Student Loan Blog : student loan defaults

SEC Investigates University of Phoenix Owner, Apollo Group

Student Loan Girl — Thu, 29 Oct 2009 19:03:00 GMT

Apollo Group Inc., the parent company of the University of Phoenix, the largest for-profit college in the country, announced on Tuesday that the Securities and Exchange Commission has launched an “informal inquiry” into the company’s revenue accounting practices.

This new probe, being conducted by the SEC’s enforcement unit, marks the second time this year that the SEC has targeted Apollo’s accounting operations for investigation. In February, the corporate finance division of the SEC also revealed it was reviewing Apollo’s revenue recognition practices.

“The ‘revenue recognition’ issue revolves around how Apollo determines when a student drops out of a class and how much income Apollo can leave on its balance sheet, and for how long,” The Associated Press explains in its reporting on the new SEC inquiry (“Ahead of the Bell: Apollo Shares Sink on SEC Probe,” Oct. 28, 2009).

Nearly 90 percent of Apollo’s income — most of which is generated from student tuition — comes from federal student loans and other government financial aid. Federal student aid accounted for roughly 86 percent of the company’s revenue in the 2009 fiscal year, Bloomberg reports, up from 82 percent in fiscal 2008 and 48 percent in fiscal 2001 (“Apollo Shares Plunge as SEC Starts Accounting Inquiry,” Oct. 28, 2009).

Apollo Defends Accounting Policies

In a conference call with investors on the same day that it released the news of the SEC probe, Apollo defended its accounting practices (webcast of Apollo’s fourth-quarter 2009 earnings conference call, Oct. 27, 2009).

Analysts on the call directed questions toward Apollo’s revenue recognition policies, asking the company about its attendance records and how revenue is booked when a student drops a class.

Apollo responded that it stops recognizing revenue not immediately upon a student’s withdrawal from a course but only once a tuition refund is processed. The company books full tuition revenue for a course if a student attends more than 60 percent of the class sessions. In the case that a refund is delayed for any reason, the company will make the necessary revenue adjustments, Apollo said.

“The policies are straightforward and they are in accordance with GAAP — all of them,” said Apollo’s chief financial officer, Brian Swartz, referring to Generally Accepted Accounting Principles, the standard financial accounting guidelines that publicly traded companies are required to follow.

Analysts: SEC Targeting of More For-Profit Institutions Unlikely

After Apollo’s announcement of the SEC inquiry, the company’s shares plunged nearly 20 percent to their lowest levels in more than 19 months in New York trading.

But blowback from the news of the government’s scrutiny didn’t remain limited to Apollo: Shares of other for-profit education companies traded lower yesterday, the day after Apollo’s announcement, The Wall Street Journal reported, as investors questioned whether the SEC probe into Apollo is a precursor for an industry-wide crackdown (“Education Stocks Drop After Apollo Announces SEC Probe,” Oct. 28, 2009).

“For-profit colleges have come under fire numerous times for their methods of recognizing revenue,” the article in The Wall Street Journal notes.

Perhaps with this history in mind, “some investors have opted to scrutinize the company’s practices on student refunds and bad-debt expense, the implication being that this could be the beginning of an industry-wide review of practices,” a Wedbush Morgan analyst wrote in a note to investors Wednesday.

However, the Wedbush Morgan note went on to caution, “we remind investors that it’s plausible that the issue could equally relate to other parts of the business.”

Trace Urdan, who follows Apollo for the Signal Hill Capital Group, believes a larger regulatory examination into for-profit colleges is something to be taken into consideration. “I think there’s sort of two possibilities,” Urdan told The Arizona Republic. “Either the SEC’s got something on Apollo specifically and they’re moving in, or there’s something related to the industry” (“Apollo in Accounting Investigation,” Oct. 28, 2009).

Other analysts, however, feel the SEC action doesn’t represent anything broader in scope than a check into Apollo itself.

While downgrading their ratings of Apollo, analysts at Morgan Stanley noted there’s no reason to believe the SEC investigation signals a larger industry issue, The Wall Street Journal reported. And in a note to clients, RBC Capital markets analyst Robert Wetenhall asserted that his firm is confident the SEC accounting probe is specific to Apollo.

