When Joshua Fensterstock, a 2003 law school graduate living and working in New York, consolidated his student loans by borrowing from Education Finance Partners, which is serviced by Affiliated Computer Services, Inc., he agreed to the terms of the contract they sent him. In fact, he had no choice.
Loan applicants don't generally read the terms set out in standard mortgages, loans and credit card agreements. They are usually in very small font, in legal language and, in any case, non-negotiable. That is, an applicant for a loan or a credit card, cannot negotiate the interest rates, fees, or any other terms. It's a take-it-or-leave-it document.
Those procedures, though, could change. A three-judge bench of the federal appeals court for the New York region has determined that two significant clauses of Education Finance's agreement with its borrowers are unconscionable and unenforceable under the applicable law. The contract, which requires disputes be resolved by arbitration rather than court action, was stricken in July as being an unbalanced, unfair take-it-or-leave-it document in which consumers had no bargaining power. The court also struck a clause that required borrowers to give up their right to participate in class actions.
When Fensterstock applied for the loan in 2006, two years after he received his license to practice law, he accepted the terms as offered. But he later realized that his payments were improperly apportioned between interest and principal. He filed a federal lawsuit alleging that the defendants "engaged in fraudulent and deceptive practices in connection with the solicitation, consolidation and servicing of student loan." But the lenders insisted on alternative dispute resolution -- arbitration -- and not court action, because that was part of the loan agreement.
Fensterstock’s agreement, like most transactions with banks and credit card companies, included a binding arbitration clause. Consumers may consider arbitration more informal and cozier than litigation in a courtroom. However, while courts are public and basically free -- aside from the expense of hiring an attorney -- arbitration is costly and far beyond the means of most people with student loans. While the plaintiff and defendant sometimes split the fees, more frequently the loser must pay.
In addition, whether the borrowers or card users have lawyers or represent themselves, the bank will always have a major law firm on its side. Its lawyers, along with the arbitrators, will charge huge hourly rates that the borrower may very well end up having to pay.
In signing the agreement, the borrower gives up the right to sue in Small Claims Court or other civil court, since the bank or credit company would demand arbitration. Not only that, but arbitration involves one claimant at a time, not the entire pool of individuals with similar contracts.
The Education Finance Partners' agreement also included a provision in which the borrower gave up the right to participate in class actions. When many borrowers get together as a class to try to seek redress in the courts, they can be very forceful. Individuals might not realize how their payments are being applied, for example, or take on a battle with the lender.
In ruling on Fensterstock's suit, the U.S. Court of Appeals for the Second Circuit, in Manhattan, just handed him a major victory. In a decision written by Judge Amalya Kearse, Fensterstock won the right to form a class action with others who entered the same agreement with the defendants. He also won the right to litigate in federal court rather than submit to arbitration.
Shortly after he graduated from Hofstra Law School in Hempstead, N.Y., and become a lawyer, Fensterstock had accepted the defendant's offer to consolidate his student loans into a single loan of $52,915.49 at an annual interest rate of 9.32 percent. At the end of the loan period of 29 years, he would have paid approximately three times the amount with monthly payments being applied "first to charges, costs and fees; next to unpaid interest and then to principal."
Fensterstock's payments were due on the 14th of every month, and he always mailed them in ahead of that date. After seven months, he had paid $7,051.84 but he realized that by far the largest share of his payments was being applied to interest. In other words, his debt was being reduced by only $17 a month.
This, he was told was because payments had to arrive on exactly the 14th -- not sooner, not later. On this basis, he calculated, there would be "an enormous" payment due at the end of the loan period -- not a final payment of $335 as he had been told at the inception.
Though Fensterstock was in New York the agreement said the "note will be deemed to have been made in California ... and governed by federal laws and the law of the State of California," where defendant was incorporated. (The co-defendant is a Delaware corporation.)
Consumers don't choose creditors on the basis of where they are incorporated, whether it be California, Delaware or North Dakota, for example. The plaintiff being in New York, and the lender being a California company, two different states, explains why the lawsuit was filed in federal court, and why the federal court located in Manhattan applied California law. The loan agreement, as prepared by the lenders' attorneys, could have specified another state, one less friendly to consumers in this type of situation, but they chose California, which takes a dim view of such contracts.
