MEANWHILE THE REALITIES Student Loans: How the Government Takes the Work Out of Fraud
Kronstadt, Sylvia
MEANWHILE THE REALITIES Student Loans: How the Government Takes thework Out of Fraud by Sylvia Kronstadt Like many young women from poverty backgrounds, Ramona Gavilan is a waitress. But...
...Many authorities contend that the grossly disproportionate default rate among vocational and correspondence students exists because they are stunned, hurt, and angry at the broken promises of the schools...
...On paper the FISL looked like the open door to a promising future for hundreds of thousands searching for a career...
...Proprietary trade, technical, and correspondence schools continue to grow and proliferate to fill the gap in America’s educational system-a system which, outgoing Commissioner of Education Sidney P. Marland has noted, sends 2.5 million young people yearly into the labor force without marketable skills...
...When I graduated they finally agreed to ‘seek a trainee position’ for me at $1 10 a week...
...Our obligation to the taxpayers is to collect in full on every loan...
...The schools offer training in huncash register operating to meat cutting, beauty culture to dental technology, insurance adjusting to electrical appliance repair...
...The FISL office receives “about half a dozen complaint letters a dayvirtually all regarding vocational schools,’’ according to a staff member...
...We can’t be held responsible for what the salesman said or how good the course is-these things are school matters,’’ says Jeffery Rathensburger of the Division’s staff...
...The Milwaukee-based Career Academy, for example, has sent out form letters to prospective students noting the availability of government loans and emphasizing that “you don’t have to begin paying it back until you are in an exciting, high-paying position which we will help you find...
...The schools are happy-they received their money long ago from the federal government, leaving the hapless students to make . their excuses to a federal collection office, whose only interest is getting the money back...
...Exhilarated by the prospect of a “Real job that could give me respect,” the soft-spoken young woman called the school and agreed to permit a sales representative-or “admissions counselor,” as he was characterized-to come to her home...
...You can complain all you want about the jeweler, even take him to court if you happen to have a lawyer and a lot of free time and if the jeweler hasn’t skipped town, but you still owe the money to the bank and have to pay UP...
...When I started getting bills for the loan, I didn’t pay any attention...
...MEANWHILE THE REALITIES Student Loans: How the Government Takes thework Out of Fraud by Sylvia Kronstadt Like many young women from poverty backgrounds, Ramona Gavilan is a waitress...
...The resulting rash of foreclosures left the federal government owning blocks of gutted ghetto tenements...
...If anything went wrong, there was the federal government waiting to take the lender off the hook...
...During periods of tight money there has been some outcry that the FISLs were available only to students whose parents were regular bank customers...
...Unfortunately, the controls which have been created to insure against abuses enable blame to be conveniently diffused...
...In a courtroom the drafting school might have a hard time proving its case against him...
...Next there is the accrediting agency, which, by accrediting the school, fails to enforce its own standards...
...First, there is the individual school which is at fault...
...The FISL’s grasp of the entire situation and its compassion for the students involved comes through in statements like this one from Assistant FISL Director Bayer: “If the student has a case against the school, he should seek redress from the school-in court, if necessary...
...Suddenly there was no longer any need to worry about the condition of the home being purchased or the financial resources of the borrower...
...Tuition at these proprietary schools has been rising as well...
...The program had its own Equity Fund scandal as a college in Wisconsin wrote up loans for nonexistent students in exchange for kickbacks from a California lending institution...
...I was so happy...
...Each year, hundreds of thousands of Americans, most of them young and many of them poor, enroll in these schools, which too often present themselves as the cushioned and direct pipeline to the American Dream...
...The schools no longer have to sue nonpaying students-a practice that was “always bad PR and costly, too,” one school director admits...
...Forget it...
...Rarely spelled out is the way the FISL repayment plan bridges the gap between business and government by aping some of the marketplace’s most loathesome practices-in this case, the “holder in due course” doctrine...
...It’s a Piece of Cake...
...Instead, the program has become a parody of the way to tackle a social problem, an exercise so grotesquely managed as to suggest a guiding genius of black humor...
...Join the new and glamorous world of computers-establish a secure position in this nerve center of the future...
