Table Funded: The Student Loan Scam

The essential question I pose is this: if the student loan was table funded (and it does appear to me that they were, in many cases), then why is the originator/broker receiving the government guarantee and the exemption from discharge? By definition they didn’t loan any money to the student. It seems to me that government, lawyers, and courts are overlooking the fact that many banks (large and small) have been acting as brokers and not as lenders.

Like the so-called mortgage loans, the underwriting decisions lie outside of the organization that “granted” the alleged loan from an undisclosed third party. Yet they claim and receive and sell government benefits as though they were lenders.

My theory under current law is that if the loan was funded from the sale of student debt pools there are two outcomes, to wit: (1) the government guarantee does not attach because there is no loan or risk of loss to guarantee and because the actual lender is not the broker, pretender who appears on the note, (i.e., they were not entitled to the government protections because they brokered the transaction instead of loaning the money) and (2) since the government guarantee and other conditions are no longer involved, there is no reason to prevent discharge in bankruptcy.

THE FOLLOWING ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

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see http://www.rollingstone.com/politics/news/how-wall-street-profits-from-student-debt-20160414

Wall Street is like that closet in your house where you throw everything in that you probably won’t need for a while or maybe not at all. When you open the closet door everything falls out on top of you. In this case it is $1.2 Trillion on student debt with “default” rates rising sharply and interest rates rising into double digits. We are in effect making it impossible for the brightest minds to get the education we need for the sake of our society. Anyone want a doctor or lawyer who has been poorly education or not educated at all?

It’s all about money in education. Like medical insurance, the more distance you put between the consumer and the the actual delivery of the service, the less people think about it and the the more the vendors charge. In the end education becomes a process of justifying the cost of a commodity rather than creating the best possible education possible.

Somehow the banks managed to intervene between students and institutions of higher learning, such that they enjoy very high interest rates (after the student completes education) and a guarantee from the Federal government or at least a guarantee that the debt cannot be discharged in bankruptcy.

The government loans work the way they are intended and there are many programs to provide relief to students who in many cases are burdened for life with student debt. But the private loans, which now dominate the marketplace, are putting a drag on our prospects as a nation — but still great business for the banks. Most other countries do not allow graduating students to be burdened by this debt; and those countries that provide free tuition (up to a point) or who pay for their citizens to travel and learn in countries who have quality institutions for higher learning, end up with an increasing GDP stemming from the contribution and productivity of highly educated, trained people who became employees, officers and leaders.

But here is the rub — banks making student loans in most cases  enjoy immunity from bankruptcy and so they use all sorts of sales techniques to get the prospective student to borrow as much as possible for tuition and”expenses.” They do this for the same reasons that homeowners or home buyers were encouraged to put as much into  their alleged mortgage loan as possible — landscaping and other improvements to the house that did not raise the value of the home.

The game, once again, is securitization. Even if we assume that the claims of securitization of these loans are true, we see a basic inconsistency in the choices the banks make as to how to deal with the risk of loss. The answer, like the mortgage loans, is that they have no risk of loss. They have already sold the student loans into a secondary market for securitization. That being true, the premise behind the exclusion of student debt from the benefits of bankruptcy is false.

The first premise is that banks would not provide funding for higher education without the guarantee that the loans cannot be discharged in bankruptcy and, in other cases, without the guarantee of repayment by the government. This is not true. By securitizing the loans (or at least subjecting them to claims of securitization in the secondary market), the banks are making tons of money as brokers and conduits without any risk of loss whatsoever. Our previous system of public loans for high learning worked far better than the current one in which private lenders dominate the market despite the “reforms” that have been enacted.

The second premise is that both the loans and these government guarantees are salable to “investors.” This is the controversial part. Given the premise behind the government guarantees, why should a broker be able to sell that government guarantee at a profit? What gives them the right to sell government promises? The object was to provide capital to students — not to increase the number of arcane financial products in the marketplace. If the loans are not salable without those government guarantees, it is because (as we know from the mortgage market) the loans make no sense. These are flawed financial products based upon the same “bad underwriting” we have seen in the continuing mortgage crisis.

