Student Loan Scams Similar To Ponzi Scheme

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Student Loan Scams Similar To Ponzi Scheme


History often repeats itself, and this decade is no different when it comes to student loan scams facilitated by private student lenders willing to partner with largely unregulated vocational, trade, and technical schools.

Unfortunately, the end result often leaves the student borrower on the hook for costly student loans and, too frequently, with little or no education or training to show for it.


How it works


An underfunded school partners with a “preferred” lender to provide its students with thousands of dollars in private loans to cover the full cost of tuition upfront before training is started or substantially completed.


Often, these lenders prey on those with marginal credit and offer loans with sky-high interest rates that can take a $50,000 loan to well over $200,000 over the repayment period.



Unlike the federally-guaranteed student loans, which mandate that participating schools meet eligibility requirements including proof of financial stability, many private lenders have no such oversight and are willing to provide student loans despite red flags that warn of the trade school’s questionable, long-term viability.


All too frequently, the school fails to utilize the tuition money to provide the training and education for which it was obtained.


The school becomes dependent upon a continual flow of new students, much like a Ponzi scheme, to keep its doors open.

The private lenders, who failed to ensure that the school was adequately funded, then securitize the loans in order to shift the risk onto investors, similarly to the subprime mortgage market.


This is done by pooling the loans and selling them to an investment trust for their full value without disclosing the inherent defects in the loan.


Who it hurts



Unfortunately, everyone pays the cost either directly or indirectly for any type of consumer scam.



In this particular scam, the direct costs are often borne by people at both ends of the financial spectrum.



Vulnerable, low-income consumers and those recently unemployed or otherwise hit hard by the economic downturn may decide to change vocations or improve their resume by learning new skills.



Unscrupulous vocational, trade, and correspondence schools then pressure consumers to sign documents obligating them to repay thousands of dollars at exorbitant interest rates.



Many schools promise that students won’t have to repay the loans until after they get high-paying jobs, but after making the promises, the schools close their doors, sometimes file for bankruptcy, and leave the students with nothing more than a large debt that is usually not dischargeable in bankruptcy for the student.

In the meantime, with the private lenders having provided the funding to the sham educational entity that the federal student loan program would not, unsuspecting investors, who are not aware of the school’s inability to perform because of lack of funding, purchase the loans in good faith, completely unaware of the bad debt.

The end result is harmful to the economy, thus indirectly hurting everyone.

What can be done?

As in any transaction, Consumer Advocate Eric Witkoski recommends consumers get informed:
Ask questions about who licenses and regulates the school before agreeing to enroll.
Find out whether the school participates in the federal student loan program.
Find out the interval at which tuition will be dispersed to the school – most reputable programs receive tuition disbursements as the education is provided and completed (i.e. at the beginning of each semester). In this way, if a student decides to quit or the school ceases operations before a student completes the program, he or she is only responsible to pay for the education received. If, on the other hand, the tuition is disbursed in installments unrelated to the actual training received, the student consumer should beware.
Ask for graduation rates for prior students, and ask for former and current student references.
Contact the Nevada Commission of Postsecondary Education (“CPE”) which licenses some educational institutions. However, pursuant to NRS 394.099, the CPE does not license institutions that are licensed by another state or federal agency, providing a loophole for some unscrupulous, private educational institutions licensed by other agencies for some aspect of their business which might only be tangentially related to the educational training aspect.
For those institutions not licensed by the CPE, consumers should check with the licensing agency responsible for licensing the specific educational institution to ensure that the institution is reputable.
Most important of all, read both the enrollment and lending contracts.
Consumers should ask questions about any provisions they don’t understand and should be fully informed about all costs associated with attending the educational institution and familiarize themselves with the policy on tuition refunds.
Consumers should also understand the repayment terms and all costs associated with the loan origination.
Finally, as added protection in the event the school breaches the contract, it’s a good idea to ensure that the lending contract provides the same claims and defenses for the borrower against the lender as the borrower has against the school. This should be in the form of a notice in the school’s contract that expressly allows the student to assert against the lender whatever rights the student has against the school. Failure of the school to include this notice is a violation of federal consumer law.





If you would like further information, please call the Attorney General’s Bureau of Consumer Protection in Las Vegas at (702) 486-3420; or in Carson City at (775) 684-1180.



Consumer protection information can also be found on the Attorney General’s Web site at www.ag.state.nv.us/org/bcp/education.htm, the Nevada Fight Fraud website at www.fightfraud.nv.gov and at the Federal Trade Commission website at www.ftc.gov.