Kimberly Garrison has been struggling with her student loans for a full decade. Unable to land a job with her computer networking associate’s degree, the Homestead woman missed payments, which led to her wages being garnished — about $700 per month. When Garrison received an inheritance after the death of her grandmother, she put the full $10,000 toward her loan debt, she says, in hopes of getting it under control.
Still, the $35,168 she borrowed from 2003 to 2005 to attend the Miami campus of ITT Tech has grown to $62,030.
“It ruined my life,” said Garrison, 38, who works as a FedEx driver and has taken on roommates to keep her living expenses down.
Garrison’s for-profit college education didn’t lead to a career, and she got in over her head by taking out a mix of federal loans and higher-interest private loans. Garrison’s private loans had interest as high as 9.6 percent.
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Private loans make up a significant yet often overlooked piece of the nation’s $1.2 trillion student loan debt.
Some $150 billion of U.S. student debt comes in the form of private loans, which can be issued by banks or the schools themselves. These loans — which have been called the “Wild West” of student borrowing — represent a potentially dangerous trap for consumers.
Financial aid experts say private loans should be a last resort. Private loans demand their own separate monthly payments and the repayment options are less flexible than federal loans. Some private loans have double-digit interest rates, which is like paying for college on a credit card.
The federal government has forgiveness programs for federal loans, including a just-unveiled procedure for students who say their college defrauded them. But private loans aren’t eligible for any of that.
Students from all kinds of colleges take on private debt, but a disproportionate share are attending for-profit colleges. Tuition at for-profits is sometimes so expensive that federal loans aren’t enough to pay for it all.
A recent Miami Herald investigation, Higher-Ed Hustle, showed that some students at for-profit colleges complain they are lied to about the financial paperwork they are signing, or lured into enrolling with false promises about the school’s programs.
More than $32,000 of Garrison’s current outstanding debt is from private loans.
In an email to the Herald, ITT Tech said it couldn’t comment on Garrison’s experience without her signing a privacy waiver form, but it said the average debt load for its students is less — $23,000 — and that most of its students only take out federal loans, and not private loans.
At some for-profit colleges, private loan default rates are extremely high. For one of ITT’s private loan portfolios, a consultant for the school estimated in 2011 that 61.3 percent of private loan borrowers would eventually default, according to a predatory-lending lawsuit against ITT filed by the federal Consumer Financial Protection Bureau.
Some ITT private loans had interest rates as high as 16.25 percent, with an origination fee as high as 10 percent, according to the CFPB. The college disputes the CFPB’s allegations.
Last month, the U.S Securities and Exchange Commission sued ITT’s top executives for fraud, alleging the company, which has 10 Florida campuses, tried to hide its high rate of private loan defaults from investors and the company’s own auditors. ITT spokeswoman Nicole Elam told the Herald that “we vehemently disagree with the SEC’s position and we are confident that the evidence does not support the SEC’s claims.”
At Coral Gables-based Dade Medical College, more than two thirds of students who received one set of private loans ended up defaulting, according to a lawsuit against Dade Medical by American Student Financial Group, which helped administer Dade Medical’s private loans. Through the loans the school issued with ASFG, Dade Medical’s students were taking on as much as $28,769 each in private loan debt, records show.
In its lawsuit response, Dade Medical blamed ASFG for the high number of defaults, arguing that the company didn’t do a good job of collecting payments.
Like mortgages, private loans can be bought and sold, and California-based ASFG purchased more than $1 million in private loans that Dade Medical had previously issued to 248 students. But ASFG accuses Dade Medical of trying to still collect on those loans — even though it didn’t own them anymore — by sending out letters that told students to pay the college directly.
Students’ credit ratings could be damaged if they’re mailing checks to the wrong place.
Dade Medical’s response with the court states “defendants admit that on or about January 2, 2015, it sent letters to approximately 34 students.” The college did not describe what exactly the letters said, and it denied any wrongdoing.
Rosa Somoza attended both Dade Medical and its affiliated school, the University of Southernmost Florida. Somoza said the school told her she could drop off her monthly $124 payments on campus, instead of paying through the ASFG website. She has several months’ worth of receipts showing those payments were made at the school.
In recent weeks, Somoza was stunned to get a “delinquent” letter from ASFG, which stated that she was more than six months behind on her payments. Somoza said Dade Medical is “pocketing the money for themselves.”
Dade Medical did not respond to written questions sent via e-mail, and its attorney declined to comment. Somoza said the experience left her “furious” — and unsure of how it will affect her credit.
The buying and selling of private student loans means that students who fall behind on payments can end up getting sued by a company they’ve never heard of, which has now bought their loan. But similar to the “robo-signing” scandals in the mortgage industry, the company filing the lawsuit may not have processed the documents properly — and in some instances, judges have found the companies couldn’t prove they owned the loan.
When students take out private loans, they often don’t realize the loans are much riskier than federal loans. A report by the Consumer Financial Protection Bureau found that many borrowers who took out private loans hadn’t maxed out on federal loans, which should always come first before private loans are even considered.
