INTRODUCTION: THE CENTURY FOUNDATION SHINES A DIM LIGHT ON ECMC
AND OTHER STUDENT LOAN GUARANTY AGENCIES
The Century Foundation
recently issued a report criticizing the federal student-loan guaranty agencies--including Educational Credit Management Corporation
(ECMC), which has earned a reputation as a heartless student-loan debt collector. The report explains the complicated history of the loan guarantee agencies and is well worth reading.
Collectively, these guaranty agencies hold more than $5.4 billion in unrestricted assets, most of it obtained from collecting on defaulted student loans.
Four agencies--ECMC, Lumina Foundation, Great Lakes Higher Education Corporation, and USA Funds each hold more than a billion dollars in unrestricted funds.
According to The Century Foundation, most of this money was acquired from the agencies' student-loan debt collection activities. The Foundation did not explain the fee structure for collecting student-loan debt, but in some cases at least, the guaranty agencies slap an 18.5 percent penalty on defaulted loans--18.5 percent of the loan balance and accumulated interest.
In other words, a student who takes out a student loan of $15,000 and sees the debt grow to $20,000 due to accumulated interest, can get a $$3,700 penalty attached to the loan balance if the student defaults. Thus, a $15,000 debt can grow to $23.700 in a relatively short period of time. And this is where the guarantee agencies make a lot of money.
What do these so-called charitable agencies do with their money?
The guaranty agencies spend some of their money distributing grants for purported charitable purposes, but the biggest share of these grants (25 percent) goes to "Policy Organizations." Unfortunately, the Century Foundation did not name the policy organizations that are getting the money; but my guess is that the money goes to the various think tanks and policy groups that churn out reports proclaiming that the student loan program is under control.
I wonder, for example, whether the Urban Institute and the Brookings Institution got some of this money. Both organizations have been soft peddling the student loan crisis for years.
The Century Foundation did not examine the guaranty agencies' loan collection practices, but the Foundation gently suggested that the agencies should take a more compassionate approach to collecting on defaulted student loans.
"Lacking the profit motive," the report observed mildly, "a guarantee agency might be more humane in its treatment of borrowers, even if it resulted in less revenue from collections."
Ya think? ECMC in particular has savagely fought bankruptcy discharge for distressed student loan debtors for years. In the Roth case
, for example, ECMC opposed bankruptcy discharge for an elderly debtor with chronic health problems who was living on less than $800 a month! Indeed, there has been nothing charitable about ECMC's attacks on student-loan debtors in the bankruptcy courts.
Notably, the guarantee agencies awarded no grants to legal aid groups that could represent student-loan debtors in legal actions against fraudulent for-profit colleges. No money goes for legal aid to help student loan debtors in bankruptcy. Quite the contrary, ECMC and other loan guarantee agencies are spending millions of dollars paying attorneys to fight destitute debtors in the bankruptcy courts. ECMC hired six attorneys to fight Alexandra Costa-Conniff, who is fighting ECMC's appeal of her bankruptcy discharge before the 11th Circuit Court of Appeals.
The Century Foundation leveled several specific criticisms of ECMC:
ECMC handsomely compensates its trustees and CEO.
First, the Foundation reported that ECMC, a nonprofit charitable organization, pays its trustees annual compensation ranging from $76,000 to $142,000. According to the Foundation, it is highly unusual and controversial for a charitable organization to pay trustees such outrageous sums for what should be public service. And the Foundation says ECMC's CEO makes more than $1 million a year.
ECMC created a subsidiary to buy and run more than 50 campuses of the bankrupt Corinthian Colleges
. The Century Foundation also raised questions about ECMC's purchase of more than 50 campuses from the bankrupt Corinthian Colleges system. ECMC, which has no experience running a college, created a nonprofit subsidiary called Zenith Education Group to operate the chain of schools.
The Century Foundation asked a reasonable questions about this transaction:
Is this the case of a charity that, in purchasing the Corinthian campuses, made a noble if misguided attempt to transform a corrupt enterprise? Or is this just a corporate board seeing if they can make a buck?
And, as TCF pointed out, the trustees for Zenith are the same people who are the trustees for ECMC. The Foundation charged that ECMC hid the fact that the Zenith trustees were being paid as ECMC trustees when it filed Zenith's application for IRS tax-exempt status. The Foundation also pointed out that the IRS apparently did no more than a cursory review of Zenith's application, approving the new organization's tax-exempt status in only six weeks (far faster, apparently, than the Tea Party groups' applications).
THE CENTURY REPORT ON LOAN GUARANTEE AGENCIES IS A GOOD START BUT GLARING QUESTIONS REMAIN UNANSWERED
John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html
The Century Foundation's report is a useful document. In particular, the report explains how the guaranty agencies were formed and how they make their money. But some glaring questions remain unanswered, including:
Exactly how much do the executive officers of the loan guaranty agencies get paid each year?
The Century Foundation's report said that ECMC's CEO makes more than a million dollars a year, but we've known that for some time. Bloomberg
reported in 2013 that Richard Boyle, ECMC's CEO at the time, made $1.1 million in 2010 and that the ECMC's CFO made a half million. Surely Jane Hines, ECMC's current CEO, makes more than Boyle did in 2010. How much did Dave Hawn make when he served as ECMC's CEO?
How much are other ECMC executives making now? And how much are the senior officers making at the other guaranty agencies?
Which policy foundations get paid by the guaranty agencies?
If we see the list, I'll bet we'll find the guaranty agencies are funding think tanks that support the status quo in the student loan program.
How much does ECMC pay the attorneys it hires to harass destitute student-loan debtors who file for bankruptcy?
The Department of Education said in 2015 that loan collectors shouldn't fight bankruptcy discharge for student loan debt when it is not cost effective to do so, but ECMC and DOE itself appear to be fighting every college-loan borrower who seeks to discharge student debt in bankruptcy. ECMC must be spending millions on lawyers, but I would like to know exactly how much.
Are the guaranty agencies paying lobbyists; and if so, how much?
Corinthian Colleges filed a list of its creditors when it filed for bankruptcy awhile back, and that list showed that Corinthian had hired several Washington lobbyists to represent its interests. It would not surprise me to learn that the guaranty agencies have also hired lobbyists to protect their operations.
In short, The Century Foundation report just scratched the surface regarding the loan guaranty agencies. All we know for sure about them is that they have accumulated more than $5 billion, most of it from distressed student-loan debtors and that one of them pays its trustees unseemly amounts of money.
Let's find out more. Maybe those Senators who are so outraged by Wells Fargo could vent some of their pent-up spleen toward the loan guarantee agencies.
Brown, M., Haughwout, A., Lee, D., Mabutas, M., and van der Klaauw, W. (2012). Grading student loans. New York: Federal Reserve Bank of New York. Accessible at: http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html
Natalie Kitroeff. Loan Monitor Is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014. http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html