Soaring Student Debt Opens Door To Relief Scams (#GotBitcoin?)
Same testimonials appeared across 26 websites of supposedly different companies; former employee says company submitted claims based on false information. Soaring Student Debt Opens Door To Relief Scams (#GotBitcoin?)
Financial Preparation Services of Irvine, Calif. boasts on its website three glowing testimonials for its debt-relief services for student loans. It quotes Anthony Zwichirowski of California, Dawn Robinson of New Hampshire and a smiling Dean Edelman of Virginia, who says using the company “was the smartest move I have made since graduating.”
One or more of the three ostensibly happy borrowers also appears, with slight variations, on at least 25 other websites of purportedly different companies offering student-loan debt-relief in the last four years, The Wall Street Journal found.
Student debt is soaring—it is now nearly $1.5 trillion—and defaults are at a record. That has been fertile ground for companies that promise to help stretched borrowers by navigating the maze of federal programs that can reduce or forgive debts for those who qualify, such as public-service workers or people on low incomes.
Some companies operate legally, although there is nothing they offer that borrowers can’t get free, regulators say. Other firms are outright scams, or make promises to borrowers that are illegal, regulators and consumer advocates warn.
Financial Preparation Services has submitted claims for federal relief based on fictitious information, according to a former employee. Sales teams within the company also switched regularly to using new corporate names and websites, the former employee said. The company is one of several about which federal regulators are demanding information, according to a bankruptcy court filing.
Many of the websites on which the three testimonials are featured appear to be carbon copies, with only the company’s name changed. A few companies attributed the same quote to different people: Dean Edelman becomes Dean Ederman of California, for example. Other websites used the same names and photos with different quotes.
Financial Preparation Services didn’t respond to emails requesting comment, and couldn’t be reached by phone at the number listed on its website. The Journal wasn’t able to find Mr. Edelman, Mr. Zwichirowski and Ms. Robinson or ascertain whether they were indeed real people.
A record $89.2 billion of student loans was in default at the end of June, New York Federal Reserve data show. Of the $1.48 trillion outstanding, 11%, or $160 billion, was at least 90 days behind on repayments—and the true rate is likely double that, because only half the loans are currently in repayment.
“We’ll do the work for you,” Financial Preparation Services says on its website. “No more drowning in a sea of confusing paperwork and processing!” Its fee: $1,195 for document preparation, then $40 a month for almost 20 years—a total of $10,555—according to a 2018 client agreement reviewed by the Journal.
Regulators, including the Federal Trade Commission and the Consumer Financial Protection Bureau, share oversight of such companies. One issue they face is the sheer number of small firms offering these services, many using several names.
“This is a relatively target-rich environment,” Michelle Grajales, an FTC attorney, said in an interview. “There are unfortunately a lot of companies that still appear to violate the law.” Ms. Grajales didn’t comment on Financial Preparation Services specifically.
The regulator has filed nine civil cases against alleged student-loan debt-relief scams since 2017, involving a total of 77 different companies. Financial Preparation Services isn’t among those companies being sued.
Many of the FTC cases allege that the companies charged upfront fees for debt relief, which is illegal, or engaged in other prohibited practices such as masquerading as being government-approved, or faking information on applications for federal relief.
Stephanie Beger of Moscow Mills, Mo., a former teacher turned paralegal, says Financial Preparation Services promised to help reduce payments on her $109,000 of student loans when she contacted them in October in response to a text message. “I told them I was married, and we have two incomes and no children,” she said.
Ms. Beger signed up. In April, she says she got a notice from the government that a payment was due, and discovered when she called up that Financial Preparation Services had used false information about her to apply for debt relief. “I was told the paperwork said I was a single mother of six,” she said. She said she made clear that she had no idea what the company had submitted.
She complained to the Better Business Bureau. In response, Financial Preparation Services refunded the fees she had paid. The company wrote an online response on the BBB’s website: “We apologize for your negative experience…We will continue to perfect our process so mistakes do not happen on our clients accounts.”
A report by the Government Accountability Office in June identified “indicators of potential fraud or error” in the income-related student loan relief program, including 40,900 plans that were approved based on family sizes of nine or more.
Salespeople at Financial Preparation Services until recently often submitted claims showing a family size of six or seven to qualify callers for debt relief, without the borrower’s knowledge, a former employee told the Journal. It couldn’t be determined exactly why it changed the practice, but a company email seen by the Journal said that too many of its claims were being rejected.
Financial Preparation Services operates under several different identities, creating new websites every few months, the former employee said. A copy of a sales script, reviewed by the Journal, instructs salespeople when they call customers about payments: “MAKE SURE YOU HAVE THE RIGHT COMPANY NAME: Hi this is NAME with [COMPANY].” The Journal couldn’t determine the date of the script.
