/05/2013 - 17:35 | 3217713 worbsid
worbsid's picture

I thought the idea of working through college or getting the money from your parents ... oh wait ... he lost.

Tue, 02/05/2013 - 17:45 | 3217728 samsara
samsara's picture

"You could take a job at Subway or wherever to pay the bills ...

Like a good indentured Serfs, Unlike Businesses and CORPs(who are people too remember)  can just say.... Sorry,  we're writing it off, drop dead. we have no legal responsibility to pay ... Right Jon Corzine?

  It seems like basic responsibility to me,"

 

Perspective is Everything   I guess

(Perspective and millions of dollars of lobbying.  

WHAT A PHUCKIN Coincidence that the Bankruptcy bill was passed in 2005 JUST BEFORE the bottom fell out. 

ALMOST like They saw it coming....  Hmmm the Patriot Act can be viewed that way too....

Hmmmm.   I'm seeing a pattern here....

What are they doing lately?  Gun Laws... Hmm I wonder what they see coming in 3-5 years????

Tue, 02/05/2013 - 17:51 | 3217766 MeBizarro
MeBizarro's picture

2005 law was for just private education loans.  Uncle Sam changed the bankrutpcy laws on government loans for higher education back in the 80s after the Boomers graduated in large numbers and defaulted during the severe recession in the early 80s or just said 'suck it losers' since there wasn't much legal recourse if someone just declared bankrutpcy.   

Tue, 02/05/2013 - 17:57 | 3217788 alien-IQ
alien-IQ's picture

Go to Yale. Get a degree. Graduate. No Jobs available in your field. Go to work at Subway for minimum wage so you can pay back the loan you got to get the degree you got but there was no job available upon graduation? That's just fucking GENIUS!!!!

Why not avoid the degree and debt and just drop out of High School and go work directly for Subway? Or will Subway soon be requiring 4 year Ivy League degrees to be considered qualified to make disgusting sandwiches for minimum wage?

Tue, 02/05/2013 - 17:59 | 3217797 icanhasbailout
icanhasbailout's picture

So, how well is that whole "suing people who have no jobs and no money" thing going for them?

Tue, 02/05/2013 - 20:24 | 3218277 secret_sam
secret_sam's picture

At LEAST as well as the foreclosure/liquidation process is working for the TBTF banks.

Tue, 02/05/2013 - 18:00 | 3217807 MeBizarro
MeBizarro's picture

As for the people on here who says that it makes more sense to not go to college than a place like Yale/Penn, you have no idea what you are remotely talking about.  Yale BA (and to a lesser degree Penn except if it is Wharton or a few other schools) simply open doors and networks that you just wouldn't have the opportunity to access otherwise.  That has always mattered a lot and always will. 

I took a few undergrad courses at Harvard when I was a BA.  Frankly, they weren't that hard and the entire issue with Harvard is getting in and not how hard the coursework generally is.  It is a completely different story at a place like MIT where the workload especially if you are a engineer or hard sciences major is incredibly difficult and you are competing against people at the BA who are incredibly smart & generally quite motivated.  

Tue, 02/05/2013 - 18:02 | 3217811 Jumbotron
Jumbotron's picture

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.

 Fucking REALLY !!????  Respsonsibility is a TWO WAY street asshole.  What about the school's responsibility of NOT LOANING to hard case prospective students when they know that their criminally overpriced and worthless education will NOT land that graduate the job they need to pay back said loan?

 

Fuck you Debt Pimps.  Eat that default and die.

Tue, 02/05/2013 - 18:31 | 3217915 madcows
madcows's picture

You aren't allowed to default on a school loan.  It's the law.  really.  But, you can still declare bankruptcy, collect ebt, rent, utilities, foodstamps, and never work again.  Just let the peckers stew on that unpaid loan.

How sweet would it be if every puke at Yale just decided to default. 

Tue, 02/05/2013 - 18:10 | 3217837 Brahms Third Racket
Brahms Third Racket's picture

Unemployed grad: So let me get this straight...if I didn't go to your bullshit, overpriced school in the first place, I might have only been qualified to work someplace like Subway...but I wouldn't owe you shit. Now, I still gotta' work at Subway PLUS I owe you all this money? Fuck you!