“We feel that the issues that are affecting Apollo are unique to it and not applicable to the broader sector” of for-profit education companies, Wetenhall said.

Analysts at Deutsche Bank, consulting with financial legal expert David Seide, concurred. In their estimation, the StreetInsider reported, the SEC issue “is probably company-specific, not part of an industry-wide sweep, as the SEC enforcement division focuses on potential violations, not policy” (“Apollo Group Can’t Find Traction After Disclosing SEC Probe,” Oct. 29, 2009).

Seide “did not rule out an industry sweep, but this seems like a lower-probability event.”

A Move Toward Increased Oversight of For-Profit Colleges?

Some market-watchers wonder if the SEC probe of Apollo, while not ushering in a federal swoop-down on for-profit colleges, may still be an indication of significant changes in regulatory attitudes toward these schools looming in the wings of the White House.

In this view, the SEC inquiry may have arisen out of the move toward generally increased consumer financial protections within the new government administration.

“It is no secret to insiders that the Bush-era education team has been favorable to for-profit education,” Citron Research declared, noting that Sally Stroup, the assistant secretary for post-secondary education during the Bush administration and the highest-ranking official overseeing for-profit schools, was a lobbyist for the University of Phoenix for eight years (“Citron Releases the Document That the Apollo Group Does Not Want You or the U.S. Government to See,” Jan. 13, 2009).

Citron has been fiercely critical of what it argues are Apollo’s fraudulent business practices and unethical, strong-arm recruitment tactics (“Citron Exposes Apollo’s Big Dirty Secret,” March 4, 2009).

“Count on the Obama administration to take a fresh, critical look” at Apollo, Citron predicted in January. “As the largest single recipient of student loans in this country, [Apollo] is a for-profit institution whose insiders have sold hundreds of millions of dollars of stock while collecting over 75 percent of their revenue from government-guaranteed loan funds, while delivering an education of questionable value amid a history of unsavory business practices.”

Continuing Legal Embroilments for Apollo

The changed tenor at the White House notwithstanding, specialists in financial circles say the SEC’s investigation into Apollo may never go any further than the current “informal inquiry.”

“We do not believe a formal inquiry or fraud allegations are a foregone conclusion,” Deutsche Bank analysts told the StreetInsider.

In fact, out of the roughly 800 informal investigations initiated each year by the SEC against corporations and individuals, only slightly more than half, about 450, result in formal investigations, the StreetInsider reports. Just 100 result in actions.

At the same time, even if this newly launched SEC review of Apollo’s accounting practices fades away with no further repercussions, corporate observers can’t escape the fact that this latest government probe is adding yet another chapter in a growing string of recent legal troubles for the company:

Sued by employees: In its fourth-quarter and year-end earnings report issued on Tuesday, the same report in which it disclosed the SEC inquiry, Apollo also revealed it took a charge of $80.5 million for the quarter to cover a possible settlement pending in a federal whistleblower suit (“Apollo Group, Inc. Reports Fiscal 2009 Fourth-Quarter and Year-End Results,” Oct. 27, 2009).

The lawsuit, brought in 2003 by two former University of Phoenix enrollment counselors, accuses the University of Phoenix of violating a federal ban that prohibits schools from paying recruiters based on the number of students the recruiter enrolls.

Apollo paid $9.8 million to the U.S. Department of Education in 2004 to settle alleged violations of the same rule, Bloomberg reports.
Sued by shareholders: That same year that Apollo settled with the Education Department for illegal recruiting, Apollo officials, after receiving a scathing report from government regulators on the company’s recruitment practices, decided not to publicly disclose the contents of the government report, out of concern for the potential negative reaction from shareholders.

The decision to hold back this information led to a securities class-action lawsuit from Apollo shareholders, accusing the company of misrepresenting and of failing to disclose “material adverse facts.”

