SAN FRANCISCO (CN) - Sallie Mae aided and abetted a fraudulent culinary school by issuing student loans at "credit card rates," four students claim in a federal class action.
Lead plaintiff Andrew Bradshaw sued SLM Corp. and Sallie Mae, claiming they aided and abetted fraud at the California Culinary Academy, which is not named as a defendant.
SLM and its subsidiaries own, manage and service more than 11 million student loans totaling more than $234 billion, according to the 60-page complaint.
California Culinary Academy has been sued repeatedly. Twenty-one of its recruiters sued
the school in September 2011, claiming the companies that run the for-profit college "run the school like a used-car lot, preying on vulnerable students ... saddling them with loans they cannot pay back," Courthouse News reported at the time.
In a June 2008 class action
, the two named plaintiffs claimed they each ran up $50,000 in debts for an education worth no more than $2,000. Both those complaints were in Los Angeles Superior Court.
According to the new complaint: "Sallie Mae misled plaintiffs and committed other unlawful conduct of its own, causing plaintiffs to take out enormous loans with credit-card interest rates, when Sallie Mae knew that these students had a relatively small likelihood of being able to repay the loans in full. Plaintiffs now seek to get their lives back on track by having Sallie Mae bear its fair share of the losses.
"Plaintiffs had no idea that attending CCA was an economically irrational act. Plaintiffs did not know that a CCA education has little or no value. Nor did they understand that at no relevant time has there been a job market for CCA graduates that pays sufficient wages to enable graduates to pay down the substantial debt they must incur to finance CCA's exorbitant education.
"Sallie Mae knew these facts when it issued plaintiffs their high-interest private education loans ('high-interest private loans') to pay for their CCA education. It further knew that CCA needed Sallie Mae to extend these loans in order to carry out its fraudulent recruiting scheme, and Sallie Mae, seeking to profit, happily obliged. The results harm to the plaintiffs has been catastrophic.
"Moreover, Sallie Mae knew at all relevant times that there was an unusually high probability that plaintiffs would be unable to make the full payments necessary to keep these high-interest private loans from falling into delinquency and default. And Sallie Mae knew that plaintiffs did not know this. Yet, intent on issuing as many of these loans as possible, Sallie Mae purposefully did not tell plaintiffs any of these facts.
"When Sallie Mae loaned CCA purchase money to plaintiffs, it knew CCA students were defaulting on much smaller, lower-interest federal student loans at rates that substantially exceeded the rates at which traditional college students default on such loans. Sallie Mae knew that by setting very high interest rates (typically in the range of 12-15 percent) on its high-interest private loans-often two to four times larger than on federal loans-it was significantly diminishing plaintiffs' chances of fully repaying these loans. Sallie Mae further knew that this would likely result in significantly raising the plaintiff class's high-interest private loan default rates relative to traditional student loan default rates. Sadly, this likelihood has been realized; the putative class has defaulted at extraordinarily high rates."
The school lured students with a string of false promises, the class claims.
"Among CCA's false and misleading representations were the following: (a) admission to CCA was a competitive and selective process; (b) a CCA education increases graduates' incomes and opportunities in the food-service industry to a degree that makes a CCA education well worth the sky-high tuition (approximately $48,000 for the Culinary Arts Program, $28,000 for the Baking and Pastry Program, and $38,000 for the Management Program) and corresponding student-loan debt; (c) CCA has an extensive network of contacts and close relationships with prestigious restaurants and other food-service employers where CCA graduates can easily obtain employment in one or more of the positions for which CCA promises to train them; (d) CCA has an excellent reputation, and graduates will benefit from that reputation by being able to gain better and more prestigious jobs with a CCA degree than without one; (e) CCA students have an extremely high rate of job placement in jobs for which the students seek to be trained; and (f) the programs can be financed through student loans, with a resulting debt service burden that is reasonable and manageable in light of the income opportunities available to graduate," according to the complaint.