...a TV commercial had urged Ramona Gavilan right after she graduated from high school...
...Earn Big Money...
...A number of schools have been so anxious to get what one school director termed “a big piece of the cake” that they have, in violation of federal regulations, paid or in other ways “made it attractive” to lending institutions to mike loans to their students...
...But what public attention the program has received has been triggered by its rising level of defaults-currently $55.2 million...
...By the time you discover it’s not the standard diamond wedding ring, the jeweler has sold your payment contract to a bank, which becomes the “holder in due course” of your obligation...
...But of course the real tragedy is not the waste of tax money-Americans have developed a high level of tolerance for that...
...Remarkably, there have been few attempts to study the problem...
...Not surprisingly, this high default rate has been blamed on that much maligned, but rapidly vanishing species, the student radical...
...He can be banned from employment in any government or government-subsidized job and can be prevented from obtaining a security clearance, bank loan, or insurance policy...
...To use a more pertinent example, if you get a federal loan to go to a vocational school and then find that the school’s promises were a hoax, this has no effect on your obligation to repay the loan...
...Consumer protection agencies receive additional thousands of complaints each yearenough to persuade them that the “career industry” should be a top priority for reform...
...If the debt is reported to the Department of Justice, it can create a lien against the student’s assets or earnings...
...Let Uiicle Sam Do the Dirty Work...
...Proprietary schools are trading in more than money...
...This law, whose administration was later consolidated with that of the Higher Education Act, authorized identical loan programs for students enrolled in proprietary institutions...
...But banks have devised their own methods for turning the program to their advantage...
...Because the government turned on the money without watching where it was going, roving packs of charlatans and con men moved in to fill the gaps in the educational system...
...Most important is the role played by the banks in the default problem...
...The original FISL concept was to provide loans only to college and university students...
...Out of work and hounded by the government, he should go hire a lawyer, wait six months for the courts to do their work, and hope that at the end he won’t be $5,000 farther in debt if he loses the case...
...No doubt this scenario is not what the designers of the FISL program had in mind when they approved use of the loans for vocational schools...
...The school sent her to two interviews-one company wanted only college graduates, the other demanded two years experience...
...The owner of the faulty television set may be dragged into court or harassed by early morning calls from a collection agency, but students who have been fleeced by a vocational school discover that they are dealing with an agency far more powerful than a mere bill collector...
...Most people don’t want to employ a debtor,” he says flatly...
...This concept is the legal doctrine that prevents fraud, deceit, or abuse by one party in a business deal from inhibiting other parties’ ability to collect the money originally bargained for...
...Even more disquieting is the government’s role in Ramona’s predicament...
...The government pays off the bank and goes to work on the student...
...To be eligible for the FISL program, the student receiving the loan must attend an “eligible school...
...The only way you can get out of it is to die-or suffer to tal, irreversible injury,” says Jeffrey Rathensburger...
...Many require that the student open an account with them, and a 197 1 American Bankers’ Association study indicated that 90 per cent of the loans were being made to the banks’ own depositors...
...Since its passage in 1965 the student loan program has generally stayed out of the headlines...
...Brief newspaper articles noting another quarterly rise in the default rate conjure up visions of Vermont communes where not repaying student loans has the kind of prestige value once reserved for resisting the draft...
...I always want to be a good citizen, pay my taxes, obey the law...
...Although parents of students are under no legal obligation to pay off their offspring’s defaulted loans, “about half the debts are being paid by parents who can’t stand the thought of their kids in trouble with the government,” explains Rathensburger...
...The high default rate has surprisingly little to do with dropping out of the system but reveals a lot about the perils of living under its thumb...
...Even more compelling is the case of a 19-year-old black grocery checker from Newark who managed to complete only five lessons of a drafting course which he had been assured would be “simple...
...She wasn’t caught cheating on her taxes and she hasn’t jumped bail...
...When a student fails to keep up his loan payments, the lender (usually a bank) turns the account over to the FISL office...
...But the real benefits were reaped by profit-making institutions...
...What was really at fault in both this case and with the student loan program was the loss of accountability which seems to invariably accompany such federally guaranteed loans...
