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Student loan scam

student loan scam

By Andrew Leonard

Earlier this year, the U.S. House of Representatives voted to pass a bill with the impressive, everybody-can-get-behind-this title “Protecting Academic Freedom in Higher Education Act.” Sponsored by the ultra-conservative North Carolina Republican Virginia Foxx, the bill ostensibly took aim at an issue close to small-government-loving hearts: intrusive federal regulation of for-profit colleges — fast growing, highly profitable outfits like DeVry University or the online-only University of Phoenix.

Like so many of the bills passed by the House since Republicans gained the majority in the 2010 midterm elections, the bill was designed to repeal specific actions taken by the Obama administration. In this case, the issue at hand was the Obama administration’s efforts to ensure greater “program integrity” in the for-profit educational sector. Specifically, a new federal definition of what constitutes a legitimate academic “credit hour” and a new requirement that all online providers of post-secondary education be accredited in each and every state in which they do business.

Foxx’s bill repealed both measures. (The Senate has yet to address the measure.) According to Foxx, the new federal regulations threatened “innovation” in the educational sector. As reported by InsideHigherEducation, Foxx is on record as declaring that for-profit colleges do a “a better job of being mindful about efficiency and effectiveness than their nonprofit peers.” By, for example, flexibly providing online education when and where low-income working Americans want it, the for-profit free market delivers the kind of quality higher education that Americans so desperately need. The government should just stay out of their business. The College Conspiracy.

I stumbled upon this story while researching the student loan crisis and at first I was perplexed. I didn’t understand why Republicans were opposed to higher academic standards for the for-profit sector, and I didn’t get the connection to student loans. But it didn’t take much research to discover what was really going on: an example of blatant hypocrisy sufficient to outrage even the most jaded observer of American politics.

The for-profit educational sector is an industry almost entirely subsidized by the federal government. Around 70-80 percent of for-profit revenues are generated by federal student loans. At the same time, judging by sky-high dropout rates, the for-profit schools do a terrible job of educating students. The Obama administration’s efforts to define a credit hour and require state accreditation were motivated by a very understandable desire: to ensure that taxpayers are getting their money’s worth when federal cash pays for a student’s education. In contrast, Foxx’s legislation is designed to remove that taxpayer protection. So here’s a more accurate title for her bill: “The Protecting the Freedom of For-Profit Schools to Suck off the Government Teat Without Any Accountability Whatsoever Act.”

The for-profit educational sector has been growing extraordinarily rapidly for the past decade: 12 percent of all post-secondary students are now enrolled in for-profit schools, up from 3 percent 10 years ago. But the main beneficiaries of the growth appear to be the shareholders and executives of the largest publicly traded for-profit schools, not the students.

In 2008, for-profit schools registered a a graduation rate of 22 percent. (Public and private non-profits registered 55 percent and 65 percent respectively.)

54 percent of the students who enrolled in 2008-2009 in 14 publicly traded for-profit schools had withdrawn without a degree by 2010.

The biggest player in the for-profit sector, the University of Phoenix, graduated only 9 percent of its B.A. candidates within six years.

The pathetic performance of the for-profit sector in delivering actual degrees becomes all the more alarming when you realize that most of the students who are dropping out paid for their educations with student loans that have to be paid back: According to a report released in the summer of 2010 by Sen. Tom Harkin, D-Iowa, “Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education,” in 2009, the five largest for-profit schools reported that government grants and loans accounted for 77.4 percent of their revenue.

The Harkin reports comes to a stark conclusion:

The Federal government and taxpayers are making a large and rapidly growing investment in financial aid to for-profit schools, with few tools in place to gauge how well that money is being spent. Available data show that very few students enroll in for-profit schools without taking on debt, while a staggering number of students are leaving the schools, presumably many without completing a degree or certificate.

It is precisely this situation that the Obama administration’s efforts to ensure “program integrity” were designed to address. Student loans are tied to credit hours: By requiring a more rigorous definition of credit hour, the administration was attempting to make sure that government money was paying for actual education. Similarly, the requirement that all for-profit schools must be accredited by the individual states in which they do business was a measure designed to keep fly-by-night online schools operating out of states with weak accreditation requirements from enrolling out-of-state students and ripping them off. The issue is not “innovation.” The issue is basic consumer protection.

