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San Diego Union Tribune Writes About The Plight of the SSH Students

JACIE LANDEROS / Union-Tribune

Left in the lurch
Lenders expect students to repay private loans even if school goes bankrupt
By Bruce V. Bigelow
March 9, 2008
Hector Leon was a freshly divorced father with two small children when he decided in 2006 to enroll in a helicopter flight school offered at El Cajon’s
Gillespie Field by Nevada-based Silver State Helicopters.
The flight school required all students to pay the full amount of their $69,900 tuition up front. Leon said Silver State made it easier by arranging
a private student loan for the full amount, with payments deferred until six months after graduation.
“When I heard their ads, which said you could make upwards of $150,000 to $180,000 a year, I thought it was the way to get a better income and provide
a better life for my two kids,” the San Diego resident said.
But Leon’s helicopter dreams began to spin out of control when he learned on Super Bowl Sunday that Silver State had ceased operations and was filing
for bankruptcy liquidation in Las Vegas.
The privately held company has refused to comment since its Feb. 4 Chapter 7 filing, when it issued a brief statement that blamed its abrupt liquidation
on “a rapid, unprecedented downturn in the U.S. credit markets.”
The credit squeeze “severely curtailed the availability of student loans” Silver State said, “and resulted in a sharp and sudden downturn in new student
By some accounts, Silver State’s bankruptcy was triggered after a major lender informed the company it would no longer make loans to its students.
Now Leon and some 2,500 other Silver State students nationwide are facing a double bind not of their making: fighting for scraps of their paid tuition in Silver State’s bankruptcy while battling lenders who insist the students are still on the hook for repaying the loans. “My first reaction was a sick feeling,” said Leon, 36.
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CHARLIE NEUMAN / Union-Tribune
A bankruptcy notice was taped to the door at Silver State Helicopters, which required students to pay tuition upfront.
CHARLIE NEUMAN / Union-Tribune
Local Silver State students are among those battling lenders who insist that the students are on the hook for repaying their loans.
To consumer rights advocates, the situation is reminiscent of a wave in trade school scams and student loan abuses in the 1980s and early 1990s. They suggest Silver State may be an early casualty as credit woes squeeze lenders and pose problems that may be especially painful for students at postsecondary vocational
schools and private, for-profit educational institutes.
“The new twist this time around is that most of them have these private student loans,” said Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston. Students today “don’t have the same protections and remedies” available 20 years ago, when most education loans were federally
backed, Loonin said.
For one thing, the federal Bankruptcy Act of 2005 made it far more difficult for individuals to discharge a student loan in personal bankruptcy.
A California law established to protect students at private postsecondary and vocational schools expired June 30, 2007. Gov. Arnold Schwarzenegger vetoed legislation to renew the program, calling the existing statutes “fundamentally flawed.”
At the time the law expired, California had about 2,400 postsecondary schools, including technical-training institutes, cosmetology, culinary and truck-driving schools, as well as educational chains operated by Corinthian Colleges, Career Education Corp. and others.
Since then, there has been little if any state oversight.
The company at the center of the latest controversy was founded in 1999 in Henderson, Nev., by Jerry Airola, who rapidly expanded Silver State’s business to at least 33 flight schools nationwide. In addition to its school in El Cajon, the company operated in six other California cities: Long Beach, Camarillo, Chino, Los Banos, Oakland and Sacramento.
Many, if not most, of Silver State’s students received private student loans to cover all or part of their $70,000 enrollment. But because Silver State did not participate in federal education aid programs, its students were ineligible for federally guaranteed student loans.
After Silver State’s bankruptcy, many students learned that private student loans usually cannot be discharged if their school goes out of business – unlike federally guaranteed education loans.
Shortly after the bankruptcy, San Diego-based Student Loan Xpress, which worked closely with Silver State’s California flight schools, indicated it had no plans to write off its loans to Silver State borrowers.
In a statement, Student Loan Xpress urged students to contact Silver State’s bankruptcy attorney to file individual claims for a refund on the “unearned” portion of their paid tuition.
“We also encourage those students whose tuition was financed by SLX to contact us to implement mutually satisfactory repayment plans,” the lender said.