Thus my premise and my question are the same: why should a bank or other “lender” make a profit on a bad loan? Why should banks be freed from the risk of loss that the government guarantees are meant to cover? Why have we strayed from existing law in which the “banks” (which we have all presumed to be “lenders”) are the party primarily responsible for the viability of the loan? Why should these bad loans be subject to sale to “investors” whose only interest in the student loans is the elimination of risk because the government has guaranteed benefits? Why should young people, before they get their education, be held to a higher standard of responsibility than the banks who are setting them up for failure?

My proposed legal theory is that once a bank makes the election to sell the student loan into the secondary market, the government guarantees should vanish. My theory under current law is that if the loan was funded from the sale of student debt pools there are two outcomes, to wit: (1) the government guarantee does not attach because there is no risk of loss to guarantee and because the lender is not the broker, pretender who appears on the note, (i.e., they were not entitled to the government protections because they brokered the transaction instead of loaning the money) and (2) since the government guarantee is no longer involved, there is no reason to prevent discharge in bankruptcy.

Then we will have close attention paid to the value of the loans and the manner in which they were sold. Once sold, these loans should be dischargeable in bankruptcy. Once sold these loans should offer no safe haven to investors that the loan will be paid by the U.S. government. Whether this can be done in the courts under current law is debatable. But it can and should be done through Congress and state legislatures. Without these reforms we are essentially eating our young.

MISSION CREEP NOTICE: Wall Street is now looking to “Securitize” health care loans. There is hardly anything they are not claiming to securitize.

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8 Responses

  1. So NPV- after the insurance pays out 30-50%, the debt collector/ servicer tries to collect in the name of ? For the full amount? Same as the mortgages? And again, no chain of title, as it were, between the “lender” and the debt collector?

  2. Npv- thanks for that previously unknown(to me) information.
    We wont need to tale out any college loans for any of our kids because they have succeeded on their own merits to make themselves more attractive to
    College recruiters than any on the other students applying.

  3. Thank you, but it does get sold and then it becomes doable to get rid of it as your debt.

  4. Louise you are wrong… Sallie does not sell anything because they only insure the loans. They do not purchase the debt on default… it is sent to the collection account inside the pool and the master servicer sells it out the back-door to collection companies for X amount depending on the insurance.

  5. Ian, here’s the worst part… just like mortgages – if your kid gets a co-borrower – i.e. parents – they sell the loan to the CDO pool for more money because they typically have the student, both parents and the Sallie as Guarantor’s, not to mention the over-collat tranche at the bottom of each series.

    Add interest rate premium based on risk of obligors, and what amounts to a 30 year amortization, and college costs as much as a house in many cases.

    Everyone should refuse to co-sign and have congress remove the guarantees and you will see how cheap colleges get.

  6. Yes the student loan “deal” is another financial scam. However, they (Sallie Mae) sells the alleged debt to debt collectors. That changes the whole scenario as far as paying the debt back. Please read the Fair Debt Collections Practices Act.

  7. Neil- it’s funny as I read this, i am at my son’s college where he will be entering as a freshman in the fall. Yesterday I listened to a presentation by the head of the financial aid office. He stated in passing that the present system is better than the previous system of student loans, if only for the reason that the former system was riddled with fraud due to massive kickbacks from Sallie Mae to the loan placement brokers.
    Knowing what I know, thanks to your site, i was interested in seeing what the guy had to say. From 8 am to 8pm there are many programs for visiting parents.
    In our case, we atarted working with amd encouraging our three boys to work hard, study hard, try their hardest at whatever sports they like, to be polite, to lead their friends away from trouble, etc.
    So they have all been heavily recruited both academically and athletically by numerous schools. As a result they have all 3 gotten practically free rides.
    Throughout all this i have struggled w mortgage servicers, foreclosure mills, do-nothing attorneys, financial disasters, medical bills, deaths in the family.
    But this student loan bubble where kids get out of college w huge debts, can’t get any meaningful jobs, living at home w no hope of moving onward and upward due to lies, fraud, deceit, and a government full of employees who arent going to do a thing about it. It is all an inconceivable disgusting abomination and a gross miscarriage of justice. Thanks for all you are doing.

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