One would imagine that Republicans, who theoretically oppose government involvement in the private sector, and are always looking for ways to cut government spending, would approve of efforts to seek greater accountability for taxpayer funds. Virginia Foxx, after all, was notorious for being one of only 11 members of Congress to vote against a federal relief package for victims of Hurricane Katrina, citing the “high potential for the waste, fraud and abuse of federal tax dollars.”

But as it turns out, Foxx herself is benefiting from the waste and abuse of federal tax dollars. Among the top 20 financial contributors to Foxx in the 2011-2012 cycle are the Association of Private Sector Colleges/Universities, the Apollo Group (owner of the University of Phoenix), and Corinthian Colleges. Since federal student loans comprise the vast majority of the revenues of those for-profit schools, it follows that their campaign contributions to Foxx are also made possible by U.S. taxpayers.


Student-Loan Debt Tops $1 Trillion

Student-Loan Debt Tops $1 Trillion


The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery, U.S. officials said Wednesday.

Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

Total student debt outstanding appears to have surpassed $1 trillion late last year, roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York. Joshua Mitchell has details on Markets Hub. (Photo: AP/Reed Saxon)

The new figure—released Wednesday at a banking conference in Austin, Texas—is a preliminary finding from a study of student debt that the bureau plans to release this summer. Bureau officials said the estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports.

CFPB officials say student debt is rising for several reasons, including a surge in Americans going to college in recent years to escape the weak labor market. Also, tuition increases—which many colleges say are needed to offset big cuts in state funding—have many students taking out bigger loans.

In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, bureau officials said. New York Fed data show that as many as one in four student borrowers who have begun repaying their education debts are behind on payments.

Law School Wins in Graduate Suit

Economists say college is an increasingly good investment because of the widening pay gap between jobs that require a degree and those that don’t. Ultimately, the educational degrees and added skills are meant to help workers earn higher incomes that, in time, will more than offset the student debt.

But as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married, U.S. officials and economists say. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.

Rohit Chopra, student-loan ombudsman for the Consumer Financial Protection Bureau, said student debt could ultimately slow the recovery of the housing market. “First-time home-buyers are a substantial part of the housing market,” Mr. Chopra said in a speech at the banking conference in Austin. “Instead of saving for a down payment, these borrowers are sending big payments every month.”

Student debt is a burden not just for recent college graduates in their 20s but also parents, who often co-sign their children’s student loans, as well as midcareer professionals who opted to go back to school during the sluggish recovery.

David Johnson, a 58-year-old groundskeeper from Milton, Wash., decided to leave gardening after more than two decades to become a nurse. Two years ago, he took out about $18,000 in private and federal loans to attend a local community college that had a nursing program. After completing prerequisite classes, he learned that the program had a waiting list. With no guarantee of getting into the nursing program, he is wondering whether to take out more debt to continue in school.

“It’s an awkward place to be. I’m not yet a nurse but I’ve got all this debt and interest compounding on me,” he said. “I don’t have a lot of working years left and I’m saddled with this debt.”

A version of this article appeared Mar. 22, 2012, on page A5 in some U.S. editions of The Wall Street Journal, with the headline: Student-Loan Debt Tops $1 Trillion.


20 biggest money losers

20 biggest money losers

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The aftermath of the burst housing bubble continues to hit Freddie Mac and Fannie Mae — they’re the two worst Fortune 500 money losers for the second year in a row. Who else lost big bucks?

1. Freddie Mac

Fortune 500 rank: 20
2010 loss: $14.0 billion

First, some trivia: Freddie Mac’s losses the past three years were among the 20 worst annual losses any Fortune 500 company has suffered since the list began.

For Freddie, which was taken over by the government during the financial crisis along with its big sister Fannie Mae, much of its $14 billion loss in 2010 stemmed from $17.2 billion in provisions for losses on bad mortgages. The company was also burdened by the $6.4 billion in annual dividends it had to pay on senior preferred stock owned by the government. Freddie ended the year asking for an additional $500 million in aid.

Freddie may not have that many more opportunities to make this list; if the government has its way, the two mortgage giants will eventually be dismantled.

2. Fannie Mae

Fortune 500 rank: 5
2010 loss: $14.0 billion

Fannie Mae slides iin right behind Freddie Mac, as the weak housing market and high unemployment rate continue to hamper the nation’s largest mortgage buyers.

Although Fannie narrowed its losses on risky mortgages in 2010, the company’s balance sheet is still ugly. Though it’s been nearly three years since the U.S. government bailed out Fannie and Freddie, there doesn’t seem to be an end to the problems in sight. In February 2011, Fannie asked the government for an additional $2.6 billion in aid. This brings the total taxpayer bailout to $90.2 billion as of March 31, 2011.