In January 2008, a federal jury unanimously found Apollo guilty of securities fraud for misleading investors, delivering a verdict of $277.5 million, although the judgment was overturned seven months later on appeal.
Sued by students: Apollo has also been taken to court by its students: In December 2008, three former University of Phoenix students filed a federal class-action lawsuit against Apollo and the University of Phoenix, accusing the institutions of improperly denying them the use of federal student loans, in violation of the Higher Education Act.

The students alleged that, when they dropped courses shortly after enrolling, the University of Phoenix returned all of their federal student loan funds to the lenders without the students’ “knowledge or consent,” even though the students had already incurred tuition charges. The school then demanded immediate repayment from the students for the partial tuition owed.

By charging the students directly and not allowing them to use their federal student loans as payment, the complaint stated, the University of Phoenix denied these students the borrower protections and more generous loan repayment terms offered by the federal government.

Returning the students’ federal student loan money was also a “transparent attempt” by the University of Phoenix to unlawfully manipulate its federal student loan default rate, the lawsuit charged, since students who don’t finish their education are at the highest risk of defaulting on their student loans. In this case, the school effectively prevented these high-risk students from defaulting on federal student loans. If the students failed to pay their tuition charges, they would be defaulting on a debt to the school, not to the government — a default that wouldn’t affect the school’s eligibility for federal funds.

Student loan default rates were also the focus of a recent government assessment of for-profit schools. The Government Accountability Office released a report last month critical of the high student loan default rates at for-profit colleges like those run by Apollo (“Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid”).

For-profit schools, the GAO found, exhibited a tendency to admit unqualified students who are more likely than other students to drop out, as well as a pattern of allowing students to remain enrolled despite a lack of academic progress.

On the company’s Tuesday conference call, Apollo’s co-chief executive, Chas Edelstein, assured investors that the company is working to “ensure that only students who have a reasonable chance to succeed enroll in our universities,” as a means of trying to scale down the number of students who default on their student loans.

Apollo’s bad-debt expense — defaulted student loans the company has written off as uncollectable — rose to 4.2 percent in the fourth quarter, up from 3 percent.

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‘Gap Loans’ at For-Profit Colleges Escape Proposed Legislation

Student Loan Girl — Tue, 27 Oct 2009 19:47:00 GMT

While acting last Thursday to approve the creation of a Consumer Financial Protection Agency, which will expand federal oversight of private student loans, a Congressional panel at the same time voted to reject a proposal that would have included school-sponsored “gap loans” under the authority of the new CFPA.

The House Financial Services Committee, in a vote of 39 to 29, approved the Consumer Financial Protection Agency Act of 2009 (H.R. 3126), a centerpiece of the Obama administration’s pursuit to overhaul the nation’s financial regulatory system. The approved legislation would create a new federal agency, the CFPA, which would have the authority to write new consumer protection rules in the arenas of lending and credit, including private student loans (“House Panel Moves to Regulate Private Student Loans,” Oct. 26, 2009).

Gap loans, however, could potentially be exempted from the CFPA’s oversight due to language included in the bill meant to shield small businesses and local merchants that extend credit to their customers. A proposed amendment to the CFPA Act that would have clarified that gap loans are subject to CFPA regulation was narrowly defeated in the House committee by a vote of 35 to 33.

Gap Financing on the Rise at For-Profit Schools

“Gap” student loans — so-called because they’re intended to cover students’ financing gaps, any college costs that aren’t covered by a student’s financial aid (scholarships, grants, federal student loans) — are increasingly being offered by for-profit colleges and vocational schools to boost enrollment as these institutions encounter a swelling influx of unemployed and low-income students looking to return to school to obtain a higher-earning degree, learn a new trade, or acquire additional training for their résumé.

“Because the economic meltdown has made it harder for students to get bank loans, several of these schools are increasingly stepping in, financing degrees in the same way a furniture store or used-car dealer might extend credit to customers,” explains Justin Pope, an education writer for The Associated Press (“For-Profit Colleges’ Increased Lending Prompts Concerns,” Aug. 15, 2009).