...In one case, a student the bank said it couldn’t find-and listed as a defaultactually worked for the bank,” according to one school director...
...In some situations a default is financially more attractive to the bank, since it can ob t ai n i mme diate reimbursement from the government instead of waiting through a lengthy repayment period...
...I thought I was going to become hysterical,” recalls Dominican immigrant Eladio Romero...
...Their messages of hopetransmitted by every mass medium from television to girlie magazines to matchbooks-are directed at those who lack the money, academic credentials, or desire to attend college, and who are either unemployed or locked into dead-end jobs...
...Ramona just made the mistake of succumbing to the blandishments of a phony vocational-school course in computer programming...
...That’s what I was doing before I went to the school...
...Probably not, because guaranteed payments are an almost certain way to lower the quality of a service...
...Thus the government maintains that a student is without defenses-no “causes of action” that are relevant to his loan obligation...
...And Uncle Sam intends to collect...
...asks a Federal Trade Commission attorney...
...Student loan “portfolios” have even been used as a kind of speculative currency, to be bought and sold until, as a California state banking official phrased it, “the student has no idea who the hell he owes money to...
...The results should have been predictable...
...Even the title was fishy...
...I said ‘man, are you crazy...
...How else can they retaliate...
...Interestingly enough, proprietary schools themselves were not very interested in accreditation until they realized that they could benefit from student aid legislation...
...Eligibility for federal largesse is virtually a competitive necessity, according to many school proprietors...
...1 found out we would be backoffice clerks instead of investment executives, but they still said I’d make ‘many times’ my present pay of $150 a week as a printer, so I stuck it out,” Romero recalls...
...We Always Win...
...In early 1972, for example, Congress appropriated $12.8 million to cover the defaulted loans and to pay salaries for an additional 58 collection officers...
...In just a few short months we will prepare you for a profession with prestige, responsibility, and high pay...
...Not only are these hustlers tolerated as they grow fat at their victims’ expense, but they are actually abetted by government policy...
...So, I’m paying-paying for nothRomero, who enrolled in a course entitled “Investment Banking” from the Career Academy, one of the most aggressive beneficiaries of the loan program, alleges that “everything the salesman told me was a lie except for the price and the starting date...
...Yet under the terms of the FISL, this 19-year-old youth, and many thousands like him, are cast in the role of fugitives from justice...
...Ninety minutes after his arrival Ramona had signed a nine-month training contract, which was co-signed by her Spanish-speaking aunt...
...It turns out that this accusation contains about as much truth as the charge of just a few years ago that the activities of anti-war students were hardening North Vietnam’s resolve to fight...
...A new breed of proprietary school has evolved-schools at which nearly every student, and thus the school itself, is dependent upon government aid...
...What has gone wrong with the program since it was approved with such fanfare back in 1965...
...Like 1.3 million other young people last year, Ramona took out a Federally Insured Student Loan Sylvia Kronstadt formerly worked with New York City’s Department of Consumer Affairs...
...Correspondence schools, for example, have increased their loan volume by 2,000 per cent in three years...
...In any instance where a “government recognized” accrediting agency exists for the type of school involved, accreditation by that agency amounts to eligibility...
...But the reason this 2 I -year-old South Bronx resident is waiting tables 14 hours a day is somewhat different-she owes the federal government $1,500...
...We’re doing something that we’ve tried to avoid for six years-we’re admitting that we need to make it into a commercial instead of a publicservice venture,” an Office of Education division chief said...
...Would there be so many defaults if the schools knew they might have to prove their good faith in court if they wanted to collect from the students...
...In 1971 only 10 per cent of the FISLs went to students enrolled in vocational schools, but these trade schools accounted for more than 70 of the defaults in one part of the program...
...She also signed a student loan agreement that enabled the school to receive payment in full immediately from a bank, thus beginning Ramona’s chain of indebtedness...
...One man said he would hire me as a clerk-typist...
...And pro pri e t ar y-school students have meanwhile compiled a default rate 20 times higher than their collegiate counterparts...
...As long as the student remains in school, and for up to a year’s grace period after the end of his studies, the government pays interest on the loan to the original lender, usually a bank...