The overall default rates for private loans is unknown. For federal loans, the three-year default rate is 7 percent at private non-profit colleges, nearly 13 percent at public colleges, and 19 percent at for-profit schools.
Some for-profit college students have complained to the Florida Attorney General’s Office that they were pressured into private loans they didn’t want.
Kelly Yancewicz was one of them. Yancewicz, who attended Everest University in Orlando, said her school offered a private loan with 7 percent interest when she enrolled. Two months before graduation, Yancewicz told the Herald, the school advised her that the previous loan “never went through” and had to be processed again.
But this time, the interest rate would be 15 percent. She signed because she felt she had no choice.
Yancewicz graduated in 2012 with honors but she said Everest never helped her become a certified pharmacy technician as the school had promised. Yancewicz took Everest off her resume, and she fell behind on her loans.
“I had excellent credit until I went to that school,” said Yancewicz, a single mom with a 10-year-old daughter. “Now it’s just ruined.”
Everest’s former parent company, Corinthian Colleges, declared bankruptcy last month while facing widespread fraud allegations. Everest continues to operate, but under new ownership.
Even with the high default rates, for-profit colleges have a strong incentive to make private loans.
Under federal law, the schools can only get up to 90 percent of their revenues from federal financial aid programs such as Pell grants and loans. For-profit colleges frequently struggle to attract cash-paying students, so getting the required “other” 10 percent is difficult.
Private loans qualify as that other 10 percent. Even when the loans go bad, the schools benefit, because a single dollar in private loans can mean up to nine more dollars in federal money.
Maura Dundon, a senior policy counsel with the North Carolina-based Center for Responsible Lending, said “there should never be a lending practice” where loans are made with the full expectation that most borrowers will default.
“The schools knew that these loans would default on high levels, and they didn’t care, because they needed them as part of their 90/10,” she said, calling it “casebook predatory lending.”
Colleges pay much more attention to whether students default on their federal loans, because if that number gets too high — more than 40 percent in one year, or above 30 percent for three years in a row — the school loses its eligibility for federal money.
Some colleges aggressively track down former students who are behind on their federal loan payments, and try to make sure they don’t default.
Sometimes, this can be beneficial to students, such as when a college steers a student into a more-manageable income-based repayment plan. But colleges have frequently tamped down defaults by convincing students to accept a “forbearance,” where the student temporarily postpones any payments, the past due balance is added to the loan principal and the account is made current.
A forbearance is a short-term solution, and it doesn’t solve the larger issue of students who can’t afford to pay back their loans. It also makes the student’s total mountain of debt bigger.
But colleges are only judged for federal loan defaults in the first three years after completion of school, so if the forbearance postpones the student’s default to year four, the college doesn’t have to worry about losing access to taxpayer dollars.
One former Dade Medical College employee, who posted her resume online, listed her former position as a default rate “specialist” who would reach out to students and work to “monitor and minimize” defaults. Dade Medical’s current federal default rate is 18.8 percent — down from 25.2 percent the year before.
When a U.S. Senate committee investigated for-profit colleges, it found some chains had large in-house departments dedicated to pushing down federal default rates. Internal company documents obtained by the committee showed Corinthian Colleges had a goal of stopping as many as 25,000 students a year from hitting default — which required up to 2.5 million annual phone calls.
Corinthian offered some former students a $20 gift card from McDonald’s as an incentive to get them to respond, records show.
At Kaplan University, a 2009 “Default Management Status Update and Strategy” document showed “spot use of private investigators” to reduce defaults. The investigators earned $1,000 for each student they tracked down and prevented from defaulting.
Kaplan, which teaches mostly online and is partly based in Fort Lauderdale, boasted in the 2009 document that the federal default rate at one campus had been pushed down from 26.9 percent to 16.4 percent in a single year.
“Results show that, with focus, the rates can be moved,” the company wrote.
The Senate committee’s 2012 report wrote “this practice is troubling for taxpayers,” as default rates are supposed to be a “key indicator” of a school’s quality and the ability of its graduates to get jobs.
“Schools that would otherwise face penalties — including loss of access to further taxpayer funds — continue to operate because they are able to manipulate their default statistics,” the report states.
Company-wide, Kaplan’s current federal default rate is about 20 percent. The Senate committee found that, in 2009, one of Kaplan’s private loan programs had a default rate of 69.5 percent.
In a statement to the Herald, Kaplan said its in-house private loan program was “limited in scope” and has since been discontinued.
Kaplan added that it cautions its students to limit how much they borrow in the first place, and it provides them with debt management courses, and “lessons on managing a personal budget and understanding interest payments and calculations.”
“Our financial counseling and support programs represent student-focused, best practices,” Kaplan wrote.
NEED TO MAKE A COMPLAINT?
The federal Consumer Financial Protection Bureau accepts student loan complaints at: http://1.usa.gov/1EvFdeN