Monday, January 23, 2017

A Bipartisan Solution to the Student Loan Crisis: What if Betsy DeVos and Senator Elizabeth Warren Worked Together to Craft A Fix?

At the conclusion of Betsy DeVos's Senate hearing last week, Senator Elizabeth Warren refused to shake DeVos's hand. If this is a sign of enmity between Senate Democrats and the Trump administration over education policy, this is a scary development for distressed student-loan debtors.

Millions of borrowers are drowning in student loan debt--now pushing $1.4 trillion dollars. Eight million have defaulted, and millions more are teetering on the edge of default. Now is the time for Republicans and Democrats to work together.

What if Secretary of Education DeVos and Senator Warren cooperated to solve the student loan crisis? Thinks what they could achieve.

Here's a plausible scenario:

1. During the first month of the Trump administration,  Secretary of Education DeVos calls a press conference to announce that the federal government will stop garnishing Social Security checks of elderly student-loan defaulters.

At the press conference, Secretary DeVos is flanked by several U.S. Senators, including Senators Warren, Bernie Sanders, and Lamar Alexander. Senator Warren announces she will introduce legislation barring the government from garnishing Social Security checks of student-loan defaulters.

2. Next, DeVos issues a directive to DOE bureaucrats, ordering them to speed up the process for processing so-called "Borrower Defense" claims by students who are trying to get their student loans discharged on the grounds that their colleges defrauded them.

DOE responds quickly, and thousands of debtors who were scammed by shady for-profit colleges get their loans discharged. Warren and her Senate compadres issue press releases praising DeVos's action.

3.  Shortly thereafter, DeVos tells reporters that she agrees with the Obama administration's stance on arbitration clauses in student enrollment documents. The for-profits routinely require their students to sign these clauses, which forces students to arbitrate their fraud claims in unfriendly forums.  The Obama administration said it opposed these clauses but did not do anything to stop them from being used.

DeVos says, as of the day of her announcement, DOE will not allow any for--profit college to participate in the student-loan program that forces students to sign coercive arbitration agreements. Senators Warren and Senate Democrats applaud DeVos's step.

4.  In spring of 2017, Senator Warren holds Senate hearings on the student loan guaranty agencies, which rake in millions of dollars in fees from collecting student loans. Warren points out that four of these agencies have each amassed $1 billion in unrestricted assets, even though they are non-profit companies. She subpoenas the agencies' records and learns that the guaranty agencies' CEOs are paid millions in salaries and benefits for harassing destitute student borrowers.

DeVos testifies at Warren's Senate hearing, pledging DOE will do what it can to rein in the debt collectors.  DeVos makes good on her pledge by terminating its contract with Education Credit Management Corporation, perhaps the nation's most ruthless student-loan debt collector.

5. A bill passes Congress that disbands the student-loan guaranty agencies and abolishes all fees and penalties that have been applied to defaulted student loans over the past 20 years. President Trump signs the bill.

6. With bipartisan support and Trump's blessing, another bill is approved by Congress to amend the Bankruptcy Code to eliminate the restriction on discharging private student loans in bankruptcy.

Trump signs these bipartisan student-loan reform bills and give the bill-signing pens to Senator Warren. Senator Warren then shakes Secretary DeVos's hand.


What will it take for Senator Warren to shake Betsy DeVos's hand?
References

Paul Crookston. Betsy DeVos Hearing Ends with Handshakes — Except from Elizabeth Warren. National Review, January 18, 2017.

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014. Acccessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

Saturday, January 21, 2017

May you fare well, President Trump. Reflections on the VMI Marching Band and the 2016 inaugural parade

Look away, we're bound away
Across the wide Missouri.

Growing up in Oklahoma, I viewed many small-town parades.  Most of them began with a marching band and ended with horseback riders followed by sanitation workers who scooped up the horse poop. I was surprised therefore, as I watched last night's inaugural parade, to see the cadets of Virginia Military Institute as the last group to march past the presidential viewing stand.

I found myself deeply moved as I watched hundreds of marching VMI cadets filing by President Trump's viewing party in perfect formations. All those cadets, men and women; all those young people of every race and ethnicity; and all showing by their grave countenances that they were proud to be Americans and to be participating in the inauguration of the 45th President of the United States.

As the cadets marched by President Trump, the VMI band played Shenandoah, that quintessentially American song, made more poignant to me by the VMI bagpipes.  Oh Shenandoah: our great American song of loss and longing, of our restless quest for fulfillment somewhere far away in the West.

Our presidential election season was shockingly brutal, and even some of our elected Congresspeople were so offended by the outcome that they boycotted Donald Trump's inauguration. Some of them even claim Donald Trump is not a legitimate President.

