A check on bad student loan debt
The feds are writing off millions of dollars in bogus student loans every year
Last year, federal education officials did something they almost never do: They wrote off more than $3 million in student loan debt belonging to nearly 500 students. Short of dying or paying them off, students almost never shed their college debt, even through bankruptcy. Yet the 500 students managed to convince the federal government that their loan providers had been duped into giving them the money illegally as part of a scheme by some colleges to take advantage of the federal government’s guaranteed loan program.
Federal officials say the students claimed their schools mischaracterized their qualifications or in some cases forged their names on documents so the students would qualify for loans they weren’t entitled to. Attorneys who have represented some of the borrowers say they typically are non-English speaking students who are misled by their schools.
Government officials have made little attempt to recover money from those responsible for the bogus loans, in part because the loans represent such a small part of their $90 billion-a-year lending program. “It’s the cost of doing business,” says one US Department of Education official who was authorized to talk about the issue but only without being identified. The official said many of the offending schools are for-profit institutions, such as beauty academies and technical institutes, that are now defunct.
For students to qualify for federally guaranteed loans, their educational institution has to certify that they have obtained a high school diploma or general equivalency degree or passed a special exam that proves they are capable of learning at that institution’s level. In many of the cases in which the loans were discharged, the schools falsely certified students who did not meet the guidelines and then pocketed the tuition payments made with the loan money. In some cases, the schools apparently signed a student’s signature to the paperwork without the student’s knowledge.
Many of the students don’t discover what’s happened until years after they graduate. “We continue to see a stream of clients that come in who went to school almost 30 years ago that are still paying their debt,” says Robyn Smith, a California lawyer who works with the Massachusetts-based National Consumer Law Center. “Many are non-English speakers, students from other countries. [The schools] will have the students take a test online and they’re issued a fake high school diploma by taking a test.”
Federal officials were able to quantify the value of the loans they wrote due to faulty school certifications off ($11.2 million over the last six years), but they were unable to provide any details on which loans were discharged or whether any of the colleges involved were located in Massachusetts. The officials said most of the records are in paper form and stored at regional offices.
Officials point out that the amount of loans written off is a tiny fraction of the $1.3 trillion in total student debt, but they admit they don’t know how widespread the certification problem is because it is up to individual students to report it, not for officials to find it. “There aren’t a lot of these cases,” says the Department of Education official. “It’s the kind of thing we know about when we know about it.”
Federal officials can also discharge student debt if the student can prove it was procured through identity theft or some other illegal means. When the loans are dismissed, the Department of Education also dismisses accrued interest and penalties and is supposed to contact a credit agency to correct any problems on the borrower’s record.
One would think students would notice right away if they are being charged interest on a loan they didn’t want, but advocates say it’s often not that easy. They say students often take out loans worth thousands of dollars, so a small bogus loan slipped in as part of the overall package is often hard to spot.
It’s also difficult for a student to prove they’ve been wronged. For unauthorized signature challenges, the Department of Education requires at least four handwriting samples, including at least one from within a year of when the loan was originally issued. Because student debt never goes away, even in bankruptcy, the loan could go back decades, making finding anything with a signature from that long ago difficult.
“If you can’t provide that kind of evidence, even though the department hasn’t got contradictory evidence, you’re forced to prove a negative,” says Smith, the California-based lawyer. It’s a “very difficult burden.”
Toby Merrill, an attorney at the Legal Services Center of Harvard Law School who deals with predatory lending issues for low-income people, says the majority of clients she deals with on bad student loans fall under the category of not qualifying for loans because of a lack of a high school diploma. But even then, she says, a student has to jump through hoops to show they were approved to enter their school without the proper credentials.
“Very few people have all their loan documents,” says Merrill. “The burden is not just high, it’s wrongly placed. The department is skeptical of such applications and requires volumes of documentation. Your say-so as a student is not enough.”Merrill and Smith both say the DOE needs to come down harder on offending schools, not create insurmountable hurdles for students who were taken advantage of.
One example of those hurdles, says Merrill, is a Department of Education requirement that there be other claims filed against an accused school if someone seeking a loan discharge lacks a full complement of records. A classic Catch-22, she says. “When is the first student going to make the first claim?” she asks. “It’s an impossible bar.”