Wed, 02/06/2013 - 08:12 | 3219381 jerry_theking_lawler
jerry_theking_lawler's picture

plus, if you started straight out of Subway, worked really hard and learned the business, you could then take out a $150k loan and open up 2 stores of your own.....

Tue, 02/05/2013 - 18:26 | 3217899 Lewshine
Lewshine's picture

These friggin student loan collectors are the most aggressive in the collection industry - Trust me, you don't want these assholes on your tail. I recently got a new cellphone number, it turns out the person who either had the same number or decided to make this one up at their application for the loan, either way - I get at least 40 calls a day from different personalities trying to reach "Vicki". ...And these people don't get off the phone till they are convinced I'm not her (I'm a 50 year old man). Uncle Sam is a collector you don't want to owe. So every time I here about someone going to college I think to myself - You better pay cash, cuz these idiots will ruin your world.

Tue, 02/05/2013 - 20:53 | 3218351 secret_sam
secret_sam's picture

They stop pestering you a lot quicker if you return their calls. 

Constantly.  With a few cocktails in ya.

"Hi, uh....this izh Joe.  Y'all leff me anovver message for some girl named Vicki, but I don't know her, ya oughta update your numbers...thanx."  click...redial.

"Hi.  I got anovver message again from ya lookin' for Vicki?  She's not here--I'm a fiffy year old man and jush got this new phone...did I call ya back arready?  Sorry."  click....redial.

"Hello, this izh Joe.  I'm jesh goin' through all my voicemailsh to make sure ya know there's no Vicki at this number...I...well, yeah, maybe I had a few drinsks, what business of that is yoursh?  I don't remember callin' ya before...ok...bye."  click...redial.

"My namezh Joe and I wanna...oh.  Don't take that tone with me!  Let me speak to your supervisor!  RIGHT NOW!"

Two weeks.  Tops.  They'll leave you alone.

Tue, 02/05/2013 - 18:28 | 3217907 madcows
madcows's picture

Awesome.  They are suing them b/c they are too poor to pay.  So, what, they'll pay after they're sued?  ha.

Tue, 02/05/2013 - 20:25 | 3218279 Bobportlandor
Bobportlandor's picture

It's worse then that. 1) Their trying to help them out in the first place. 2) To enter a job market saturated with too many people.

Who caused the problem?

Sound familiar? Bankers!

 

 

Tue, 02/05/2013 - 21:23 | 3218394 mendigo
mendigo's picture

What it means is that they will have to forgo paying thier bills so that they can pay the lawyers fees. Which is what they should be doing in the first place. Seems like the colleges might have factored in ability to pay and probability of finding work - perhaps they are needing to refresh thier finance and math skills. For example id like to see the analysis that the kids could resolve the problem by working at subway - I was not aware that it was so easy. Perhaps I need to refresh my skills. Don't bother with those risky equities you can work at subway.

It is refreshing to hear reference to the need for responsibility and accountability so clearly in that spirit the universities and banks will be terminating and clawing-back wages of those who so had the poor judgement to issue loans to people who were so clearly at risk of not being able to repay them. If there were such accountabilty I suspect this problem who disappear going forward. I await with bated breath this example being set by our institutions of higher learning.

Tue, 02/05/2013 - 19:14 | 3218068 Jeepers Creepers
Jeepers Creepers's picture

I definitely don't buy the idea that these students are victims. They're no different than any other welfare queen.  A Yale graduate not being able to make a minimum payment on a student loan?  Horsehit, even in this economy.

Everyone is playing the game because they know eventually this "debt" isn't worth the paper it's written on.  It will all either be inflated or forgiven by politcians.  The ones that worked their way through college or parents that saved their whole lives for their kids education are now the suckers.

If you want affordable higher education, get the government out of the business of making college affordable.  It would be fixed overnight.  My local University cost around $2,000 a year when I went, and that was in the 90's. You could easily make college under $5k a year once you make people actually pay for it instead of funny money.

Tue, 02/05/2013 - 20:07 | 3218237 SheepleLOVEched...
SheepleLOVEcheddarbaybiscuits's picture

here is candace smiths twitter, tell her how you feel.