Consumer Advocacy Center—doing business as Premier Student Loan Center, whose website quoted identical testimonials to Financial Preparation Services—filed for chapter 11 bankruptcy in January.
It shut down because of lawsuits by former clients and “investigations from different state attorney generals,” according to a court filing. Despite pretax revenues last year of more than $19.4 million, the company had only $24,500 in its bank account when it filed the petition, the bankruptcy trustee said.
Albert Kim, the company’s owner, told a bankruptcy court hearing “the possibility of getting into a big lawsuit with, you know, federal regulators made it basically not worth it to continue at that point.”
Mr. Kim didn’t respond to requests for comment. His lawyer, Peter Levitt, didn’t respond to specific questions but said in a statement that Mr. Kim is committed to ensuring all the businesses he is affiliated with operate legally and to “identifying and correcting any compliance deficiencies.”
After the bankruptcy, Premier Student Loan Center’s operations appear to have carried on as Financial Preparation Services. In addition to the testimonials on multiple sites, both companies use the same Irvine address on their business license. The Journal also identified several employees who worked for companies with those names according to their social media accounts.
In July, the CFPB filed a subpoena in the Premier Student Loan bankruptcy case, demanding information be sent to the regulator and U.S. Attorney for the Southern District of Florida. The subpoena named eight companies, including Prime Consulting LLC, which does business as Financial Preparation Services, and 11 people, including Mr. Kim.
The CFPB didn’t respond to a request for comment. A spokeswoman for the U.S. Attorney for the Southern District of Florida declined to comment.
One of the companies named in the subpoena is True Count Staffing Inc., which does business as SL Account Management, also based in Irvine.
A representative declined to comment and the company didn’t respond to an email seeking comment.
Since the start of 2018, SL Account Management has racked up more than 70 complaints with the FTC, according to a public records request.
One borrower, who described himself as a “war veteran who just wanted to go to college to pursue happiness,” said last year in an FTC complaint that his tax returns and wages have been garnished, he has lost his truck, and “not 1 single cent of my debt has been diminished.”
Red Flags For A Student Loan Debt-Relief Scam
The Federal Trade Commission says borrowers should beware of companies that:
Charge upfront fees. It is illegal for companies to make you pay before they help you.
Promise fast loan forgiveness. Scammers may pretend to offer an easy way to wipe out loans—it doesn’t exist.
Pretend to have official endorsements, such as using Department of Education logos. The government doesn’t approve any debt relief companies: it advises if you have federal loans to go direct to https://studentaid.ed.gov/sa/
Try to rush you into signing up. Companies may say you have to act fast to qualify for programs: Check them out before you commit to anything.
Demands your student loan ID, or asks you to sign a power of attorney, to deal with the government on your behalf. You can lose control of your finances, and be cut off from information on what’s happening to your loans.
A Borrower Will Be 114 When Bonds Backed By Her Student Loans Mature
Billions in bonds wouldn’t be paid off in time, so issuers extended maturities by decades to avoid downgrades.
Julie Chinnock is 50 years old and owes about $250,000 in student loans. She was happy to get a new payment plan that lowered her monthly bill, but the holders of two bonds backed by her loans were probably less cheerful.
The two bonds were due in 2043 and 2054, but Ms. Chinnock and other borrowers were paying less each month under a new government plan that tied debt payments to income. Because borrowers were taking longer to pay off their loans, there was a risk the bonds backed by the loans wouldn’t be paid off in time. Bond-rating firms were watching and getting ready to downgrade the highly rated bonds, potentially causing losses for investors.
The issuer of the bonds and the investors who owned them hatched a plan to avoid the downgrades. Their solution: make sure bonds were paid off in time by extending their maturity dates by decades. The bonds that include a big chunk of Ms. Chinnock’s loans now mature in 2083, when she will turn 114.
Today, the bonds are rated triple-A. Altogether, issuers have extended maturities on about $11.5 billion of outstanding bonds backed by mostly older-vintage student loans, extending maturity dates by as much as 54 years.
“I certainly wish that there was a better system for affording education in this country,” says Ms. Chinnock, a nurse anesthetist in Seattle who sold her house to help pay down her student loans.
Altogether, Americans owe about $1.5 trillion in student loans, a small slice of which is held by investors who bought bonds backed by the loan payments. The standoff between investors and ratings firms over the bonds’ potential defaults shows how long it will take some borrowers to pay off their debt.
It also shows the potential burden faced by the federal government, which guarantees most of the investor-held loans and owns the majority of the remainder.