For-profit schools, also known as “proprietary” colleges, that provide gap financing, which include national heavyweights ITT Technical Institutes, Corinthian Colleges, and Career Education Corp., say that their financing programs allow students to attend school who wouldn’t otherwise be able to afford a college education.

But these gap financing programs are risky and expensive for students, consumer advocates maintain. Gap loans typically carry high interest rates, sometimes in the double digits, and large monthly payments that the schools’ generally low-income students often aren’t able to handle — all while allowing the schools to reap hundreds of thousands of dollars in federal money from the federal financial aid that students use to pay the bulk of their attendance costs.

“I believe we have an obligation to ensure that these schools are not allowed to continue to prey on students,” said Rep. Maxine Waters, D-Calif., who sponsored the defeated CFPA amendment. “By subjecting these schools to CFPA’s authority, the quality of the student loans these schools provide will improve” (“House Panel Approves Expanded Oversight of Private Student Loans,” The Chronicle of Higher Education, Oct. 22, 2009).

Consumer Groups Push for Regulation of Gap Financing

Consumer and student advocate groups, concerned about the potential for student loans made by proprietary schools to be exempted from the CFPA legislation under the bill’s small-business clause, had been lobbying in support of the Waters-sponsored amendment to explicitly bring gap loans under the authority of the CFPA.

“We just want to make sure that the risky financial products that some colleges, for-profits in particular, have been making to students are still covered by this agency, and not undercut by a well-intentioned suggestion of how to make sure that the neighborhood grocer isn’t unfairly and unduly impacted” by increased regulation, said Lauren Asher, president of The Institute for College Access & Success (“Regulating Private Student Loans,” Inside Higher Ed, Oct. 19, 2009).

Asher and TICAS joined a number of other consumer and student advocacy groups in drafting a letter earlier this month to Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee, urging the committee to clarify that school-sponsored loans wouldn’t be shielded from the CFPA’s reach (letter to Rep. Barney Frank regarding H.R. 3126, Oct. 7, 2009).

“To effectively protect consumers, the CFPA must have full authority to regulate private student loans regardless of the institution offering them,” the groups wrote. “For consumers, a private student loan can pose the same serious risks whether issued by a financial institution or by a school. The CFPA should apply and enforce standards based upon the product and not the issuing institution.”

Gap Loans vs. Gap ‘Financing’: The Non–Student Loan

Proprietary colleges argued against the Waters amendment, saying that gap student loans are already regulated by the federal Truth in Lending Act.

New TILA rules, mandated under last year’s Higher Education Opportunity Act (H.R. 4137) and which will go into effect in February, will require student lenders to disclose more details about their private loan programs, including interest rates and estimated monthly payments, and to inform applicants for private student loans about federal student loan options.

Consumer advocates, however, hold that TILA regulations aren’t sufficient and that the stricter oversight of the CFPA is necessary in order to protect student loan borrowers.

In pushing for the Waters amendment, consumer and student advocacy groups pointed to the move being made by some schools to offer their gap funding under the auspices of “consumer financing” rather than as a student loan program. By structuring their gap funding programs as consumer financing rather than as private student loans, schools are able to skirt the student loan–specific requirements, regulations, and borrower disclosures mandated by the Higher Education Opportunity Act.

“It’s very alarming,” said Deanne Loonin, director of student loan borrower assistance project at the National Consumer Law Center. Schools “can structure the products in all kinds of ways — things like revolving credit lines, unsecured loans, even secured loans. It’s this new thing, and we’re worried about it.”

One for-profit school, Colorado-based Westwood College, is currently defending itself against a class-action lawsuit brought by students accusing the school of fraud in its student financing. The lawsuit charges Westwood with violating state banking laws. Westwood’s student financing program carries a relatively high interest rate of 18 percent, but the school doesn’t call its financing student loans.

The For-Profit Risk

Students at proprietary colleges are particularly vulnerable to the schools’ high-interest loans and financing programs, consumer and student groups say, because of who these students are: lower-income, higher-risk borrowers.

Low-income students, who tend to drop out of college in greater numbers than higher-income students, generally end up struggling to repay their student loans. And for-profit colleges, with their student populations that skew toward lower income levels, on average have lower graduation rates and higher loan default rates than other schools.