 

Tue, 02/05/2013 - 20:07 | 3218238 stiler
stiler's picture

what about the old adage, "there's no free lunch"?

I went to Penn and graduated, paid by my Dad, except for the last semester, which I paid. In those days it wasn't $40k/semester but $40k/BA degree. I remember being up on a ladder for a painting co. on an old rowhouse in West Phila, with the owner/bossman shouting, "brush up dere on da modin', on da modin'!" 

Tue, 02/05/2013 - 20:33 | 3218308 Tunga
Tunga's picture

How can the university claim a loss when the money for the loan was created from thin air? Did ja ever think of that? Huh? Did ja? 
 
Is our children learning?  

Tue, 02/05/2013 - 20:50 | 3218338 hedgehog9999
hedgehog9999's picture

 

FUCK THEM!!!

The fuckers on government and the banks have no resposibility in how they operate. They will NEVER pay what they owe. Just ask Obama and loook him in the eye.

Why become a debt slave? this thing is going to implode anytime now!!  Enjoy while you can.......

 

 

 

 

 

 

R

Tue, 02/05/2013 - 22:37 | 3218615 GrinandBearit
GrinandBearit's picture

I'm in the process of tapping out all my CC's and not paying them back a red cent.  Guess what I'm buying with it?...  Shiny white and yellow metal. 

Hurry up and get your share now while it's still available.

Tue, 02/05/2013 - 20:55 | 3218356 Sizzurp
Sizzurp's picture

The irony of this college loan bubble bursting is rich. The ivory towered idiots in academics are now victims of their own deluded teachings. Let them reap what they have sown.

Tue, 02/05/2013 - 21:31 | 3218427 Flatchestynerdette
Flatchestynerdette's picture

Aaron Graff, a farmer's son from Denver went to George Washington and graduated 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.

Inquiring minds would like to know why didn't he just go to the University of Colorado, get in-state tuition, and not go into debt. He signed 2 loans with his parents co-signed and he's now defaulted on $4000 in Perkins loans. WHAT WAS HIS DEGREE IN? Bachelor of Arts - Music Appreciation Tuba playing?

Kids make such stupid choices when they're told 1. You can do anything 2. You can be anything 3. Follow your dreams.

How's that narcissistic upbringing feel now? You couldn't be a farmer like your dad? WE NEED THOSE. Not some schlub to teach part time and fix garages. Please leave that to a contractor - right? Right.

 


Tue, 02/05/2013 - 22:04 | 3218500 laosuwan
laosuwan's picture

if I were an american young person i would borrow as much as i could because i would know, instinctively, that in a few years there would be no chance of job or education for me so might as well take the money and live for today. that is the example their leaders and government has set for them, anyway

Wed, 02/06/2013 - 02:24 | 3219159 hedgehog9999
hedgehog9999's picture

Ditto. Moral Hazard has been thrown out the window, Fake government stats, manipulated rates. manipulated markets, Corzine running free, bernanke prinring money ad nauseum, Obama spending and borrowing like a drunken sailor on steroids ....money they will NEVER repay and you want people to pay? what planet are they living on. People aren;t stupid. You reap what you sow.....

Wed, 02/06/2013 - 06:45 | 3219314 toomanyfakecons...
toomanyfakeconservatives's picture

Expect an increase in STUDENT LOAN SUICIDES.

Wed, 02/06/2013 - 14:26 | 3220652 escargot
escargot's picture

"You could take a job at Subway..."

Um....does she mean as a second job?  Jobs at Subway are what most college grads already have.  Once you pay for little extravagances like rent, car insurance, and FOOD, there ain't much left of a Subway paycheck.  

 

Mon, 02/18/2013 - 09:38 | 3252645 AmeliaV
AmeliaV's picture

Student loan bubble is probably the biggest problem for Amercan’s economy. It doesn’t allow the economy to recover because students borrow more and more but can’t manage their debt. I’m even afraid to imagine how much the education in Yale can cost so in case your parents are not rich then taking out a student loan is probably the only way to get there. Taking out a loan is not a problem, there are lots of options available for students. But how to pay it off? Especially considering the fact the youth unemployment rate is really high these days. Lots of recent graduates work below their skills and use online no fax payday loans to repay their college debt.

 

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