At least two New Jersey state senators say the state should scrap its major student loan program, called “predatory” and “loan sharking” during a special hearing on Monday, but note there are no easy answers for how best to replace it.
The Senate Higher Education and Legislative Oversight committees held a joint hearing on Monday on the state’s Higher Education Student Assistance Authority and its policies, in light of a Pro Publica-New York Times investigation that highlighted tactics that senators found “disturbing.” Those included the agency telling staffers they “should not be volunteering” information about a policy of considering loan forgiveness for students who die before making full repayment unless families ask about it.
What they heard confirmed published reports as witnesses described a state-authorized agency that misled borrowers about flexible repayment options, does not allow for refinancing or loan consolidation, considers loans in default even when borrowers are making partial payments and sends them to collection (where they face additional fees of as much as $25,000), and would not forgive the debt of at least two students who had died.
The hearing was one-sided, since HESAA officials declined to testify. Instead, the authority’s executive director, Gabrielle Charette, sent a letter stating that it would be “premature for me or my staff to appear before the committees” while it undertakes a review of the policy governing the potential forgiveness of a loan when a student dies or is permanently disabled and how staff carry out that policy.
“I personally am outraged,” said Sen. Robert Gordon (D-Bergen), who chairs the oversight committee. “It seems to me we need to just end this program and start over from scratch to find ways to help students that are better than sending them into bankruptcy, that is more concerned with the residents of New Jersey than with investors on Wall Street.”
Sen. Sandra Cunningham (D-Hudson), chair of the higher education committee, agreed: “We have to start all over again. It’s very painful to see young people starting their lives in a hole, already in debt.”
The testimony got some immediate results, as the higher education committee voted 4-0 to approve S-743, which would require HESAA to forgive the student loan of someone who dies before completely repaying it, as the federal government does.
And Cunningham said that she planned to introduce bipartisan legislation by the end of the day that would require the authority to get a court order before it could take certain legal actions – taking a state income tax refund or lottery prize, garnishing wages, or suspending a professional license — against borrowers or their co-signers, often the parents of students HESAA determines to be in default.
At issue is the New Jersey College Loans to Assist State Students, or NJ CLASS program, which issued nearly 11,000 loans totaling more than $163 million in the 2015 fiscal year — an average of $15,269 per student borrower. The program had nearly $2 billion in outstanding loans held by New Jerseyans in college and out-of-state students taking classes at New Jersey schools as of June 20, 2015. While the program is administered by a state authority, the money lent out comes from private bonds. Students can borrow an amount up to the total for tuition, room, board, fees, books, and other related costs, minus any other financial aid they receive.
According to data HESAA provided to the committees, the authority had forgiven 670 loans totaling $6.9 million over the past decade because of death or disability. Since formalizing its policy in 2012, HESAA received 62 applications for loan forgiveness from co-signers of students who had died and had forgiven three quarters of those, totaling $560,000. Some of the 15 that were denied were due to the applicant’s refusal to provide documentation of their finances.
Charette said the review is designed “to ensure that we are handling each case with appropriate compassion and consideration for the individual circumstances of the borrower and any co-signer, as balanced against our fiduciary obligation to be responsible stewards of public funds.”
The borrowers and their family members who testified said HESAA’s scale weighs more heavily in favor of bond holders.
Deborah Carney-Gumpper of East Brunswick told a story similar to that of others who testified:
Her son took out a NJ CLASS loan to help pay for college and, because he did not qualify on his own, her husband co-signed the loan. Almost immediately on graduating, he learned he would have to begin paying back more than $1,000 a month. He spent 18 months looking for a job, and then he was earning $35,000 a year. He paid as much as he could and requested a loan consolidation but that was denied. When he owed about $5,600, HESAA judged him in default and sent the loan to a lawyer for collection. The authority refused further contact, and the lawyer charged a $22,000 collection fee. Her son filed for Chapter 13 bankruptcy, is making payments through the court trustee, and is now forced to keep living at home.
