Colleges Cheating on Student Loans
Warning: Colleges Caught Cheating on Student Loans? Decide for Yourself
Just when you thought the student loan problem couldn’t get any worse – it did. A recent report issued by the GAO (Government Accountability Office), cited serious infractions by some colleges and universities regarding default rates, effectively cheating on student loans.
Some background and explanation will illustrate it better. In order for a college or university to be eligible for federal financial student aid, they must maintain a “cohort default rate” that is below a certain level. What that default rate means is the college’s share of their students who have student loans that went into default within three years of beginning repayment.
You can be sure that when a lot of money is involved, educated minds are at their highest level of creativity. Some colleges hired outside consultants who were motivated in helping the college and not the student. The consultants improperly placed many unfortunate borrowers in forbearance, even when there were better options for the student to pursue.
This action took the student loans out of default classification because their loans were now in a status where repayment was postponed for a certain period of time. This resulted in the college now having a lower default rate and assured them of continuing federal student aid. All of these loans in forbearance continued to accumulate interest, and in the long run, made it much more costly for the student and the taxpayer.
Under the accountability rules, a college can be sanctioned if 30 percent of their students end up in default on direct federal loans, within three (3) years after they leave the college. Should a college reach that rate for three consecutive years, all access to federal student aid can be lost. Any college that reaches a 40 percent default rate in one year can suffer an immediate loss of aid. Cheating on student loans by colleges is serious.
The intent of the accountability rule is to make sure that colleges properly prepare students to enter the labor market when they graduate. Colleges must be held accountable if a large number of their students are unable to cope and their loans go into default. The GAO report did find that colleges tend to cover up the fact that many of their students are having problems repaying student loans.
Consultants quick to place loans in forbearance
The colleges’ idea of helping the students, was to hire outside consultants and pay them for every loan taken out of default status. The consultants quickly discovered that placing a loan in forbearance was faster and took less work. A huge benefit to this was another loan removed from a delinquent classification. Cheating on student loans is a serious offense.
Ideally, the consulting firms were to contact the delinquent borrowers and offer their assistance to avoid default. There are various options available that would help the borrowers get back on track to keep the loan current. This procedure would also help the school to be in compliance with regulations.
Unfortunately, the consultants took the easy way out by recommending the borrowers place their loans into forbearance. This meant that the borrowers would not be in default, and would have no payments due for a certain period of time. Interest on the loans would continue to accrue and would add to the balance of the loan to be repaid at a later time.
It appears that consultants were motivated in helping the college and not the student. They improperly placed these unfortunate borrowers in forbearance, even when there were better options for the student to pursue, such as a plan with repayment based on income. You can get help with your student loans here.
Forbearance is a short-term fix, not a long-term solution
When a borrower relies on forbearance, often times for a year or more, it illustrates an intended short-term fix being used as a long-term solution – and that will not work.
Loan forbearance is intended to help a borrower who may have a temporary cash flow problem, such as between jobs, or perhaps an expensive medical issue. A borrower who accepts the forbearance option will have a substantial amount of interest accruing that must be paid back with future payments.
The GAO report stated that, for many borrowers, loan forbearance for a long period of time simply postponed the inevitable default. All that it succeeded in doing was to keep the college within the norms of the accountability rate.
Placing delinquent borrowers in forbearance rather than trying to help them with other workable options, is done to benefit the school, not the students. This method of managing the delinquency rate is wrong and needs to be changed. Cheating on student loans cannot be tolerated.
Borrowers and taxpayers suffer in long-term
It makes one wonder if forbearance primarily benefits the college and the consultants they hire, why does Congress sit back and hope that it goes away? It would be much better if delinquent borrowers were placed in a program with repayment based on their income. Their loans would remain current and they could work toward some portion of the loan being forgiven at some future date.
Normally, consultants hired to work with student loan borrowers are paid based on the number of loans brought current. This alone is the incentive to recommend that borrowers take the faster option of forbearance.
The GAO report revealed other improper methods used by consultants hired by colleges. One firm sent delinquent borrowers a letter along with an application for forbearance, advising them that if they went into default, they could lose the federal benefit of food stamps. ( An outright lie)
Other firms simply sent delinquent borrowers a forbearance application and did not advise them of the other options available.
One firm actually advised borrowers if they placed their loans in forbearance, they would receive a gift card.
The GAO report addressed a number of improper procedures used by colleges and did not move the Department of Education or Congress to take action. As a matter of fact, some of them were critical of the report and one individual stated that the GAO had no explicit authority to get involved or make recommendations. You would think that colleges cheating on student loans would be taken seriously.
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Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.