Like Freddie, Fannie attributed some of its 2010 losses to dividends on preferred stock paid to the U.S. Treasury as part of its conservatorship agreement. Fannie topped this list last year and held the No. 2 spot the year before. Just how much longer these losses can continue remains to be seen.

3. Sprint Nextel

Fortune 500 rank: 85
2010 loss: $3.5 billion

The outlook seemed brighter for the wireless carrier at the end of 2010 as it managed to add postpaid subscribers during the fourth quarter for the first time since 2007. For the year, it lost a net of 855,000 postpaid customers, but that’s a significant improvement over the 3.5 million prior year loss.

The progress in Sprint Nextel’s customer retention wasn’t enough to keep the company from reporting its fourth annual loss in a row. The carrier noted in its annual report that the net loss of its postpaid customer segment in the past two years means wireless service revenue in 2011 could be about $2.4 billion less than if Sprint had kept those subscribers. The company is also still hurting from its troubled acquisition of Nextel in 2005.

And news that AT&T plans to buy T-Mobile only puts Sprint farther behind its two larger rivals.

4. Energy Future Holdings

Fortune 500 rank: 292
2010 loss: $2.8 billion

This Dallas, TX-based electric utility company formally known as TXU Corp. was taken private in 2007 and has since been saddled with debt. The $45 billion leveraged buyout remains the biggest recorded in U.S. history and was one of the last big private equity deals before the financial crisis.

Fast-forward to today and the deal has continued to haunt Energy Future Holdings. Texas’s largest power provider saw a loss of $2.8 billion in 2010, partly reflecting lower prices for natural gas and wholesale power.

5. Bank of America Corp.

Fortune 500 rank: 9
2010 loss: $2.2 billion

The banking giant has been slow to rebound and was the only major U.S. bank in the Fortune 500 to report an annual loss in 2010. The company turned a profit in the first two quarters, but swung into the red during the last half of the year.

The biggest blights on the company’s results stemmed from its credit card and mortgage divisions, which both lost money in 2010 and together led to $12.4 billion in combined accounting charges during the year.

Bank of America is still hampered by its purchase of Countrywide, which the Charlotte, N.C.-based bank acquired at height of the financial crisis, inheriting a problematic mortgage business. The charge in the credit card division stemmed from changes in financial regulation that cut card fees. The company’s $2.6 billion in litigation expenses — mostly related to its mortgage unit — also didn’t help results.

6. AbitibiBowater

Fortune 500 rank: 474
2010 loss: $1.9 billion

The world’s largest newsprint producer is reeling from a combination of the global economic slowdown and the gradual decline in demand for print newspapers.

The company, headquartered in Montreal, Quebec, emerged from bankruptcy in late 2010, wiping out former shareholders under its reorganization agreement. Since then, AbitibiBowater has worked steadily to turn the company around, but it remains to be seen if and when its efforts will pay off.

In December, the company replaced its CEO with Richard Garneau, who said AbitibiBowater would focus on diversifying the business away from North America’s shrinking newspaper industry. The company has already tapped into markets in South America and India, where demand for print newspapers is growing.

7. MGM Resorts International

Fortune 500 rank: 380
2010 loss: $1.4 billion

This casino operator’s big business is Las Vegas, which has seen an unprecedented drop in spending — especially around gambling — in the last few years. Consumers aren’t the only ones who have tightened their purse strings — businesses have cut travel budgets, leading to a drop in convention activity.

Part of the company’s loss stemmed from the decline in value of its City Center resort and casino complex, a joint venture with Dubai World on the Las Vegas Strip. MGM founder Kirk Kerkorian, who remains the company’s largest shareholder through his investment firm Tracinda, recently announced plans to step down from the board when his term expires.

One bright spot: the company’s joint venture property in Macau, which the company is planning to take public. While business has been grim for casino operators in Las Vegas, Macau has been going gangbusters.

8. Williams

Fortune 500 rank: 257
2010 loss: $1.1 billion

The Tulsa, OK-based energy company underwent a massive and costly corporate restructuring that helped swell the company’s losses in 2010. Williams Companies also took an accounting write-down on its exploration and production businesses amid weaker prices for natural gas.

Despite the losses, it reported a profit during the fourth quarter of $174 million, mostly from higher margins for natural gas liquids, such as ethane and propane.