Fensterstock argued that under California law, "when an arbitration clause requires a consumer to waive the right to bring claims on behalf of a class, that waiver is unconscionable if ... it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money. The party with the superior bargaining power drafts the contract and requires the other party to either accept or reject the contract in full. ... Such waivers are 'indisputably one-sided' because they operate to insulate a potential defendant from liability since any one plaintiff's damage will usually be too small to justify bringing an individual claim."
Citing various federal cases, the court said, "Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus an unscrupulous seller retains the benefits of its wrongful conduct. "
On the other hand, it continued, "A class action by consumers produces several salutary by-products. ... A company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit; the class action is often the only effective way to halt and redress such exploitation."
Because Fensterstock was a lawyer, albeit for only two years, the creditors argued he should have understood what he was signing and so, they said, Fensterstock was bound by the arbitration clause and had given up the right to a group lawsuit.
Kearse disagreed, writing, "Fensterstock was just three years out of law school. And although the expertise he had gained through representing clients in financial transactions may show that he was well aware of the presence of the ... class action and class arbitration waiver clause, we have seen nothing in his education, experience or expertise to suggest that he had any meaningful opportunity to negotiate that clause out of the contract."
Now the two controversial clauses have been ruled unenforceable in all contacts with the company, a class of many thousands will be formed, and litigation will continue in the federal court in New York on the issue of how the payments made by borrowers is applied to their debt.
The implications of the case may be very widespread. However, courts in other federal circuits could reach different conclusions about the laws of various states. In the end, the matter may be resolved not by arbitration or litigation but by the Supreme Court of the United States. But the offending clauses in the California agreement are out and unenforceable.
The plaintiff was represented by Orin Kurtz of Abbey Spanier Rodd & Abrams in New York. The defendant was represented by Edward Lenci of Hinshaw & Culbertson, also of New York.
Emily Jane Goodman is a New York State Supreme Court Justice
Spending an afternoon at the Leonard Branch Library in Brooklyn, the looming threat of steep budget cuts this year appears refreshingly non-existent. For now at least, business is as usual -- people typing away at the public computers, teens chatting over Magic cards and readers lurking in the CD and fiction sections.
The library's information supervisor appears pleasantly surprised to find that all the flyers for the branch's new adult yoga program had already been taken. Though cheery and upbeat, Shelly (who prefers to omit her last name), was one of two employees at the branch to receive a notice of their potential layoff come July. "It's been devastating," she said. "I love my job."
Coined the "biggest loser" in the mayor’s executive budget, the city's three library systems are facing a proposed total of almost $75 million in cuts for fiscal year 2011 -- the most severe library cuts in the city's history. Should the mayor's budget pass, community branches in each system would be forced to curtail their opening hours by as much as half or, worse, close permanently. As many as 1,500 library employees could lose their jobs as a result, and about 650 employees in the Queens and Brooklyn libraries have already received 90-day layoff notices.
In 2008, the City Council managed to increase baseline funding to libraries, allowing branches in all five boroughs to stay open six days a week. In 2009, city library subsidies reached an all-time high, with a total allotment of almost $327 million. Falling to less than $310 million in 2010, the projected budget for subsidies in 2011 hangs at $254 million -- an almost 22 percent reduction over the past two years alone.
The city cut library subsidies by as much as 5.2 percent in 2010, and proposes a daunting 17.9 percent reduction in 2011.
In the early years of the Bloomberg administration, libraries were a frequent target of mayoral cuts. These came to be seen as half-empty threats however, since City Council would manage to restore funding -- either fully or in part -- relieving libraries of any dramatic losses. The back-and-forth between mayoral cuts and libraries became a kind of annual tradition, informally referred to as thebudget dance.
Today, the budget dance is far less predictable. This year, given the severity of the city's fiscal situation, no one is promising that the cuts will be restored.