But I saw the TV cameras linger on President Trump's face as the VMI cadets strode by in their grey uniforms and scarlet capes. He looked somber, respectful, and fully in charge.

Hearing Shenandoah's strains wafting through the ranks of those earnest young cadets , I was reminded of our country's noble heritage--our ancestors' sacrifices and courage. My own father spent more than three years in a Japanese concentration camp--for what? Surely it was to protect our right to choose our leaders in free elections.

I am content with the outcome of this election. I am hopeful Donald Trump will restore our national pride. I hope we move forward with courage and confidence in the new year, supporting the man we chose to lead us.

In any event, we're bound away, all of us in America, 'cross the wide Missouri. So let's not whine about it.






Friday, January 20, 2017

Department of Education inflated student-loan repayment rates for nearly every school and college in the United States! Playing for Time

The Wall Street Journal published a story a few days ago that is truly shocking.  Based on WSJ's analysis, the Department of Education has inflated student-loan repayment rates for 99.8% of all colleges, universities, and trade schools in the United States.

Earlier this month, DOE acknowledged that a "coding error" had caused the Department to mistakenly under report the student-loan default rates at many schools and colleges. But the magnitude of the error wasn't generally known until the Journal published its own analysis.

According to WSJ, at least half the students who attended more than a thousand colleges and trade schools had either defaulted on their student loans within 7 years of beginning repayment or failed to pay down even one dollar of their student loan debt.

This news is shocking, but not surprising. DOE has been misleading the public for years about  student-loan default rates.  Last autumn, for example, DOE reported a 3-year default rate of about 10 percent, a slight decrease from the previous year. But that figure did not take into account the people who had obtained forbearances or deferments and weren't making payments.  The five-year default rate for a  recent cohort of  student debtors is more than double DOE's three-year rate: 28 percent.


And last September, DOE mislead the public again. The Department  identified 477 schools where more than half the students had defaulted or failed to pay down their loan balances 7 years into repayment. But we now know the figure is more than double that number: 1029.

The implications of this new data are staggering. Obviously, the federal student-loan program is a train wreck. Millions of people have student loans they will never pay back. Eight million have defaulted and millions more are making payments so low that their loan balances are growing due to accruing interest.

Several large for-profit colleges have closed under allegations of fraud.  Corinthian Colleges and ITT together have a half million former students. DeVry, which just reached a settlement with the Federal Trade Commission, has a total of more than a quarter of a million students who took out federal loans to finance their studies. Accumulated debt for DeVry students alone is more than $8 billion.

Like the inmate musicians of Auschwitz, DOE's response to this calamity has been to play for time. It has encouraged millions of people to sign up for income-drive repayment plans (IDRs) under terms such that IDR participants will never pay off their loans.  And DOE has set up a cumbersome procedure whereby students who believe they were defrauded by a college can apply to have their student loans forgiven.

But there is only one way out of this nightmare: bankruptcy relief. Ultimately Congress will have to repeal the "undue hardship" provision in the Bankruptcy Code, which has made it virtually impossible for overburdened student debtors to discharge their loans in bankruptcy.

Until that happens, President Trump's Department of Education should modify its harsh stance toward bankrupt student loan debtors. DOE must stop insisting that every bankrupt student borrower should be pushed into an IDR that stretches loan payment periods out for 20 or 25 years.

Student loan debtors who are honest and broke should be able to discharge their student loans in the bankruptcy courts. Within a couple of years that simple truth will be apparent to everyone. Why not start now to relieve the suffering of millions of Americans who got in over their heads with student loans and can't pay them back?

And let's not sell the Trump administration short. Liberals have assumed that Donald Trump will protect the for-profit colleges because of his history with Trump University. But I am not so sure. President Trump knows how to read a financial statement and he understands the value of bankruptcy. He might just do the right thing and turn this calamity over to the federal bankruptcy courts. 

Playing for Time


References

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2020.

Thursday, January 19, 2017

DeVry University settles deceptive advertising claims with FTC for $100 million: Chicken Feed

About a year ago, the Federal Trade Commission filed a lawsuit against DeVry University, alleging that DeVry had engaged in deceptive advertising. Specifically, the FTC charged DeVry with making false claims about the employment prospects for DeVry graduates.

This month, DeVry settled the FTC lawsuit for $100 million, which may sound like a lot of money. But let's look at how that money will be distributed.

First, as reported by the Personal Finance Syndication Network, half the money represents loans DeVry made to its students that it will forgive.