The year ahead is poised to be one filled with big changes under CEO Alan Armstrong, who took over Steve Malcolm’s top spot at the start of 2011. In February, Williams announced plans to spin off its exploration and production arm into a separate publicly traded company later this year. The move, which would give each segment more flexibility in making operational decisions, is aimed to boost growth.

9. PulteGroup

Fortune 500 rank: 486
2010 loss: $1.1 billion

A glut of homes remains on the market thanks to a combination of rising foreclosures, tougher lending requirements, and high levels of unemployment. This makes for a toxic equation for the U.S. homebuilder, which hasn’t reported an annual profit since 2006.

But things may finally be heading in the right direction. Pulte posted a smaller loss in 2010 than it did in 2009 and noted that it has seen signs of stabilization in some of its local markets. Its average unit-selling price increased by $1,000 in 2010 over the prior year to $259,000, but that’s still down from $337,000 in 2006.

The company also took a significant charge, albeit a smaller one than in previous years, related to its write-off of deposits and other costs on land that it no longer wants to purchase.

10. Boston Scientific

Fortune 500 rank: 305
2010 loss: $1.1 billion

This Natick, MA-based medical devices manufacturer slogged through a year marked by product and legal setbacks.

In March 2010, Boston Scientific halted shipments and voluntarily recalled unused units of its implantable cardiac defibrillators after the company changed its manufacturing procedures without properly notifying federal regulators. The month-long recall of the devices, which typically generate about 15% of its revenue, hurt its bottom line. It also hurt the company’s 29% share of the $4.3 billion U.S. market for ICDs. On top of that, Boston Scientific was hit by a $1.7 billion payment to a unit of Johnson & Johnson to settle patent disputes.

Looking forward, the second-largest make of heart devices sees several challenges ahead, including uncertainty around a U.S. Department of Justice investigation into the proper use of defibrillators.

11. Masco

Fortune 500 rank: 314
2010 loss: $1.0 billion

As Masco’s CEO Tim Wadhams put it, last year was the “tale of two halves” for the home improvement and building products company. Sales inched up in the first part of 2010, but the end of the home-buyer tax credit and rising commodity costs hurt results in the second half of the year.

Masco, which counts Home Depot and Lowe’s as its biggest customers, saw businesses tied to new home construction (i.e. installation and cabinets) take the biggest hit. The company noted in its annual report that the decline was not just about a reduction in home repairs, but also a reflection of consumers opting for less expensive products.

A charge on goodwill due to a slower-than-expected recovery in new construction, along with a charge on cost-cutting measures like plant closures and headcount reductions, further eroded its results.

12. First Data

Fortune 500 rank: 236
2010 loss: $1.0 billion

This Sandy Springs, Ga.-based credit card processor faced huge losses as it struggled to pay off debt from its 2007 leveraged buyout.

The deal with Kohlberg Kravis Roberts left the company plagued with $24 billion in debt. First Data has attributed its losses partly to high interest payments, which totaled $1.8 billion in 2010 and exceeded the company’s operating profit of $516.7 million.

First Data has restructured a portion of its debt in an effort to bring down costs, but it’s still a long way from paying off loans that financed its buyout.

13. Constellation Energy

Fortune 500 rank: 172
2010 loss: $982.6 million

After a $1.3 billion loss in 2008, the Baltimore-based energy company managed to swing to a profit in 2009 before plunging back into the red last year.

Income grew at Constellation’s supply and services business and at its electric and gas public utility. But problems arose in its power generation division, which includes its nuclear businesses. The company recorded charges on its investment in its nuclear units partly due to the decline in power prices during the third quarter of 2010 and uncertainty around how potential environmental laws will impact pricing.

14. Great Atlantic & Pacific Tea

Fortune 500 rank: 278
2010 loss: $876.5 million

The century-old Montvale, NJ-based grocer, which operates nearly 400 supermarkets under names including Waldbaum’s, Food Emporium, and Pathmark, filed for bankruptcy at the end of the year.

Better known as A&P, the grocer failed to compete with wholesale clubs, drugstores and supercenters. The bankruptcy was needed to bring costs in line with the grocer’s financial obligations, including hundreds of millions in pension funding and liabilities from leases that the company has been unable to shed.

A&P’s rocky year was also marked by turnover at the top. CEO Ron Marshall, who started his job in January, lasted fewer than six months before being replaced by former OfficeMax operating chief Sam Martin at the end of July. In the year ahead, it remains to be seen how the grocer will fare as it emerges from bankruptcy under its new CEO.