...Many students break down and agree to make payments as soon as they discover that the loan is in the hands of the federal government and they begin receiving stern letters regarding their “debt to the U. S. Treasury...
...The abuses of the student loan program closely parallel what happened after Congress approved the 1968 Housing Act designed to make mortgages-and thereby home ownershipreadily available to the poor...
...Another reason the amount of tuition doesn’t seem to matter to the students is that very few of them realize what they’re getting into when they sign the loan agreement...
...Some schools, for example, have been accused of watering down their courses in order to retain students for longer periods and thereby to collect more tuition...
...But according to the U. S. Office of Education’s Division of Insured Loans, the government has neither the intention-nor the authority-to forget or “forgive” a defaulted student loan obligation...
...The student then has up to 10 years to repay the loan at an annual interest rate of only seven per cent...
...And he said there was so much need for programmers that me when I graduated-starting at $12,000 to $15,000 a year...
...The failure of FISL in the proprietary schools is an indictment of more than the concept of the program or the intentions of its administrators...
...Now the government is saying pay us $1,500...
...The secret of their success is the knowledge that the federal government will bail them out when they need help, serving as the collection agency of last resort...
...But I really did try, and I graduated...
...But vigorous lobbying by private, profit-making vocational and correspondence schools quickly led to the passage of the National Vocational Act of 1965...
...With the government providing the money and the student envisioning a “rewarding new career,” it seems to make scant difference whether the loan is for $1,500 or $2,500...
...There were too many in the class, and the teachers just read to us from the textbook all day...
...Over half the class dropped out and lost most of their money...
...Because of inflation, legislation was passed in 1972 to increase the loan maximum to $2,500 a year...
...Many school officials allege that banks often make no bona fide collection attempts or do not try to find delinquent student-borrowers once the repayment period has begun...
...Its standard form is when a crooked jeweler sells you a piece of glass- on the time payment plan...
...Existing trade associations for vocational schools decided to create purportedly independent “accrediting commissions,” and thereby qualify for recognition by the Office of Education...
...This is just the kind of advice the student needs...
...Until the government got into the guaran teed-loan business, this doctrine had mainly been of use to encyclopedia salesmen, sharpies of all sorts, and touts in shiny suits...
...Their contents are fairly standard: the advertising was misleading, the salesman lied, the training was inadequate, graduates can’t get jobs...
...Needless to say, there were few corporate recruiters at Ramona’s graduation...
...What this default rate provides is a pretty fair gauge of the actual market value of many vocational courses...
...The real failure lies in the mammoth void in the American educational system that renders proprietary vocational training the only choice ?or a large segment of tomorrow’s labor force-and which creates a moral imperative to pour government money into vocational studies even though the “career industry” has not matured and is not adequately regulated...
...The salesman told me I had a ‘high aptitude’ for computers,” she recalls...
...each debt is handled individually...
...Night school and correspondence courses may offer their students the only hope of escaping low-paying and menial jobs, of attaining some independence and professional respect...
...To Ramona it sounded like just the thing: the loans, originally intended to reduce the burden on families sending children to four-year colleges, have been expanded to cover vocational training schools as well...
...Banks, too, have bgen parties in such illegal transactions, according to the Office of Education...
...Because the banks have not found the student loan program sufficiently attractive to allocate adequate funds to meet the demand, a number of measures have been taken to “make FISLs more competitive with other loans...
...Congress has found itself in a position in which to deny funds for proprietary training would be to discriminate against a substantial body of American students, yet to authorize such expenditures is to almost insure that large amounts of money will be wasted...
...Booming Opportunities...
...After four dismal months pounding the pavement on her own, Ramona discovered that “there were no jobs anywhere...
...Once mortgage bankers discovered that the government would reimburse them if a homeowner defaulted on his mortgage, events were set in motion that led to the worst housing scandal in our history...
...The FISL program, described by one of its federal administrators as “the government aid program that touches more lives than any other except Social Security,” was made possible by the Higher Education Act of 1965...
...Although a correspondence course in radio announcing can be as useless as a television set whose picture tube fades long before the payments are up, the collection process is rather different in each case...