In 2007–08, students at proprietary colleges defaulted on their student loans at a rate of 11.1 percent, according to the Department of Education, compared to a default rate of 6.0 percent for students at public nonprofit colleges and universities and a rate of 3.8 percent for students at private nonprofit institutions.

Students at for-profit schools are also taking on increasingly higher debt loads: The percentage of proprietary college students borrowing at least $40,000 nearly tripled to 30 percent between 2003–04 and 2007–08, says Mark Kantrowitz, founder of the financial aid website, FinAid.org. The proportion of proprietary college students taking out private student loans has also come near to tripling, rising to 43 percent from 15 percent in that same time period, according to an analysis of federal data by the nonprofit group Education Sector.

Nonetheless, critics charge, as long as proprietary schools can continue to bring in significant federal funds with each student, the schools have little incentive to refine their lending practices to ensure that students aren’t taking on unmanageable debt.

“Consider, for example, a school charging $10,000, hoping to enroll a student who has lined up $9,000 in aid from the government and elsewhere,” writes Pope. “Even if the school loses half of the $1,000 it lends to get the student in the door, it comes out $9,000 ahead.”

And “for many of these students, if you don’t apply these thousand dollars, they’re not coming to school,” says Jeff Silber, an industry analyst with BMO Capital Markets.

From the school’s perspective, you’re realizing “all those other revenues,” he elaborates, “even if you write off $500 [of that $1,000] right away. … Financially it still makes sense to do this.”

And with last week’s defeat of the CFPA amendment, the stage is set for schools to press on with their gap financing programs, having sidestepped, at least for now, the impending shadow of the CFPA and increased federal oversight.

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Anticipating a Falloff in Student Loan Defaults

Student Loan Girl — Thu, 22 Oct 2009 19:47:00 GMT

After hitting a new high of $443 million in charge-offs on its student loans this past quarter, major student lender Sallie Mae anticipates a slowdown in these student loan defaults, the company announced during its third-quarter earnings call yesterday (SLM Corp. Q3 Earnings Call Transcript, Oct. 21, 2009).

Although Sallie Mae’s student loan charge-offs — the student loans the company writes off as defaulted and not being repaid — rose to a total of $443 million over the third quarter, up from $355 million in the previous quarter, monthly charge-offs declined month by month through the third quarter itself.

Monthly student loan charge-offs during the third quarter fell from $160 million in July to $129 million in September, and the company sees this trend continuing into 2010 as more borrowers with stronger credit profiles begin to represent a larger portion of Sallie Mae’s student loan portfolio.

In the credit crunch that followed the subprime mortgage implosion, Sallie Mae and other student lenders struggled to find investors willing to buy bundled student loans and take on the risk of student borrowers. As a result, student loan lenders tightened their credit criteria for their private student loans, requiring higher credit scores from borrowers and creditworthy co-signers for student borrowers with low or unestablished credit.

“The credit of the new borrowers is extraordinarily strong,” said Albert Lord, Sallie Mae’s chief executive officer.

Remondi concurred, “The quality of the loans we disbursed in the [third] quarter was very strong,” with an average borrower FICO credit score of 746 and with 88 percent of the loans carrying a co-signer. In 2007, only 54 percent of the company’s private student loans carried a co-signer.

Already, October 2009 charge-offs are projected to be more than $40 million lower than in July, Remondi said.

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Government Asks Student Loan Borrowers in Default to Pony Up

Student Loan Girl — Mon, 16 Feb 2009 22:02:00 GMT

Americans who have failed to repay their federal student loans may soon find themselves facing litigation, The National Law Journal reports (“Government Cracking Down on Unpaid Student Loans,” Feb. 13, 2009).

The U.S. Department of Justice has contracted with Teller, Levit & Silvertrust, P.C., a collections law firm that specializes in creditors’ rights and commercial litigation, to recover defaulted college loans — some taken out almost 30 years ago. The collections firm is expected to file as many as 20 new cases a week in early 2009 against borrowers who are delinquent on their federal student loans.