That's right--in addition to sucking up Pell Grant money and federal student loan funds, DeVry loaned its students a lot of money--about $30 million.  DeVry has agreed to write off these loans. And DeVry students owe DeVry another $20.5 million for tuition, books and lab fees that DeVry will cancel.

In another words, fully half of the FTC settlement won't cost DeVry anything; it just forgives $50 million it loaned to its students.

The other half of the settlement--$49.4 million--is money DeVry has agreed to distribute to qualifying students who were injured by DeVry's deceptive advertisements.  Of course the  DeVry students who receive that money will be grateful, but $50 million is a drop in the bucket compared to DeVry students'  total student-loan debt. It's chicken feed.

According to a Brookings Institution report released in 2015, DeVry students have taken out more than $8 billion in federal loans over the years to attend DeVry University.  That's billion with a B.

How many students went into debt for the privilege of attending this dodgy institution? Well over a quarter of a million (274,788)!

Of course not all of those quarter of million DeVry students were injured by DeVry's allegedly deceptive advertising. And not all the $8 billion that students borrowed attend DeVry was wasted. I feel sure that at least some of students benefited from their time at DeVry and even got good jobs when they graduated.

But a lot of DeVry students were undoubtedly gypped.  Let's estimate conservatively that only $1 billion of the $8 billion borrowed can be linked to deceptive advertising or shoddy instruction. DeVry's settlement of $50 million represents just 5 percent of that loss.

If I could settle all my debt for 5 cents on the dollar, I would certainly do it.

So, as I said, DeVry's $100 million settlement with the FTC is chicken feed.  And DeVry slipped out of the FTC's lawsuit without admitting any liability.



References

DeVry University Students to Get Help With Student Loan Debt. Personal Finance Syndication Network, PFSn.com.

DeVry settles claims of deceptive advertising for $100 million. Personal Finance Syndication Network. PFYSyn.com

FTC Brings Enforcement Action Against DeVry University. Federal Trade Commission press release. January 27, 2016.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).





Tuesday, January 17, 2017

Inside Higher Ed asked Higher Education Insiders to Pose Questions to Betsy Devos: Madeleine Kunin and Wick Sloan Win Stupid Question Award

Betsy DeVos, Donald Trump's choice for Secretary of Education, faces questions from a Senate Committee this week. Inside Higher Ed contacted several higher education "experts" and asked them to pose their own questions to Ms. DeVos.

Most of the questions were what you would expect. Several people asked DeVos hypothetical questions designed to find out if the financial status quo for higher education for higher education will change under the Trump administration.

Some of the questions, however, were down right stupid. In fact, I give the Stupid Question Award jointly to Madeleine Kunin, former governor of Vermont and deputy secretary of education under President Clinton, and Wick Sloane, an instructor at Bunker Hill Community College.

Here is Ms. Kunin's question:
"Do you support public education and the mission of the department?"
Madeleine Kunin
 I assume Kunin wants a yes or no answer.  So what do think DeVos will say--No, I don't support public education?

Governor Kunin's question was inane, but Wick Sloane's question was just as wacky.  Here's Sloan's question.
"How quickly will you put in place a federal free and reduced-price lunch program for eligible low-income college students?"
Oh yes, and Sloane also suggested the federal government should provide free bus fare and subway passes to low-income college students. Of course that would be in addition to the $150 billion the federal government doles out every year in Pell Grants, student loans, and work-study money.

Interestingly, none of the insiders asked DeVos whether she supports reasonable access to bankruptcy for student borrowers who are overwhelmed by their college-loan debt.

None asked whether the government should stop offsetting Social Security checks to elderly student-loan defaulters.

None asked whether DOE should ban for-profit colleges from putting arbitration clauses in their enrollment documents--clauses that prevent defrauded students from filing lawsuits against the colleges that bilked them.

None asked whether DOE would streamline the loan forgiveness process for students who attended for-profit colleges found guilty of defrauding their students

No, the tone of most questions from higher education insiders across the spectrum of interests was simply this: "What's in it for us?"

References



Andrew Kleighbaum. Experts offer questions they hope to see asked of Trump's education secretary pickInside Higher Education, January 17, 2017.


Obama's Department of Education grants automatic loan relief for all students who attended the American Career Institute: A puny effort--too little, too late

Last Friday, the U.S. Department of Education granted automatic debt relief to all students who attended American Career Institute. As Inside Higher Ed pointed out, this is "the first time the department has granted automatic loan relief to all students of a college without requiring individual applications." About 650 former ACI students received closed school discharges; but the rest--about 3,900 students--are getting their loans discharged en masse. In addition, DOE also announced it will grant Borrower Defense discharges to 28,000 student who had attended Corinthian Colleges.

