Bad debt pays off in loan industry

November 4, 2007 at 3:07 pm | Posted in Chiropractic, Chiropractic Student Debt, Latest News | 1 Comment
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Little-known practice called ‘dumping’ costing taxpayers an estimated $400 million

(click HERE to read full story)

Washington- Alyscia Taylor, a 5-foot-2 Georgia fireball, graduated from chiropractic college outside of Atlanta with an education in treating spines and student loans totaling $53,880.

The debt seemed manageable as she began her career as a chiropractor in suburban Washington, D.C., in 1994. But she had asthma, got recurrent pneumonia and needed to care for parents on a farm near Augusta, Ga. So she moved, eventually left the profession and took sales jobs that paid basic bills but left little for the loans.

That’s when the problems began.

Collection agencies called relentlessly. Late fees and interest compounded the debt, churning the $53,880 balance to $134,466 by 2004. By then, many bankers would have figured the loan was uncollectible and declared the matter closed. They would have gotten most of their money back, too, and with interest, because the U.S. Department of Education guarantees the loan industry that it will make up most losses.

But the student loan industry has had a practice, unknown to outsiders, that lets it earn even more money off a bad debt while shifting the problem to taxpayers, a Plain Dealer examination has found. Its official name is Direct Loan default consolidation, and it is costing taxpayers an estimated $400 million.

Insiders in the industry, government and some college financial aid offices have a harsher name for it: “dumping.”

What that means is that the borrowers’ bad debt, often multiplied because of earlier delinquencies and refinancing, gets turned into a new loan – with interest, late charges and an 18.5 percent handling fee for the industry. But this new, expensive loan is no longer the industry’s liability; rather, industry employees convert it into a new government loan, issued under the federal Direct Loan program.

The new loan is shifted from the private sector and dumped on the government.

“The student winds up with a lot more debt, and the taxpayer winds up with more obligations,” said Robert Shireman, executive director of the Institute for College Access and Success and a former White House and U.S. Senate education policy adviser.

Department of Education data between 1995 and 2005 put the default rate of these dumped loans at about 34 percent. A department analyst, however, says that over the long-term life of these loans, the default rate could approach 60 percent.

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