“The government pursues recovery of money it’s owed,” said Randall Samborn, a spokesman for the U.S. Attorney’s Office for the Northern District of Illinois, the federal court in which the cases were filed. “Unfortunately, student loan defaults are a voluminous source of litigation.”

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Defaulted Student Loans Stuck in Credit-Freeze Induced Limbo

Student Loan Girl — Tue, 10 Feb 2009 18:52:00 GMT

Thousands of student loan borrowers who have defaulted on their student loans — including 15,000 additional borrowers each month — are being forced to remain in default despite their efforts to bring their loans back into good standing, The Chronicle of Higher Education reports (“Credit Freeze Leaves Thousands of Student Borrowers Stuck in Default,” Feb. 13, 2009).

“I’ve done what I’m supposed to do, and they’re holding me hostage,” says Judy Ellis, a borrower who has made nine on-time payments to bring her student loan out of default. “I want to make this right, and I want to move on.”

But Ellis can’t move forward because the stagnant credit markets have made it harder for student loan guarantors to sell these “rehabilitated” loans back to lenders. A borrower must wait for the guarantor to find a lender to buy the defaulted loan before the loan, and the borrower’s credit, can be restored to good standing.

Currently 19 of the nation’s 35 student loan guarantee agencies, the companies who insure student loans against default, have no buyers for the rehabilitated student loans they hold. The market for rehabilitated loans has been effectively shut down for months due to the credit crisis, and in November, SunTrust, the only commercial bank that was still buying rehabilitated loans, exited the market.

Now, says Timothy Fitzgibbon, vice president for debt-management services at the National Council of Higher Education Loan Programs, nearly $150 million in debt is piling up every month on top of an existing backlog of loans awaiting rehabilitation.

Guarantors Awaiting Legislative Action

Consumer advocates say changes need to be made quickly before borrowers get so fed up with being “stuck” in default that they stop paying their student loans altogether, which could lead to more defaults and re-defaults.

“The last thing we want is for people to pack it in and say, Oh, never mind,” says Michael Ryan, vice president of borrower services for American Student Assistance, the student loan guarantor in Massachusetts.

Legislation passed by Congress last year authorized the Department of Education to buy up student loans from guarantors, but the legislation only approved the department to purchase loans made after 2003, and most rehabilitated loans that guarantee agencies hold predate that.

Guarantors believe that with creative interpretation of the law, allowing almost-rehabilitated loans to be considered “new,” the Education Department could use its authority from the bailout to buy up more loans. But Fitzgibbon argues that “it would be much cleaner to get a legislative fix,” which could come as part of a proposed spending bill or as part of revisited legislation from the previous session of Congress, than for the Education Department to reinterpret its purchasing authority.

“While this is being sorted out,” says Deanne Loonin, a staff attorney with the National Consumer Law Center, guarantors should stop collecting on the loans — a step guarantee agencies aren’t likely to take. Guarantors are encouraging borrowers whose student loans are currently frozen in default to continue making payments until buyers can be found.

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Univ. of Phoenix Accused of Manipulating Its Default Rate

Student Loan Girl — Wed, 14 Jan 2009 23:39:00 GMT

Three former University of Phoenix students are suing the for-profit higher education giant for using a questionable loan repayment practice that skews the university’s default rate and takes away federal student loan repayment options from students who withdraw from the school, according to The Chronicle of Higher Education (“Lawsuit Accuses U. of Phoenix of Protecting Its Default Rate at Students’ Expense,” Jan. 14, 2009).

The lawsuit, which could soon reach class-action status, alleges that the university’s ”payback” policy is designed to manipulate the school’s default rate — the percentage of a school’s students who stop repaying their loans. Under the current policy, the school “pays off” students’ federal college loans without students’ knowledge or consent after they have withdrawn from the institution. The University of Phoenix then attempts to improperly collect on the paid-off loans directly from the students “under terms more onerous than those of the original federally guaranteed loans.”

By canceling the federal student loan debt of students who withdraw from the school, the University of Phoenix, which has one of the lowest default rates among the nation’s for-profit colleges, effectively prevents those loans from being considered in its default rate.