"Budgeting is determined by bottom lines and figures, and the hoped-for consequence of funding cuts is a reduction in any budget gap,” said Councilmember Vincent Gentile, chair of the committee that oversees libraries. "I believe it's important to put a face to the consequences of reduced funding to libraries: When we take away a resource that has the ability to help everyone, regardless of their race, age, gender or income, we hurt everyone."
All of New York City's three library systems will be affected by the cuts. Brooklyn and Queens have their own systems, while the New York Public Library has branches in Manhattan, Staten Island and the Bronx. Though each of the three is funded differently, all face potential branch closures, layoffs and reductions in hours. Until the passing of the final budget however, none of this is certain.
Queens Library: Measured on the basis of circulation volume, the Queens Library is the largest library system in the country. In 2009, it was named library of the year by Library Journal.
As proposed in the executive budget, Queens faces a $17 million loss. If the budget is passed, 14 branches will close permanently, as 34 others would be open only two or three days a week, a reduction in service by almost half. The budget also calls for a 38 percent reduction in the system's workforce, or a cumulative 44 percent over the past 18 months.
The library's communications director, Joanne King, called the cuts a "grave threat" to service in Queens.
New York Public Library: With 90 community branches in Manhattan, Staten Island and the Bronx, the New York Public Library faces a total reduction of $38 million, or 25 percent of its funding from the city. At the budget hearing Friday, President Paul LeClerc estimated the potential layoff of 736 employees, or 40 percent of its total workforce.
Brooklyn Library: In the 2011 preliminary budget, Brooklyn Library faces a $20.6 million reduction. Under the "worst case scenario" 363 employees, or 30 percent of its total workforce, could face layoff.
Now boasting six-day service at all 60 locations, the library will be forced to temporarily close 16 branches in order to stay open a minimum of five days a week. Without shutting branches, the library could only open two or three days as a result of drastic reductions in staff. Executive Director Dionne Mack-Harvin said in her testimony Friday, "I want to be very clear that closing libraries is not a negotiating ploy or scare tactic. We know that shutting doors is a drastic step and not an action we take lightly."
All this comes at a time when city libraries are experiencing "peak usage," according to Mack-Harvin. At the preliminary budget hearing in March, LeClerc said, "While the impact of the recession continues to take its toll across our city, we have seen no slow-down in the record numbers of people using our services."
As free English for Speakers of Other Languages classes offered by libraries continue to turn hundreds of people away, more and more find themselves taking advantage of free Internet access to search and apply for jobs. In a recent study, one third of all Americans above the age of 14 have used the internet at their libraries last year -- 50,000 of them to "find work, apply for college, get public benefits and look up medical information."
Last year at the New York Public Library, a record 25,000 people attended job-related courses and programs.
At the budget hearing Friday, Mack-Harvin said, "It's inconceivable that when our libraries are busier than ever, when children, families, seniors and other Brooklynites need us the most, the FY 2011 executive budget proposed the deepest funding cuts faced by Brooklyn Public Library in its 113-year history."
Since 2008, or the establishment of universal six-day service, Brooklyn Public Library has grown substantially in circulation and popularity, as it currently holds the highest program attendance in the country, at more than 900,000 people.
While it remains to be seen exactly which employees will lose jobs, library officials confirmed that layoffs will be made on the basis of seniority, meaning newer employees face the highest risk. For now, though, notifications sent in May are warnings -- until further notice.
Library officials in all three systems claim to have no idea as to which branches could permanently close. Preferring to remain anonymous, a supervisor at Queens Public Library said, “We don’t know names, we just know numbers.” There is also little knowledge as to which programs would be reduced or cut permanently. So far, New York Public Library announced that if it had to absorb the proposed cuts, it would reduce the number of free English as a second language classes from 117 to 48.
According to Dena Libner, director of communications for Gentile, "The speaker's Budget Negotiating Team is involved in the discussion of restorations" -- though it is still unknown what those restorations might be.
At the budget hearing Friday, library officials estimated that shutting just one community branch would cost the city between $48,000 to $50,000 – a "one-time cost of closure” excluding long term security and upkeep costs.
From re-enacting Ghostbusters at the reading room of the lavish Fifth Avenue library to protests organized by children in Queens, New Yorkers are showing libraries a little bit of love in a lot of different ways.