For investors, these bonds are appealing because the government guarantee means there is little risk and because they pay a healthy yield, which is generally higher than riskier bonds backed by credit-card debt. Investors can always sell the bonds if they don’t want to hold them to the maturity date.
Bond-ratings firms like Moody’s Corp. and Fitch Ratings follow strict rules. They will downgrade a security if they don’t think it will pay off by the due date, even when the underlying loans are guaranteed by the federal government. “Even in the event all principal will eventually be received after the maturity date, this still must be treated as a default, technical or otherwise,” Sandro Scenga, a spokesman for Fitch, said in a statement.
Investors who hold on will eventually get paid back, but a downgrade might cause them to suffer a temporary loss. “People don’t want to buy bonds that get downgraded,” said Theresa O’Neill, a research analyst at BofA Securities.
Some bonds went on a ratings roller-coaster ride, including a $406 million chunk of triple-A debt that Moody’s downgraded to junk on Nov. 1, 2016. Later that month, the maturity date was moved from 2026 to 2055. Within weeks, Moody’s upgraded the bond back up to triple-A.
Other bonds ended up with widely divergent ratings. A $30 million chunk of a 2008 student bond deal is either triple-A, if you believe Moody’s, or deep inside junk territory, if you believe Fitch. That bond is also now due in 2083.
A Moody’s spokesman said the firm’s ratings may differ from those of other firms “and that is precisely their value—they reflect our view, no one else’s.” He said the firm updates its ratings to account for new information, such as a change in the maturity date.
Congress created the maturity issue when it let borrowers tie their payments to their income. The program, known as income-based repayment, began in 2009. The program capped federal student loans’ monthly payments at 15% of discretionary income, which meant some loans wouldn’t be paid off when the securities they backed came due.
These particular bonds were sold by private lenders that originated federally guaranteed student loans. About $262 billion of those loans remain outstanding and 26% are in default, Education Department data show. Under the guarantee, the federal government pays off the loans when borrowers die.
Congress ended that program in 2010 and replaced it with direct lending via the Education Department. These newer loans, which are held by the government, total about $1.2 trillion, of which 10%, or about $120 billion, are in default, department data show.
In 2015, Moody’s put approximately $37 billion worth of bonds originated by the private lenders on review for potential downgrades as it revamped its methodology to account for slower repayments. Big student loan bond issuers Navient Corp. and Nelnet Inc. argued the moves were overly punitive.
Bond fund manager TCW Group Inc. reached out to Navient to figure out how to avoid downgrades on the securities, according to Scott Austin, co-head of TCW’s $86 billion securitized products portfolio. TCW owned one of the bonds that includes Ms. Chinnock’s student loans. A provision included in the deals allowed issuers to extend their final maturities—but only if all bondholders agreed.
Getting 100% approval from bondholders was tricky since it is hard to know who owns a bond at any given time. Navient reached out to investors at industry conferences and at its own investor day meetings, worked the phones and used a social network to identify owners and ask if they would be willing to extend the final maturities by many years, often decades.
TCW’s Mr. Austin readily agreed because doing so “mitigated the risk that the rating agencies would have to downgrade the bonds,” he said in an interview. So did Columbia Threadneedle Investments, which owned on behalf of a bank one of the bonds backed by Ms. Chinnock’s debts. A downgrade would mean the bank would have to hold more capital against the bond because it would be considered riskier, according to Jason Callan, a senior portfolio manager at the firm.
In total, Navient managed to get 100% bondholder approval on 62 securities with about $9.1 billion outstanding, or about 14% of its $65.7 billion book of federally guaranteed student loan bonds. Nelnet won approval for about $2.4 billion, or about 12% of its book, according to data compiled by the companies and Wall Street Journal research.
The threat of downgrades got the attention of federal regulators at the Consumer Financial Protection Bureau. In a 2015 report, the agency’s student loan ombudsman cited issuers’ “economic incentive to ensure that bonds backed by these loans perform on schedule” as a concern because it might mean issuers steer borrowers toward temporary payment pauses and away from income-based repayment plans that provide longer-term relief.
In January 2017, the CFPB sued Navient for allegedly “failing borrowers at every stage of repayment. ” Navient says the CFPB’s allegations are false and is fighting the lawsuit.
None of the drama over the bonds’ struggles did anything to change Ms. Chinnock’s plight. Ms. Chinnock earned two bachelor’s degrees, two masters and a doctorate. She says she kept going back to school to boost her income to pay off her accumulated debt.
In 2017, she sold her house in Portland, Ore., and used about $185,000 to pay down her student loans. She now rents and has deferred saving for retirement and buying a new car to make ends meet while servicing her student debt.
“I take responsibility for the loans,” Ms. Chinnock says.