Statistics suggest that students who withdraw from school are more likely to default on their student loans, and the more borrowers a school has who go into default thereby increasing its default rate, the more likely the school is to lose its ability to participate in the federal student loan program, among other restrictions.

Students Lose Repayment Benefits Under ‘Payback’ Policy

According to the lawsuit, the university’s payback policy harms students by preventing them from being able to take advantage of generous loan repayment terms offered by the federal student loan program, which include below-market interest rates and longer repayment terms and grace periods.

Students who must repay the University of Phoenix directly are “routinely bombarded with calls, letters, and e-mails from [the university] to collect tuition along with threats that refusal to pay will result in referral to collection agencies and negative reports on their credit.”

The lawsuit seeks actual and punitive damages on behalf of thousands of borrowers affected by the university’s repayment practice over the past four years, as well as an injunction barring the university from continuing its current payback practice, which could affect numerous other for-profit colleges that use similar practices, the Chronicle reports.

In a statement, the University of Phoenix said that the students bringing the lawsuit have “misconstrued” the Higher Education Act, and that the U.S. Department of Education had determined in January 2008 that the school’s refund policies were compliant with federal student aid rules.

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Debt Collection Agency Adding Hundreds of Jobs

Student Loan Girl — Tue, 18 Nov 2008 17:21:00 GMT

Premiere Credit of North America, a debt collection agency based in Indianapolis, is a bit of an anomaly in today’s down economy — it is thriving at a time when many businesses are cutting back their workforces and many debt collection agencies are losing money to cash-strapped consumers who can’t pay up.

Premiere Credit, which specializes in collecting unpaid student loans and government debt, has been performing so well that it’s looking to add nearly 300 employees to its 250-person staff, reports Erika Smith of The Indianapolis Star (“Debt Collector Premiere Credit to Expand, Add 300 Jobs,” Nov. 13, 2008).

To accommodate its growing business, Premiere Credit is also preparing for a $4 million expansion of its headquarters and is planning to open a second operations center (“Indianapolis Debt Collection Firm to Expand,” Chicago Tribune, Nov. 12, 2008).

The company, which manages more than 700,000 accounts valued at more than $1 billion, is scheduled to receive about $2.5 million in performance-based tax credits from the state, as well as up to $200,000 in training grants.

Student Loans Make Up 40% of Company’s Debt-Collection Business

Premiere Credit CEO David Hoeft attributes the company’s growth to its four-year contract with the U.S. Department of Education, which currently accounts for 40 percent of its business. While the number of delinquent college loans isn’t growing — the student loan default rate has remained steady at 5 percent over the last few years — Premiere has snagged a greater proportion of collection work, Hoeft said, and, with the help of an expansion to its Education Department contract, Premiere’s student loan debt collection business is expected to grow even more.

Debt collectors have a much easier time collecting government-backed student loans than unsecured debts like credit cards, which are not tied to an asset. Federal student loans can forcibly be repaid in a number of different ways and debt collectors have more legal leeway to track down debtors.

“There’s no statute of limitations on collection efforts. [Federal student loans], more often than not, can’t be discharged in a bankruptcy,” Smith writes. “Collection agents can garnish wages, tax refunds and Social Security payments, and they can access a federal database of new hires that makes it easier to find employed people who can pay.”

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Citibank Suspends Student Loan Program for International Students

Student Loan Girl — Thu, 16 Oct 2008 01:04:00 GMT

Citibank announced it is canceling its private student loan program for international students in an effort to minimize its financial risk during the global financial crisis, Bloomberg reports (“Citigroup Curbs Foreign-Student Loans at Harvard, MIT, Michigan,” Oct. 15, 2008).

The lender’s CitiAssist private student loan program allowed international students at certain schools to borrow as much as $150,000 in private student loans without a cosigner; similar programs required that international borrowers have a U.S. citizen or permanent resident cosign on the loans.