“As a borrower, my son did nothing wrong,” she said. “As a lender, HESAA was a loan shark. Someone must hold HESAA responsible for its predatory lending practices.”
Marcia DeOliveira-Longinetti co-signed for her son’s loan after he graduated from Southern Regional High School in 2009. The honor student was murdered in January 2015 and, because DeOliveira-Longetti was the co-signer, HESAA is now seeking payment from her.
“We are not in financial need, so I have to keep paying,” she said. “There are no more appeals. Every month, I have to keep writing a check for the next seven or eight years, reminding myself that my son will never graduate.”
Kathleen Spurka contacted HESAA following the death of her son at age 24. Several other loans he had taken out had been forgiven, and she wanted to know if HESAA would do the same for his $46,000 in state loans.
“We were told to read the fine print,” she said.
Tracey Timony of Forked River, whose daughter and nephew both defaulted, called the agency “unscrupulous, predatory and manipulative.” The agency refused to negotiate a modified payment plan and suggested the parents, who had co-signed a loan, remortgage their home and take any other actions necessary to make their payments. She cleaned houses and did yard work to make more money to try to make ends meet. The couple was forced into bankruptcy earlier this year.
“HESAA has deceived not only my family but hundreds of other students and families,” she said, noting that the agency added insult to injury by subjecting her to a message that kept saying “If you are having trouble repaying your loan, we can help” over and over while she was kept on hold waiting to speak to someone at the authority.
Timony termed the authority’s practices “nothing more than legalized loan sharking.
Several of those who testified said that, in addition to ruined finances, they were suffering emotional distress.
Like others, Dan Liebenthal couldn’t find a good-paying job in his field when he graduated into the post-recession world. He worked in a shoe store and a sandwich shop and could not afford the monthly payments on his $90,000 in loans. In default, he owes $133,000.
“Every day, I wake up and have to remind myself that there is no way out of this,” said Liebenthal, 27. “I have had thoughts of suicide on numerous occasions. I lost so much hair due to stress so I decided to shave my head.”
Carney-Gumpper said the greatest problem is with one of the loan types HESAA had been pushing for those with limited finances — the option that allows a borrower to defer all payments until after graduating.
Under current rules outlined on the HESAA website, this option is the most expensive of five offered. An incoming freshman taking out a $10,000 loan today would pay a total of $12,500 if he chose a 10-year fixed rate loan with an annual percentage rate of 5.66 percent that requires repayment of $107 a month beginning immediately on enrolling — the cheapest option. By deferring payments of both principle and interest while still in school, that same $10,000 would result in an APR of 8.36 percent, monthly payments of $118 starting in May of 2020 and continuing for 20 years, and a total repayment of $22,721.
Suggesting improvements to the process, several advocates who testified suggested that loans should not begin accruing interest and payments should not be due until six months after graduation. The authority also should adopt repayment options that are related to a graduate’s income and implement a rehabilitation program to allow borrowers in default to start making payments again.
While that’s a start, Gordon said that’s probably not enough to fix the problem.
“I would like to try to find some relief for these people who find their lives ruined today. There may be a legislative remedy that allows them to restructure their loans,” he said.
Clearly, there are major problems with the loan system as it exists now.
“They are conducting very aggressive marketing that is not telling the whole story,” Gordon said. “The agency sent us some documents. I have a Wharton MBA and it’s not entirely clear to me.”
He said it appears that HESAA did not follow any clear underwriting rules and was not making any efforts to weed out unqualified borrowers.
“It’s very similar to subprime lending,” Gordon said. “It appears to be focused on short term gains and if we ruin the lives of some young people so be it.”
But Gordon wants to go further, conducting “an independent audit of the agency” and comparing HESAA’s program to those in other states that are working well to try to come up with a better way to see that New Jersey students can afford a college education.
He said a program that takes bond holders out of the equation would be preferable, but that would mean a state appropriation and “the money isn’t there,” given the state’s other fiscal problems.
Gordon recognized the issue is a national one and is tied to the high cost of college.
“I don’t know what the answer is at this point.”