Colleges suing students?

Wow, alright, I am drowning in a pile of unfinished blog drafts over here. I have a total of 14 unfinished posts  in my queue just from the last week, so I'm just gonna go ahead and post a few of them, rapid-fire style, just to get some of this stuff out there. You might get a little less of my ranting and raving in these posts than you'd usually expect, but maybe that's a good thing. And hey, it's better than another link dump, right?

First up, I'll consider this post to be an update on the burgeoning student loan crisis about which I've written numerous times. Per Bloomberg,

Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates. 

The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship. 

Yale, Penn and George Washington University have all sued former students over nonpayment, court records show. While no one tracks the number of lawsuits, students defaulted on $964 million in Perkins loans in the year ended June 2011, 20 percent more than five years earlier, government data show. Unlike most student loans -- distributed and collected by the federal government -- Perkins loans are administered by colleges, which use repayment money to lend to other poor students. 

The increase in the amount of defaulted loans among poor students comes as President Barack Obama says he wants to expand access to college for working-class families and increase funding for the Perkins program. Under his proposal, the pot for Perkins loans would increase to $8.5 billion from about $1 billion. The Education Department would service the loans instead of colleges.

Oh, this is gonna be fun... leave it to Yale, right? As is mentioned later in the article, student loan debt has soared in the last several years (total debt outstanding now exceeds $1 trillion, more than our nation's aggregate credit card debt), as tuition costs have gone nowhere but up in a world flush with government-guaranteed debt.

As Karl Denninger writes (okay, rants),

Let's cut the crap -- colleges market themselves to young men and women on the premise that their educational services will provide you a means to get a better job than you would otherwise obtain.  That's the entire purpose of a career-focused education and the only justification for the outrageous tuition charges they assess. 

Well, as it turns out if you fail to benefit from the alleged "education" that these people sold you, and in the process you borrowed money using Perkins loans, the college is very likely to come after you, including in court! 

Oh, and lest you think they'll just sue to the principal and accrued interest, nope. 

As I've pointed out to a number of High Schoolers contemplating going to college and taking out loans, there are statutory penalties that apply if you default.  In the case of Perkins loans these amount to an additional 30% of the principal, increasing to 40% on a second collection attempt and another 40% on top of that if they sue. 

That basically doubles the amount you owe. 

Of course colleges don't talk about this before you matriculate.  After all, "education" as offered in these edifices is only partial, and the representations, both expressed and implied are many -- but the warranties few.

Yikes. The implications of the student loan crisis could well be far-reaching, and it's a dynamic that we'll need to keep our eye on over the next few years, because a lot of these institutions are proving to be ruthless when it comes time to collect payment.

In the meantime, I'm hoping we see some guts from the students who are being sued—let's see a countersuit from the unemployed (or underemployed) college graduates against their colleges and universities, alleging fraudulent marketing and failure to deliver on the promises made. The suits may have little merit, but I think it's the lender's (and not the borrower's) responsibility to determine the creditworthiness of the borrower. If they made bad loans to bad students, they should be forced to pay the price. That's how loans are supposed to work, period.

[Bloomberg]
[Market Ticker]