Citibank informed MIT and the University of Michigan this month that it will stop making CitiAssist loans to the schools’ international students in November, just before students begin borrowing for the 2009–2010 academic year. Earlier this month, the bank also terminated its international lending program at Harvard University.

CitiAssist “did fill a very important role,” says Elizabeth Hicks, executive director of student financial services at MIT, where more than 200 of the school’s foreign students at the Sloan School of Management will have fewer borrowing options to help them meet their education costs, which total nearly $76,000.

International Student Loans Drying Up, More Banks Unwilling to Lend

In suspending its lending program to international students, Citibank joins Bank of America, one of the largest providers of student loans to foreign students, which terminated its foreign student lending program in April.

Other lenders are not likely to fill in the lending gap to international students, due, in part, to the fact that international students have a higher likelihood of default than U.S. students and because loans to “international students are not the most profitable loans,” says Mark Kantrowitz, publisher of Finaid.org, a financial aid website sponsored by Citibank’s parent company Citigroup.

Analyst Daniello Natoli, of New York-based financial firm Matrix USA, adds, “It makes sense for [Citibank] to move away from riskier products such as loans to international students, whose creditworthiness is more difficult to assess.”

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Shares of Corinthian Colleges Stock Take Nosedive Over Student Loan Defaults

Student Loan Girl — Fri, 29 Aug 2008 01:56:00 GMT

Despite an 11.5-percent boost in student enrollment and an 18.3-percent growth in revenue over the last quarter, Corinthian Colleges saw its shares tumble in afternoon NASDAQ trading on Tuesday, as investor fears persist of rising defaults on the school network’s student loans (“Defaults Drown Corinthian,” Forbes, Aug. 26, 2008).

Corinthian’s stock value plummeted 19.3 percent, with investors selling off shares even as the company posted a smaller-than-expected fourth-quarter loss, thanks to higher revenues spurred by the increase in enrollment.

Second-Worst Stock Downslide Since Being Dropped by Main Student Loan Provider

Corinthian, a for-profit operator of more than 100 colleges and trade schools in the United States and Canada, has been struggling to maintain a source of financing for its 72,000 students ever since three of its largest student loan providers — Sallie Mae, College Loan Corp., and Student Loan Express — informed the company that, effective March 1, they would no longer be able to offer “serial” private student loans to the schools’ subprime borrowers. These serial transactions provided current subprime student borrowers — those who have weaker or limited credit histories — with subsequent student loans for ongoing studies.

In 2007, over 75 percent of Corinthian’s private student loan portfolio consisted of subprime student loans, and 90 percent of Corinthian’s private student loans in the United States were provided by Sallie Mae.

In fact, the 19-percent drop in Corinthian shares on Tuesday was the biggest percentage decline only since Sallie Mae made its announcement, on January 22, that it would stop issuing subprime private loans to Corinthian’s students. In the last 12 months, up until Tuesday, reports Bloomberg, Corinthian shares had risen 20 percent (“Corinthian Falls After Increases in Student Lending,” Aug. 26, 2008).

Taking Student Loans Into Its Own Hands: Inviting Risk With Revenue

To offset its loss of student loan lenders, Corinthian established a new company-sponsored student loan program in the fourth quarter called ACCESS and, according to Chief Executive Officer Jack Massimino, was able to provide funding for “the vast majority of students.”

But with a greater volume of student loans comes increased exposure to potential student loan defaults, and Corinthian’s defaults in the fourth quarter rose to 9.1 percent of its revenue, compared to 6.2 percent a year ago.

Corinthian’s chief financial officer, Kenneth Ord, said that for the 2009 fiscal year, Corinthian will spend all available cash on student loans that isn’t already earmarked for capital expenditures; however, investors are still uneasy, worried that Corinthian will fall short of its projected earnings for 2009 and may need to write off some of its student loans to stay afloat.

The company’s student loan program — and the higher rate of borrower defaults that investors fear is coming with it — “adds risk to the forecast,” said Jeffrey Silber, an analyst with BMO Capital Markets. “People were expecting sizable margin expansion, and this is going to put a damper on that. People are not giving [Corinthian] the benefit of the doubt.”

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