15. Avaya

Fortune 500 rank: 445
2010 loss: $874 million

Businesses continued to curtail spending on information technology in 2010, and this communications systems company felt the pinch. Avaya managed to grow revenue by 22% thanks to the assets it acquired from Nortel Networks at the end of 2009, but the company saw declining sales from existing customers.

Although the acquisition bumped up revenues, it has been costly. Avaya spent millions consolidating operations, paying severance, and closing facilities.

Private-equity firms Silver Lake Partners and TPG took Avaya private in 2007 for $8.3 billion. That buyout, along with the acquisition of the Nortel assets, led to more than $500 million in charges and saddled the company with almost $6 billion in debt as of the end of its fiscal year. As a result, the company was required to pay several million dollars in interest during the year.

16. Caesars Entertainment

Fortune 500 rank: 277
2010 loss: $831.1 million

Even gamblers keep a tighter hold on their spending during a weak economy.

Although Caesars boosted its net income with the purchase of Planet Hollywood casino-resort in Las Vegas in February, the company struggled to cope with a more cautious consumer. CEO Gary Loveman has said that consumers aren’t necessarily visiting casinos less often — they’re just spending less than they once did.

Loveman stands against resort fees, even while competitors have adopted the charges as a way to cope with lower room rates. Caesars, formerly known as Harrah’s Entertainment, tried to raise more cash by going public last year, but the company withdrew plans for an IPO. The private equity firms Apollo Management and TPG took the company private in 2008.

It remains to be seen how the company will fare in 2011 as the economic recovery gains steam. But gambling is showing some signs of recovery in Las Vegas, which bodes well for the company.

17. Eastman Kodak

Fortune 500 rank: 327
2010 loss: $687 million

The company that helped put cameras into the hands of everyday consumers has struggled to remake itself in photography’s digital age. Eastman Kodak’s attempted transformation has been hampered as consumers and businesses cut back on spending during the downturn. The company has reported just one fiscal year in the black since 2005.

Eastman Kodak has tried to rebound by focusing on developing its consumer inkjet and commercial printing businesses and by licensing its technology, but some analysts have warned the company is overly dependent on that strategy.

The biggest blow to earnings in 2010 came from a $626 million write down associated with its unit handling film. The rising price of commodities like silver, used in making film, and competition from digital have taken a toll on the division.

18. Chrysler Group

Fortune 500 rank: 59
2010 loss: $652 million

The Detroit-based automaker operated by Fiat SpA continued losing money in 2010, a year after it emerged from a multi-billion dollar government bailout and a trip to bankruptcy court.

Chrysler CEO Sergio Marchionne said 2010’s losses had more to do with high interest payments than the company’s performance. And indeed, Chrysler announced plans earlier this year to pay performance bonuses to all 53,000 workers for meeting or exceeding performance targets.

In the year ahead, Chrysler is preparing itself for an initial public offering and plans to sell shares to the public in the second half of 2011. Marchionne has said the automaker has been talking to banks including Goldman Sachs Group about such a deal.

19. SunGard Data Systems

Fortune 500 rank: 434
2010 loss: $570 million

The software and technology company that serves the finance, education, and public sectors cut its losses in half in 2010 over the prior year, but that wasn’t enough to keep it off the money losers list.

A big toll on earnings came from a charge on goodwill associated with parts of its public sector and higher education businesses. The value of these units dropped on slower-than-anticipated growth due to the difficult environment in these industries.

SunGard, which was taken private in a massive leveraged buyout in 2005 by a consortium of private equity firms, still had more than $8 billion in debt at the end of 2010.

20. Regions Financial

Fortune 500 rank: 293
2010 loss: $539 million

For most of 2010, the Alabama-based bank continued to suffer losses as foreclosures further hampered the U.S. real estate market. Since the housing crash began in 2007, Regions hasn’t posted an annual profit and it’s written off billions in loans, mostly tied to developers, homebuilders and mortgage borrowers in Georgia and Florida.

Regions was one of several troubled banks that received helped from the U.S. government. In November, Standard & Poor’s ratings service downgraded Regions to junk status on worries that its portfolio of bad loans would crimp its future earnings and capital.

But the lender has started 2011 off on modestly better footing. During the first three months, it posted a profit, reflecting fewer funds reserved to cover loan defaults and a significant reduction in loans written off as uncollectible.