...He may have nothing now, but in 20 years he may have something, and we’ll get it,” Rathensburger predicts confidently . The government has no standard collection procedure...
...Now, the cost and the accompanying ill will are passed on to the federal government, where collection work-originally seen as a minor part of the FISL programhas become its overriding task...
...But because he never formally disenrolled from the course, he was liable for all of his $1,000 student loan...
...Government collection agents may visit the exstudent’s employer and inform him of his employee’s “just obligation,” according to Rathensburger...
...In addition, it is likely that SLMA will affect the default rate, as it further removes the student’s repayment obligation from any experience or relationship that is meaningful to him...
...m any p ro pr ietary schools have provided enlightened, innovative, and solid vocational training, the industry as a whole has been SO full of hucksters and overblown promises that Senator Walter Mondale has called it “the last legalized con game in America...
...Their ads portray well-dressed young people striding authoritatively through gleaming laboratories and executive suites, reading radio news bulletins with modulated urgency, skillfully thrusting the gears of “the big rigs,” or appraising the rhythmic blinking of obedient computers...
...Others have hired money brokers to locate a source willing to make the loans, or to provide the school itself with sufficient capital to make the loans...
...For a year I told them I wouldn’t pay but when the government got into the act, I can’t hold out...
...Why not...
...No student of government can be surprised at failure or misdirection, but rarely is there such a federal theater of the absurd, in which government has become one of the actors...
...Why do these students default...
...Call us now-and arrange for a confidential interview...
...Yet because of the vast amounts of quick capital that the loan program has made available, the proprietary school business has been transformed into one of the newest entrepreneurial gold mines, a sought-after acquisition for conglomerates like ITT, Bell and Howell, Control Data, and RCA, whose only interest in education is its profitability...
...Dramatic enrollment increases” at many schools is often accompanied by a “deterioration in admissions standards,” according to David Bayer, A 1 t lio ugh Associate FISL Director...
...This approach reached its zenith in 1972, when Congress autliorized creation of the Student Loan Marketing Association (SLMA), “a private, profit-making, stock-issuing corporation’’ to purchase student loan obligations from banks and then sell them to a profit-seeking “secondary market...
...FISL) to help finance her postsecondary education...
...She is currently involved in prison reform...
...While they may have been bilked by a shady vocational school, the students may end up in debt directly to the federal government...
...Holder in due course not only destroys the student’s only real bargaining toolnot paying tuition-to make sure the school lives up to its promises, but also turns the government into the most unprincipled sort of collection agency for proprietary schools...
...The defaulting student can also be “blacklisted” with the State Department, making it impossible for him to obtain a passport or visa...
...Ramona felt sure that the school was legitimate, partly because “if they’re approved for federal aid, they must be good...
...Halfway through the course, it was changed to “Investment Operations...
...Since the program began in 1965 a total of $6 billion has been loaned to 6.1 million students...
...About half the defaults since 1 9 6 5 have been for vocational students...
...I’ve got five children.’ ” If a student-borrower fails to crumble at the prospect of a battle with Uncle Sam, the Division has a variety of auxiliary strategies and may call the Internal Revenue Service, the Federal Bureau of Investigation, or even the Social Security office into the fray...
...Even a student’s assertion of bankruptcy is not viewed as an “out...
...Legal action is usually taken only as a last resort, and “we always win,” a loan director boasts...
...The course was very terrible,” she remembers...
...It permits “eligible students”-those with adjusted family incomes of under $15,000-t0 obtain interest-free loans of up to $1,500 per year from some 20,000 participating banking institutions, if they enroll in one of the 8,000 “eligible” schools, either nonprofit or profit-making (“proprietary...
...Their most precious currency is the fragile dreams of America’s aspiring poordreams that, with the complicity of a well-mo tivated government program, too often end in a harsh dawn of anger and hopelessness...
...Then there is the Office of Education’s Institutional Accreditation and Eligibility staff, which fails to remove the negligent accrediting agency from the approved list, and finally, the Division of Insured Loans, which technically could, if it chose to ignore the other three levels of expertise and responsibility, revoke a school’s eligibility by simply pressing a button on the computer...
Vol. 5 • November 1973 • No. 9