With 22 days to go before the budget deadline, some 96,200 letters have been sent so far to City Council members' district offices across the boroughs, nearing the libraries' proposed goal of 100,000. Sponsored by advocacy groups Urban Libraries Unite and the Save NYC Libraries Postcard Campaign, a 24-hour "We Will Not Be Shushed" read-in is scheduled for June 12 at the Central Library in Brooklyn. The event signifies a combined effort by all three systems to rally one large last-hurrah for libraries.
"Today, our goal is to make the potential widespread effects of library cuts clear, and to make clear how crucial libraries are to us," Gentile said at a recent rally at City Hall. "Because everyone can be hurt by these cuts, everyone needs to fight for the protection of libraries."
Some 1 million New Yorkers over the age of 16 do not have a high school diploma. For these people, the high school equivalency diploma -- the GED -- can offer the best hope of a better job or further education.
To get that diploma, though, these New Yorkers have to navigate an often confused and chaotic system. Most who try do not succeed. Only 47.5 percent of New Yorker City residents who take the GED pass it, compared with a passing rate of 56 percent for the state as a whole and a national rate of 71.5 percent. The state's rate is said to be the highest in the country.
To address this, adult education advocates and some members of the City Council would like to see the GED system get additional resources and become more centralized. The Paterson administration, though has proposed cutting the state program by $3.9 million budget or almost 30 percent. People who have studied the GED program say these cuts could extend the amount of time students must wait to take the test and reduce the state's already low pass rate even further.
GED Basics
The General Equivalency Diploma given by New York State is based on nationwide exam created by the American Council on Education. It can be taken by any New York resident 16 years old and older. Those between 16 and 19 have to meet tougher eligibility requirementsthan older people. In 2009, almost 29,000 individuals took the test in New York City, and almost 56,000 in New York state, according to the state education department.
The seven-hour test includes an essay and subtests in five subjects: writing, reading, social studies, science and mathematics. To pass, the test taker must score at least 410 points on each section -- on a scale, like the SAT, of 200 to 800 -- and average 450 across subjects for a total of 2,250 points. Students who take the test in French or Spanish also must pass an English proficiency test. Candidates may not take the exam more than three times in 12 months.
Contrary to popular perception, the GED is not easy. The American Council on Education sets the passing score at a point where only 60 percent of a sample of high school seniors would pass the test.
Beyond that, the certificate can indicate a student's determination, perseverance and valuable life experience. At the School of General Studies, Columbia University's school for "nontraditional students," the GED is a "necessary first step … indicating academic readiness," said Curtis Rodgers, the dean of admissions. But Rodgers said. "We also look at life experience -- what they did after leaving high school and coming to us -- that indicates personal preparedness for the career they are choosing."
The New York City Department of Education offers a range of GED programs, including separate programs for individuals under 21 and over 21. The City University of New York providescomprehensive programs on campus to help students transition to work or to college. GED programs in public libraries focus primarily on basic literacy. Community organizations also offer GED preparatory classes.
New York State subsidizes the GED program with $20 for each student who takes the test.
Now, though, the Paterson administration, facing a massive budget deficit, has proposed eliminating that $20 payment. People involved in adult education say this could have a huge impact.
"If we lose this funding source we will have to suspend testing after June 30," said Mae Dick, director of the Adult Learning Center at La Guardia Community College. Even now, she said, "The monies generated by the $20 reimbursement don't come close to covering testing costs. If you test 1,500 people a year you get $30,000, which is the salary of one test site staff worker."
The state says it will continue to pay for materials and scoring the test.
One alternative would be to charge the students for the test. Every other state except Arkansas charges a fee ranging from $13 to $200, according to Jane Briggs, a spokesperson for the New York State Education Department. New York did away with its fee in 2008.
Denise Deagan, director of adult basic educationprograms at the Borough of Manhattan Community College, called the proposed budget "catastrophic" and said it would add six months to the already long waiting list for people hoping to take the test. This means, she said, that more students will fail since "students should test soon after they have attained readiness to maximize retention of the material."