Sallie Mae knowingly aided and abetted this fraud for its own profit, the complaint states: "CCA had an agreement with Sallie Mae to recommend Sallie Mae as a 'preferred lender' to prospective students: Sallie Mae would provide these students high-interest private loans to pay the balance of their educational costs not covered by federal grants and loans."
Sallie Mae conducted its own research and analysis of CCA's graduation rates and employment statistics of its graduates, so it knew what was going on, the class claims: "Sallie Mae was acutely aware, by the time plaintiffs and class members sought loans to attend CCA, that a CCA education was not worth what it had been a decade prior, that a significant percentage of CCA's students were unemployed or making very low wages, and that CCA students were financially unable to repay fully the high-interest private loans."
Three of the four lead plaintiffs are unemployed and all four say they owe significantly more money on their loans than what they took out.
Plaintiff Adam Correveau claims he took out a $45,974 loan at 13.125 percent interest. The balance has grown to $145,371. He says he works as a line cook at a restaurant where he makes $14 an hour.
Plaintiff Tanif Stephenson took out two loans totaling $16,365 to finance her education at CCA. She has already paid $14,608, but with an interest rate of 13.125 percent, her balance remains $42,385, according to the lawsuit.
"Ms. Stephenson's only culinary-related employment since she graduated from CCA was a five-month job as a cashier in a corporate dining cafeteria, where she occasionally performed light preparation work in the kitchen," the complaint states. "Her hourly wage was $9.00. She was unable to find any other culinary work after being laid off from this position, and she believes her CCA credential actually hurt her culinary-job prospects."
According to the complaint: "The sad, true fact is that a CCA education does not significantly increase graduates' incomes and opportunities in the food-service industry. CCA's reputation has plummeted since the 1990s. Indeed, food-industry personnel and potential employers snicker that CCA stands for 'Can't Cook Anything.'"
While plaintiffs and the class are saddled with debts they cannot repay, Sallie Mae has benefited in two ways, the complaint states: "First, Sallie Mae profited, and intended to profit, by inflating its balance sheet with billions of dollars of loans to plaintiffs and others at similar non-traditional schools. Sallie Mae's scheme intentionally inflated its stock price and attracted potential acquirers.
"Second, because the high-interest private loans have such high interest and Sallie Mae's own cost of funds is so low, Sallie Mae can profit even if the loans are never repaid fully. "Sallie Mae's cost of funds (estimated at 1 percent to 2 percent) is negligible compared to its high-interest private loans' typical compound interest rates of 12-15 percent.
"Third, because student loans generally are not dischargeable in bankruptcy, Sallie Mae can squeeze out small amounts of money from the student borrowers for the rest of their lives. Sallie Mae demands plaintiffs' small paychecks, even when the payments do not cover the accumulating interest, allowing Sallie Mae to profit while the CCA students' high-interest private loan balances continue to increase."
Sallie Mae has acknowledged that it knew the students would not be able to repay the loans, the class claims.
"Sallie Mae's chairman acknowledged that these loans were 'predictably not collectible.' He admitted that many students attending CCA and other similarly valueless schools likely would never be able to earn sufficient income to repay in full the loans they were taking out," the complaint states.
It adds: "Ignoring the financial burden its actions placed on borrowers, Sallie Mae blithely extended loans it never expected to be repaid fully - all for the purpose of manipulating its financial reports and increasing its revenue. Sallie Mae was fully aware there was a reasonable likelihood that plaintiffs and class members would be unable to repay their high-interest private loans in full. Yet it intentionally failed to disclose this highly relevant information to plaintiffs and class members at the time that it issued their high-interest private loans."
Sallie Mae owns the class members' "high-interest private loans under various names," the complaint states. It serviced the high-interest private loans under the name Sallie Mae Servicing LLP, which was a division of SLM until Dec. 31, 2003, when Sallie Mae Servicing LLP was merged into Sallie Mae Inc., which took over the loan servicing.
Plaintiffs seek declaratory judgment, rescission of loan contracts, and disgorgement of unjust profits. They also want compensatory and punitive damages for aiding and abetting fraud, unjust enrichment, and unfair competition.
They are represented by Adam Wolf.