ITT under government observation

"Inspecting a Student Loan Spigot"

by

Cretchen Morgenson

January 18th, 2014

The New York Times

A few days after Christmas, ITT Educational Services, one of the nation’s largest operators of for-profit technical schools, reported some unwelcome news. The Consumer Financial Protection Bureau had warned the company that it might seek penalties and remedies against it for possible student loan violations.

ITT maintained that its practices were legal and said it would vigorously defend itself. Happily for the company, its shareholders seem unworried: last week, the stock hit a new 52-week high, closing at $45.27.

ITT is not the only for-profit educator under scrutiny, of course. But it is among the largest. At 149 institutes in 39 states (and online), ITT offers nursing, criminal justice, business, information technology and other programs to 61,000 students. Based in Carmel, Ind., the company generated $800 million in revenue in the first nine months of 2013, down 18 percent from the year-earlier period.

The consumer bureau, ITT’s filing said, wants to determine whether lenders and student loan servicers working with for-profit colleges “are engaging in unlawful acts or practices relating to the advertising, marketing, or origination of private student loans.”

That’s a pretty broad purview. Asked for more details last week, Rohit Chopra, student loan ombudsman at the consumer protection bureau, said he couldn’t comment on individual companies.

But with total student debt topping $1 trillion today, regulators are clearly on the alert for abusive practices. And with jobs scarce for recent graduates, these loads loom even larger.

Debt carried by students at for-profit colleges can be especially onerous when compared with what attendees make after graduation. Nicole Elam, an ITT spokeswoman, said the average annual salary reported by its 2012 graduates was $32,612. Their average debt burden was around $30,000, she said. By comparison, the average student loan balance nationwide and across all institutions was $24,803, Federal Reserve research shows.

Ms. Elam declined to comment further on the consumer bureau’s warning. But delving into ITT’s financial statements provides clues to what the regulator may be looking at. First, though, a tutorial in the student loan industry may be in order.

The United States government is by far the largest lender to students. In 2012, it provided 73 percent of the $236.7 billion in total student aid offered that year, up from 67 percent a decade earlier.

Private-sector loans, meanwhile, have plummeted in recent years — to $6.4 billion last year from $22.9 billion in 2008 — as investors retreated from the market.

Among for-profit institutions like ITT, student access to private loans is crucial. Under Department of Education rules, no more than 90 percent of tuition payments can come from federal funding. At least 10 percent must come from private sources like family savings or other lending institutions. Veterans’ tuition costs, however, can be fully paid by federal programs.

For-profit entities exceeding the federal funding limit for two years lose access to that money for their students. That could be a death sentence for the institutions. In 2012, some 80 percent of ITT’s revenue came from government aid programs.

This is typical among for-profit schools. Because these schools cost more than public universities or community colleges and recruit students of reduced means with little access to private funds, students at these institutions rely heavily on government programs.

As the private loan pool dried up, some schools had a tougher time meeting the 90-10 rule. In January 2010, ITT came up with a solution: the Peaks Private Student Loan Program, which increased the amount of private money available for its students.

The program was financed by an off-balance-sheet trust that raised over $300 million from investors, to whom it issued debt. This debt was guaranteed by ITT, but an unaffiliated lender used the cash to make loans to ITT students. Those loans were then put into the trust.

Because the lender was unaffiliated with ITT, the loans qualified as private money under the 90-10 rule. The company, therefore, ensured that its students could keep tapping into federal grants for the other 90 percent of their education costs.

The idea was creative and immensely helpful to ITT, as it kept revenue coming in. But the Peaks program, which ended in 2012, is becoming problematic now. Many of the loans in the trust are defaulting. In its most recent quarterly filing, ITT said it projected default rates in Peaks and a similar pool of loans to be as high as 59 percent.

Contrast this to the 14.7 percent default rate for students three years after starting repayment of federal loans, according to the Department of Education.

Signaling that the Peaks trust is teetering, ITT began making payments to it on behalf of students to help them avoid default. ITT said it had paid $7.65 million as of the quarter that ended in September.

As the guarantor of Peaks trust debt, ITT is on the hook for its loans. So far, the company has set aside reserves for possible losses of $40 million.

Bradley Safalow, founder and chief executive of PAA Research, an independent research firm in New York, reckons that based on ITT’s default projections, it could be forced to make additional payments for Peaks liabilities of over $100 million.

“There’s no question that 90-10 compliance was a major motivation for ITT to set up the Peaks trust,” he said, “and it was a huge source of cash generation for them.”

There’s another potential problem with the company making payments on behalf of borrowers: the possibility that those payments would imperil its compliance with the all-important 90-10 rule when the loans were made.

The magnitude of ITT’s projected default rates of up to 59 percent may also be of interest to regulators who are increasingly concerned that lenders weigh borrowers’ ability to repay such obligations. The company may argue that it did not originate the loans, and thus could not be considered responsible.

But, speaking generally and not specifically about ITT, Mr. Chopra of the consumer protection bureau said: “When a lender originates a loan that they expect to fail, that raises questions about their broader incentives. Our concern is normal market forces may not be working properly.”

ITT is fielding inquiries from another regulator as well. Last February and again last May, the company received subpoenas from the Securities and Exchange Commission asking for information about its Peaks program. It is cooperating.

For now, it seems, there are more questions surrounding ITT than answers.