Merryl Tisch, chancellor of the New York State Department of Education said advocates exaggerate the effects the cuts would have. "To focus on the $20 reimbursement per test taker budget cut is a simplistic view of the problem. It is one of three or four major problems," she said. "We can't fix any one problem without addressing the totality.
Tisch said, though, that the state education department has asked "the legislature to invest more money in the GED program so that we can get a comprehensive solution."
"GED testing in NYC has become a barrier rather than a threshold to further opportunities," Jaccqueline Cook wrote in Our Chance for Change: A Four-Year Reform Initiative for GED Testing in New York City, a 2008 report prepared for the city Department of Youth and Community Development. "Simply stated, the NYC GED testing system functions poorly and is greatly underfunded."
Problems exist at many stages in the system, critics say. Dick of La Guardia Community College characterizes the current registration system for the GED test as "ridiculous." With no coordination among test sites, she said, students apply for five or six test seats to try to guarantee they get a place. According to Dick, the students are not notified if they do not get a seat. Often, an individual will take the test at one site and not bother to notify the other sites.
Since the $20 per seat provides needed funding for the test sites, test administrators have an incentive to overbook seats. "In order to get adequately funded for the exam, we book 170 people" for 100 places, Dick said.
In her 2010 State of the City speech, City Council Speaker Christine Quinn, who has termed the GED system "broken," called for making the city's job centers a hub for the GED. She also has proposed the creation of a website that would centralize test registration and help people find prep classes. Together, her change would cost about $1.4 million, according to the council.
Cook called for a $6.1 million to revamp the testing system. In its place, she proposed a citywide GED testing, scheduling and registration database that would track who has applied to take the GED, what seats are available and who has been accepted. In addition, Cook would establish a hotline for applicants who do not have access to computers, and a website with information about test content, procedures, methodology, strategies and scoring.
Quinn and other say that, before they can take the test, applicants should have to take a practice test. A predictor test, which is half the length of the official test, would familiarize the student with test content and multiple-choice format.
As for the test itself, Cook advocates breaking it up into shorter sitting periods. Currently, the test is administered in one seven-hour session or in back-to-back Friday evening and Saturday sessions. Students say sitting, let alone thinking, for that length of time is exhausting. And they say the 10-minute breaks between subtests don't even allow all 100 test takers to use the rest rooms.
By many accounts, though, the problems with New York's GED program start long before the test. "What we are proposing for starters is to have New Yorkers complete a GED preparatory program before testing. This would correct New York's poor image of having a very low pass rate," Tisch said. "Other states in the nation do this. As things now stand in New York, anyone can sit for a test."
In their report for the Community Service Society, Lazar Treschan, and David Jason Fischer endorse Cook's recommendations but conclude that the problems New Yorkers face "begin earlier along the road, in test prep programs hampered by insufficient funding, ineffective teachers and inadequate oversight."
People seeking an appropriate GED instruction program must deal with a "baffling" and "frustrating" system, they said, and finding the right program is often a matter of luck.
Kennedy Fischer-Mack would probably agree. Soon after leaving high school at age 17 in 1989, Fischer-Mack took the GED test twice. But he said he never got his test results, and his GED instructors shrugged him off, saying they had no way of tracking the exam. "I got frustrated," he said. "The teachers just didn't care. For them it was just a job." So he gave up.
Today, Mack has his GED and is pursuing an associate degree in business administration at LaGuardia Community College. He enrolled in January soon after passing his GED and completing a college preparation program at LaGuardia. Why did he succeed this time? Teachers at LaGuardia "guide and encourage you every step along the way," Fischer-Mack said. "So, I never felt like giving up."
Treschan and Fischer also point out that there is no standard for the teaching of GED preparation courses and that even GED instructors who "do have state certification … are not necessarily prepared for teaching the GED." They recommend the state Education Department develop a graduate level course in GED instruction and cited a need for other trained staff, including guidance counselors, college advisors and social workers.
Since "nearly 20 percent of the city’s working age population has not earned a high school diploma or its equivalent," Treschan and Fischer said, "improving the current performance of the dismal GED system is an important priority."