Last spring, Joseph Pierz received 12 warnings in three months telling him in so many words that he was a deadbeat.
Letters sent to the McDonnell Douglas senior safety engineer warned him that he was "seriously delinquent" in paying off his 7-year-old, $3,000 student loan, even though he was not. A loan collector even telephoned Pierz's aunt and uncle in New Jersey one Saturday morning asking where he could be found.
One letter the Lakewood resident received in May ordered him to pay his next installment the \o7 previous \f7 March.
"It got to the point where I didn't want to look in my mailbox," he said.
Pierz's problem was caused by the improper "servicing" of his government-guaranteed student loan by an Encino company, United Education & Software. The company later acknowledged in a letter that Pierz had been making his $35.13-a-month payments and blamed the mistake on a computer software glitch.
At the time, United Education was the fastest-growing servicer of student loans in the nation, tracking more than $1 billion in loans for clients via computer and pestering delinquent borrowers with telephone calls and letters.
United Education's servicing problems went far beyond Pierz's account and faulty computer programs. Last summer, a review of its operation by the U.S. Department of Education and other agencies uncovered the biggest mess ever in the nation's student-loan program, one that a federal report said "caused immeasurable hardship to hundreds of thousands of borrowers" such as Pierz. The fiasco may cost as much as $650 million to straighten out, according to one estimate.
One borrower's $2,500 loan was listed as $25,000 for a year before the mistake was fixed, according to the federal report. Letters containing loan-payment checks were returned to borrowers unopened, the report said, and notices to pay sometimes were mailed to non-existent cities such as Radio City, N.Y., and Bacon, Ind.
Thousands of calls that United Education said it made to delinquent borrowers were not substantiated by telephone records, according to the report. Thousands of letters that United Education claimed were mailed were never sent. Hundreds of drawers were discovered with documents inside waiting to be filed, some of them three years old. In one warehouse, authorities said, 25 boxes were found containing 100,000 documents, much of it unopened mail.
"This is the worst problem we have had with (loan) servicing ever, by far," said Dewey Newman, the U.S. Department of Education's deputy assistant secretary for student financial assistance.
$1.1-Billion Portfolio
As the fiasco continues to unravel, the most puzzling question for federal and state student-loan officials is how United Education got so much business so fast when it later proved to be so inept.
In 1984, the company was a sleepy chain of vocational schools with a small unit that serviced $22 million in student loans. By early last year, it was servicing 700,000 student loans worth $1.1 billion from what it described in a report to the Securities and Exchange Commission as a $1-million, "state of the art" loan-service center in Costa Mesa.
"The operation was in total confusion and disarray. No way do you do a billion dollars of servicing with this bunch," said an Education Department official--speaking under the condition that his name not be used--who has thoroughly examined United Education's loan-service operation since last summer.
State and federal officials are troubled by the close ties found among a Sacramento trust company that is one of the most aggressive lenders to vocational-school students, a nonprofit corporation called the California Student Loan Finance Corp. in Los Angeles, which bought the loans with money raised by selling bonds, and United Education, which was hired to service them.
About $750 million in student loans--nearly 70% of the $1.1 billion worth that United Education was handling--were first made to students by First Independent Trust of Sacramento, according to interviews and documents.
Those loans were bought--immediately after they were made--by the nonprofit California Student Loan Finance in Los Angeles, which turned them over to United Education for servicing. What troubles state and federal officials further is that United Education's chief executive, Aaron Cohen, is a close friend of the president of California Student Loan Finance, Jay Olins.
As the loans flowed from Sacramento to Los Angeles, the amount handled by United Education soared, growing on average by $40 million a month. Ultimately, state and federal officials believe, the system overheated.
"It was a meltdown," said Fred Brill, staff services manager for the California Student Aid Commission, a state agency that administers federal student-loan programs.
Many Vocational Students