Students may have little recourse, but Elena Ackel of the Legal Aid Foundation of Los Angeles offered one sliver of hope, known as “the FTC rule.”
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The rule, based on a Federal Trade Commission regulation, gives consumers the right to legally raise a financial claim against a lender in cases where a seller and lender have a business arrangement, Ackel said. It applies to private, for-profit schools and educational lenders.
To Loonin, Silver State exemplifies the sort of hidden risks the credit crunch has forced into the open as the cost of education has skyrocketed in the United States.
She views private student loans as one of the biggest hazards because they aren’t subject to the rate caps that fix the interest rates on most federally backed loans at 6.8 percent.
In a recent study of 28 representative loans, Loonin found the average initial rate was 11.5 percent, and the highest was nearly 19 percent. Most had origination charges that added, on average, 4.5 percent to the loan amount.
Private loans, which were once used chiefly by graduate students, have grown dramatically, from about 5 percent of all student loans a decade to nearly 25 percent today, Loonin said.
In 2005-06, students took out $17.3 billion in private loans, compared with $1.3 billion a decade earlier, according to the College Board.
The dramatic growth in private student loans is due chiefly to the enormous profitability of the lightly regulated industry, Loonin said.
As in the subprime mortgage market, one of the biggest factors driving profitability has involved packaging student loans and selling them to hedge funds, mutual funds and other investors as “asset-based securities.”
Selling “securitized” student loans has been a key source of revenue for many lending companies, especially those not affiliated with banks.
In a recent report issued by the National Consumer Law Center, Loonin and co-author Julia Devanthery found the market for such securitized student loans jumped from $9.4 billion in 2005 to $16.6 billion in 2006 – a 76 percent increase.
But Wall Street lost its appetite for such deals as investors’ bets on securitized subprime mortgages began turning into disastrous losses last year. The resulting credit squeeze has prompted many lenders to make drastic cutbacks and sever their ties with financially troubled schools, which apparently is what happened at Silver State.
Some lenders also have raised their loan requirements, left less-profitable loan programs and, of course, increased their interest rates and fees.
“It all helps unmask the larger problem, which is that students are having trouble affording the cost of education,” Loonin said. “We’ve masked that problem by throwing all these predatory loans at them.”
She contends that many postsecondary schools mislead students through aggressive marketing that makes exaggerated promises about high-paying careers without disclosing the exorbitant costs of their classes or the burdensome nature of private student loans.
Like a receding tide, the industry’s cutbacks have exposed some hazards that students face. But nowhere has this reef been exposed more clearly than in Silver State’s bankruptcy.
In the hierarchy of bankruptcy law, students rank as unsecured creditors who stand near the end of the line of people who hope to get their money back. Silver State has said in its filings that it does not expect any proceeds will be left over from its liquidation to reimburse such creditors.
Still, Michael Berger, a Beverly Hills bankruptcy lawyer who is intervening on behalf of hundreds of students in SignOnSanDiego.com > News > Business — Left in the lurch 3/9/08 1:35 PM
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California and elsewhere, said there are fraudulent aspects of the case he intends to challenge.
“We have students who got their loans funded the day before the bankruptcy, the day of the bankruptcy and the day after the bankruptcy,” Berger said.
He also asserted that federal investigators and attorneys general in several states, including California, have launched inquiries into Silver State’s operations.
Meanwhile, Leon and other students say they are learning details about their loans – such as higher interest rates – that they knew nothing about before now.
Leon said the interest rate on the $69,900 loan he signed in 2006 was supposed to be 10 percent. But after looking over his paperwork, Leon discovered that his rate had jumped to 14 percent and that another lender, American Education Services, was servicing his loan.
Another Silver State student, Tony Vaca of Long Beach, said as many as 70 Silver State students in California also have discovered to their surprise that someone had co-signed their student loans, presumably to help them qualify. But the co-signer’s name was not familiar to any of them – and they all had the same co-signer.
Vaca and Leon said they plan to attend a key creditors meeting in Silver State’s bankruptcy case that is set for tomorrow afternoon in Las Vegas, and they plan to fight however they can.
“A lot of students are just sort of throwing up their hands … not knowing that those $70,000 student loans are going to be following them around for the rest of their lives,” Vaca said.
Bruce Bigelow: (619) 293-1314; [email protected]
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