This is a good thing, of course; but why now? And why so small a gesture?

After all, Corinthian Colleges, which closed and filed bankruptcy under allegations of fraud, had more than 300,000 students; and ITT, which also filed bankruptcy, had 191,000 enrollees.  Yet so far, DOE has only grant Borrower Defense discharges to 28,000 former Corinthian students.

As for the small size of the gesture, I think Luke Herrine, legal director of the Debt Collective, got it right. "There's just no coherent logic whatsoever," he said. "The only thing I can think of is it would be deeply embarrassing for them to stop collecting on so much debt." It is one thing to forgive the loans of 4,000 ACI students and a small percentage of Corinthian students; it is quite another to discharge the debt of a half million people.

As for the timing, I think the Obama administration has known for quite a while that the only responsible thing to do about millions of people who took out loans to attend flaky for-profit colleges is to grant massive debt relief to nearly everyone without the necessity of reviewing each case individually. But that is a difficult thing to do politically.

I think DOE waited until a week before Obama leaves officer to offer token relief to ACI students in order to highlight the student-loan crisis when there is no time left for the Obama administration to do something substantive.

Like a retreating army that spikes its cannons before being overwhelmed by the enemy, the Obama administration may have wanted to publicize the student loan crisis to create difficulties for Trump.

Here are my thoughts on DOE's surprising but welcome action:

1) Granting debt relief to ACI students is the first small step toward doing what the federal government will inevitably be forced to do: forgive student debt to nearly all of the millions of people who attended for-profit colleges and received no economic benefit.  Billions of dollars in student loans will eventually be written off.

2) I think Obama's DOE took the action that it did for ACI students because the Obama team thinks Trump, who takes office in a few days, will try to prop up the for profits at the expense of exploited students.

But the Obamacrats may be wrong. After all, President-elect Trump knows how to read a  balance sheet, and he may quickly grasp the fact that the student loan program is a catastrophe. 

And if Mr. Trump realizes the enormity of the student loan crisis, he might actually take decisive action.  Everyone agrees that Mr. Trump understands bankruptcy and its value for distressed debtors.  President Trump might surprise everyone and ease the path to bankruptcy relief for millions of student loan debtors who will never be able to pay back their college loans.



References

Andrew Kreighbaum. Education Department announces thousands of new loan discharges. Inside Higher Ed, January 16, 2017.



Monday, January 16, 2017

The Department of Education ignores signs of an impending student loan meltdown: The Deepwater Horizon Syndrome

Deepwater Horizon, a giant offshore drilling rig in the Gulf of Mexico, blew out on April 20, 2010.  Eleven workers died, and more than 200 million gallons of crude oil spewed into the Gulf.

According to the recent film about the blowout, this catastrophe could have been prevented. Instruments on the rig alerted workers that pressure was building around the concrete core and that a blowout was imminent; but supervisors convinced themselves that the instruments were malfunctioning and everything was fine. (John Malkovich, the movie's villain, plays Don Vidrine, a fiendish British Petroleum technocrat.)

John Malkovich in Deepwater Horizon
Something similar is happening with the student loan crisis. DOE issued its College Scorecard in 2015, which reported the percentage of students who are in repayment and actually paying down their loans.  DOE reported that 61.1 percent of student borrowers had made some progress toward paying down their loan balances 5 years into repayment.

But a coding error led to an erroneous report. As Robert Kelchen, a professor at Seton Hall University explained in a recent blog posting, the picture is much bleaker than DOE portrayed.

Five years into repayment, less than half of student borrowers have made any progress toward paying off their student loans. Among borrowers who attended for-profit colleges, the numbers are even more startling.  Five years into repayment only about a third of for-profit students (35 percent) had reduced their loan balances by even one dollar!

People who don't reduce their loan balances five years after beginning repayment are not likely to pay off their student loans--ever. In fact, the Brookings Institution reported in 2015 that nearly half of for-profit borrowers in a recent cohort had defaulted on their loans within 5 years (47 percent).

In short, DOE is behaving just like John Malkovich's character in the movie Deepwater Horizon. The data warn of an impending blowout; but DOE keeps pumping money to the for-profit colleges. A disaster is inevitable; and there are already millions of casualties.



References

Paul Fain. Feds' data error inflated loan repayment rates on the College Scoreboard. Inside Higher Ed, January 16, 2017.

Robert Kelchen. How Much Did a Coding Error Affect Student Loan Repayment Rates? Kelchen on Education, January 12, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).

Michael Stratford. The New College Scorecard. Inside Higher Ed, September 14, 2015.