School pulls plug on pricey loan program

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The parent company of Lehigh Valley College is ending a controversial high-interest loan program that has left some of the school's students with overwhelming debt.

A spokeswoman for Career Education Corp. said the program failed to meet the company's expectations because so many students with the loans dropped out of school.

"If it had been a profit-maker and good for the students, then we probably would have kept it," spokeswoman Lynne Baker said.

After a report in The Morning Call last year, the high-interest loans of LVC students became the subject of an investigation by the Pennsylvania attorney general, a legislative hearing and a class- action lawsuit.

LVC, formerly known as Allentown Business School, offers training in a variety of subjects, from massage therapy to computer networking, at a one-building campus in Center Valley. Tuition for its 11/2-year programs ranges from $30,400 to $37,500.

But, The Morning Call reported in May, some students were shocked to find upon graduation that they were on track to pay as much as $100,000 because they had loans carrying 15 percent interest -- a rate normally associated with credit cards, not student loans. Faced with monthly bills of more than $500, some said they were forced to quit school, postpone marriage and file for bankruptcy.

Nina Lewis, 22, of Allentown, said her bills have only gotten bigger since last year as the variable interest rate on some of her student loans has climbed -- to 17 percent. A paginator at The Express-Times newspaper in Easton, she said her loans have left her with virtually no discretionary money.

The 2003 LVC graduate said she's stuck in a dingy apartment in a rough neighborhood. She got a second job and tried working 80 hours a week until sleep deprivation caught up with her. She said she can't afford to move, or even go on a weekend road trip.

The term of her loans will end -- if she manages to pay her bills on time -- when she is 37.

"That's when I'm supposed to start my life?" she asked. "I've worked so hard, and I still have so little to show for it."

Most of the loans in question originated from Stillwater National Bank, of Stillwater, Okla. They were then transferred to Sallie Mae, of Reston, Va., the country's top student loan provider, which handled the billing.

Career Education -- the Hoffman Estates, Ill., company that has owned LVC since 1995 -- will discontinue its Stillwater program in May, Chief Financial Officer Pat Pesch told analysts during a conference call last week. He gave no reason for the change.

This week, company spokeswoman Baker cited the higher-than- normal dropout rate of participating students. She said she did not know what that attrition rate is, or how many students have gotten the high-interest loans.

The program contributes less than 1 percent of Career Education's domestic cash receipts, Pesch said.

Pesch also said the company's "multiyear process of really tightening up credit standards" are, in part, responsible for declining enrollment at its traditional schools.

Career Education is the country's second-biggest education company, with revenues of $2 billion last year. While its online programs are growing, enrollment at its 89 campuses has declined 6 percent over the past year, from 76,600 students to 71,500, according to the company's figures.

"Those changes in credit standards have clearly kind of affected, if you will, the size of the funnel in terms of students that can come to the school," Pesch said.

The chief financial officer also blamed "adverse local publicity at certain schools."

LVC put its enrollment at 1,350 students last year. It has declined to give an updated figure.

Career Education created the Stillwater program several years ago. The program, the company said, would provide access to education to students who, because they have poor or no credit histories, would otherwise be unable to get tuition money. But the loans came at a steep price. Because such students were considered high-risk, they were charged higher-than-normal interest rates.

"That's just regular finance," Baker said. "We're talking about really low [credit] scores here."

Some Lehigh Valley College students, however, said that LVC financial aid advisers told them to sign the Stillwater paperwork without explanation of how much they would have to pay back and without mentioning cheaper alternatives, such as parental loans and co-signed loans.

Both LVC and Sallie Mae have maintained that they did their part to inform students and to comply with the 1968 Truth in Lending Act, which requires lenders to disclose interest rates and finance charges. Such information is provided over the phone at the time loans are approved and later in the mail, they said.

At the behest of state Rep. Craig Dally, R-Nazareth, the state House Consumer Affairs Committee held a legislative hearing on the loans in November.

There, a Sallie Mae official revealed that the company was charging LVC students interest rates that were 44 percent higher than the Pennsylvania average. LVC students with private Sallie Mae loans had an average interest rate of 13 percent, compared to the company's statewide average interest rate of 9 percent, he said.

He also confirmed that Sallie Mae does not tell students up front how much principal and interest they will have to repay. He said estimating total indebtedness is impossible because deferments and other variables throw off any calculation.

When pressed, another Sallie Mae official revealed that Oklahoma banks, such as Stillwater, are allowed to charge a higher maximum interest rate -- 21 percent -- than Pennsylvania banks, which can go no higher than 18 percent.

"Are you really doing [LVC students] a favor?" state Rep. Doug Reichley, R-Lehigh, asked Sallie Mae officials then. "You just can't lead them down the primrose path and tell them not to worry about the financial situation."

Part of the problem, according to Rep. Dally, is that student loan lending

institutions have found a loophole around normally required disclosure. To close the loophole, he has drafted legislation that would require lenders to give students an estimated loan repayment schedule. He plans to introduce the bill next month.

"This isn't going to protect everybody, but it will at least give people the information that they need to make an informed decision," he said.

While Career Education is ending its high-interest loan program for students with poor credit, the company will still use Stillwater to originate other loans, company spokeswoman Baker said. She said she could not say what interest rates students might expect from that arrangement.

Officials from Stillwater and Sallie Mae did not return phone calls.

sam.kennedy@mcall.com
610-820-6517

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