Perry Mason to the rescue?...Perkins loan recipients are defaulting

"Schools Suing Graduates for Defaulting on Loans"

by

Victor Luckerson

February 8th, 2013

Time

As more college graduates default on their student loans, some schools are taking drastic measures to ensure repayment. According to a recent Bloomberg report, Yale, the University of Pennsylvania and George Washington University have taken defaulters to court in recent years to try to force them to pay up.

The schools are targeting recipients of Perkins loans, which are subsidized loans usually awarded to lower-income students with exceptional financial need. Unlike the larger federal Stafford loan program, in which the Department of Education acts as the lender, Perkins loans are administered directly by participating institutions with a mixture of funds from the federal government and the schools themselves. Almost 500,000 of the loan awards are doled out annually.

According to court records analyzed by Bloomberg, the University of Pennsylvania filed at least 12 lawsuits to recoup Perkins loan money last year. Yale is suing a former student for about $6,500 in outstanding loans, while George Washington University is suing a student for $7,000 in Perkins loans and $15,000 in unpaid tuition costs. Though there’s no comprehensive data that shows how often schools are taking graduates to court, defaults grew by 20% from 2006 to 2011, up to $964 million. Overall federal student loan defaults have also been on the rise for several years.

Such amounts might seem like small potatoes in the grand scheme, hardly worthy of litigation. However, Mark Kantrowtiz, publisher of FinAid.org, says recent stresses put on the Perkins loan system may be forcing more schools to take legal action. The loan fund is supposed to be self-replenishing, with debtors paying the money they owe back into the pool of loan money. In the past, the federal government offered cash infusions of about $65 million per year to ensure the program’s solvency, but that funding dried up after the 2008 fiscal year. “The colleges are getting a little bit more aggressive in pursuing these loans,” Kantrowitz says.

Typically, an expensive lawsuit is a last resort for schools. Before taking such measures, they’re likely to send letters outlining the amount of the loan and repayment options, report the default to credit agencies, attempt to garnish a debtor’s wages, and enlist the aid of a collection agency. If a graduate is sued, they’ll also owe expensive collection fees, which are higher for Perkins loans than for other types of federal student loans. The federal government has already taken a tough stance on defaulters in recent years, with debt collectors earning $1 billion in commissions for tracking down federal student loan defaulters in 2011, according to Bloomberg.

President Obama has proposed expanding the Perkins loan program from its current $1 billion in funding to $8 billion by getting more schools involved in the program and awarding federal money to schools that are able to stem rapidly rising tuition costs. However, the interest rates on the loans would increase from 5% to 6.8%, and they wouldn’t necessarily be restricted to students with the same financial needs. The new Perkins loan model would be tailored more to reducing student reliance on private loans than providing a low-interest vehicle for low-income families.

For those in default, experts recommend trying to reach out to the school to work out a repayment plan instead of trying to dodge a debt. Increasingly, neither schools nor the government are willing to look the other way when there’s money owed. “Schools are required to take efforts to collect on these loans,” says Justin Draeger, president of the National Association of Student Financial Aid Administrators. “When you borrow money from taxpayers, you have to pay it back.”

Student loans--going, going, gone!

This is quite sad news and indicative of an attitude regarding education and the terrible economic status of this country. The Boston Globe reported that "The Massachusetts Educational Financing Authority today said it will not be able to provide any student loans this fall, which could leave tens of thousands of families in the lurch just weeks before college classes begin." This posture will certainly have a trickle down effect everywhere. All ready some banks are ceasing educational loans. Where are the philanthropists?

"Student lender won't have loan money this season"

by

Beth Healy

July 28th, 2008

Boston Globe

The Massachusetts Educational Financing Authority today said it will not be able to provide any student loans this fall, which could leave tens of thousands of families in the lurch just weeks before college classes begin.

The nonprofit lending authority said it was unable to secure funding to provide private student loans. It is contacting more than 40,000 students and families to whom it has made loans in the past, to urge them to seek other options.

"As a result of our problems and the continued dislocation of the capital markets, we have been unable to raise funds for the coming academic year,'' said Thomas M. Graf, executive director of the group.

In April, the authority -- which is widely used by Bay State students -- announced that it would no longer extend federally backed loans, due to the credit crunch that has roiled the student loan market. But on June 25, the authority had said it expected to be able to offer private loans at fixed rates by the end of July. The group has now abandoned that hope, Graf said. MEFA made $510 million in student loans in the last school year.

For families and students with tuition bills due in August, Graf said, "Time is relatively short. Parents and families really need to satisfy their bills."

He said MEFA will have a hotline set up to offer advice and is encouraging families to seek federally backed loans first, then to shop for private loans, based in part on the recommendations made to them by colleges and universities.

The student loan market began running into trouble at the end of last year, following the subprime mortgage crisis. A kind of long-term debt many lenders had relied on to make loans, called auction-rate bonds, stopped trading on Wall Street entirely in February 2008, as investor demand dried up. It has been difficult for some authorities, like the Massachusetts Educational Financing Authority, to refinance their old auction-rate bonds.

Graf said the reversal of events on private loans occurred when the agency's bond insurer faced a possible downgrade in its credit rating, which, in turn, would have pushed up the cost of floating new debt. Problems with bond insurers have compounded the turmoil in the debt markets this year.

The group still hopes to acquire funding later this year and for spring 2009, Graf said. He noted that MEFA, which employs about 50 people, continues to run other educational programs, including the college savings plan it manages jointly with Fidelity Investments. Massachusetts families have nearly $3 billion in college savings in that program, Graf said. In addition, the lender has about $1.5 billion in past loans on its books which it continues to service.

About 50 nonprofits, banks, and government entities have stopped making some or all kinds of student loans this year.