Students don't even know what they owe!

http://www.npr.org/2012/04/25/150882741/negotiating-the-college-funding-labyrinth

Will Student Loans Be the Next Bubble to Burst?

          Background.  In the early 1990s, the savings-and-loan debacle shook financial markets and hammered employee pension plans.  A decade later, the dot-com bubble burst, throwing the U.S. into recession and gutting another gaggle of pension funds.  Worst of all was the 2008-09 derivatives-driven debacle.  This disaster, which left many individual brokers richer than Croesus, but bankrupted (e.g., Lehman Brothers), nearly destroyed (e.g., AIG), or forced distressed sale of (e.g., Bear Stearns, Merrill Lynch) their firms, has generated a plethora of lawsuits.  It’s no surprise that pension plans are among the plaintiffs, as a brief review of a sampling of recent decisions reflects:

• IBEW Local 90 Pension Fund v. Deutsche Bank AG, 2011 WL 6057812 (U.S. District Court, S.D.N.Y., December 5, 2011): The complaint alleges that during the Class Period, the defendants issued materially false and misleading statements regarding Deutsche Bank's business and financial results. The plaintiffs also allege that the defendants concealed the Company's failure to write down impaired securities containing mortgage-related debt and intentionally disregarded findings that residential mortgage loans did not comply with underwriting guidelines. As a result of the defendants' alleged misconduct, Deutsche Bank's securities traded at artificially inflated levels during the Class Period.  Because of the precipitous decline in the market value of the Company's securities, the plaintiffs and putative class members suffered significant losses.
• The Government of Guam Retirement Fund v. Bank of America Corp., Case No. 2:11-cv-06239 (U.S. District Court, C.D.Cal., Nov. 22, 2011):  “On November 22, 2011, Bank of America Corporation reached a settlement with various institutional investors who had opted out of a $624 million settlement in 2010 stemming from allegations that Countrywide Financial Corporation’s officers made false statements regarding its lending standards and the quality of its home loans. Bank of America purchased Countrywide in 2008.The terms of the settlement were not disclosed, but the settling plaintiffs include the California Public Employees’ Retirement System, T. Rowe Price Group Inc., BlackRock Financial Management, Inc., and others. The original complaint was filed against Countrywide in July 2011, and alleged that the bank's public statements - assuring investors that the loans behind the mortgage-backed securities were high quality - were false, and that the securities included risky lending practices to subprime borrowers.” (Source: http://www.lowenstein.com/sflupdates/#BOA_AG1; motion accessible at http://www.lowenstein.com/files/Uploads/Documents/CapitalMarkets/settlementmotioncountrywide.pdf)
• Employees Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Company, Inc., 2011 WL 4526045 (U.S. District Court, S.D.N.Y., September 30, 2011): Institutional investor filed class action complaint for common law fraud and unjust enrichment against brokerage firm, which marketed and sold AAA-rated notes issued as part of a collateralized debt obligation (CDO). The brokerage moved to dismiss. The District Court held that:

(1) the investor failed to adequately allege that brokerage firm made a materially false misrepresentation or omission of fact, and (2) unjust enrichment claim was preempted by New York's Martin Act.

           Extent of student loan exposure.  In November of last year, the Federal Reserve Bank of New York’s Research and Statistics Group released its Quarterly Report on Household Debt and Credit. (http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q32011.pdf)   The report contains a startling and very disturbing admission:

Revisions to Student Loan and Total Debt Balances

From the inception of the FRBNY Consumer Credit Panel, we have frequently compared the aggregate balances reported on our sample of consumer credit reports to other publicly available sources of data. For most categories of consumer debt, our aggregate figures are close to other public estimates and/or we are able to understand the differences we observe. However, we came to realize that our aggregate reported student loan balance was at the low end of the substantial range of publicly available sources. After several months of discussions with our vendor, we have now come to understand the source of this difference.

Our new data reflect changes to our vendor’s method of identifying outstanding student loans in 2011Q2 and 2011Q3. In particular, the new data for student loan balances – and total debt outstanding – incorporate additional student loan accounts that had previously been excluded.

The revisions to the data are fairly substantial: as of our August report, 2011Q2 student loan balances were reported at $550 billion. We now estimate that student loans outstanding in that quarter (2011Q2) amounted to $845 billion, $290 billion or 53.7% higher than we reported earlier. These previously excluded loans were also missing from the total debt outstanding; as a result, our estimate of total debt outstanding in 2011Q2 is also revised upward by $290 billion (2.5%).

For now, we only have data using the revised methodology for the two most recent quarters – 2011Q2 and 2011Q3. As noted above, the charts and data for the 2011Q3 Quarterly Report have been adjusted and annotated to reflect this fact. We are continuing to work with our vendor to make revisions to earlier data (1999Q1-2011Q1) and will report revised data when we have them.

       In the wake of this revelation, one knowledgeable commentator opined, “It is estimated that by the end of 2011 national college debt will surpass $1 trillion—that’s even more than the nation's credit card debt. Undergraduate students, on average, will owe $25,000 at the time they graduate, and they will be heading out into a job market that hired 20 percent of law school graduates as food servers in 2010.  While much focus has been placed on the problems associated with the funding sources (or lack thereof) responsible for the student debt crisis, few have taken aim at the actual increase in the cost of education, which has outpaced inflation by 3.1 percent.”

      He adds, “In an attempt to ease the student debt burden, President Obama recently approved a new student loan plan allowing students to consolidate their loans, lower their interest rates and reduce monthly payments to 10 percent of their discretionary income over a 20 year period; any remaining debt after 20 years will be forgiven.  This plan is scheduled to take effect in January 2012 and represents the first sign of relief for students in recent years.  President Obama's bill will help an estimated 1.6 million students meet their financial obligations, but his solution does not address the underlying problem regarding the continued increase in the cost of public education.” (Jon Berk, “Student Debt Crisis Hits Tipping Point,” Faculty Row, Dec. 1, 2011, accessed at http://www.facultyrow.com/profiles/blogs/student-debt-crisis-has-reaches-breaking-point)
Read more in the January 2012 issue of Compensation & Benefits Law Bulletin:
http://store.westlaw.com/compensation-benefits-law-bulletin/148213/40740023/productdetail?