This converts receivables into cash by selling them a third party at a discount. This doesn't prevent the educational institutions from getting their cash.
Not sure how it works in the US.
If you don't believe the notice you are given, you fail to pay. If you do believe whatever notice you get, you are vulnerable to fraud.
I wouldn't buzz in on Jeopardy with that answer, though.
Further, the problem isn't the educational institution getting paid, it's the lender (in this case the government, and thus the taxpayers) who lent out money to people without any historical context of their ability to pay off a loan. Hence the quote:
“On what planet does a financing vehicle with those kinds of terms and those kinds of performance metrics make sense,” he said.