Monday, February 20, 2017

Hillary Clinton had a good idea for addressing the student loan crisis: The Trump administration should implement her plan

Although many people have forgotten, Hillary Clinton introduced a sensible plan for addressing the student loan crisis while she was campaigning for the Presidency. She proposed a 90-day moratorium on student-loan payments to give college debtors an opportunity to refinance their loans at a lower interest rate.

This is a good idea. Forty-three million people have outstanding student loans, and many borrowed at high interest rates--much higher than today's rates.

For example, in the Murray bankruptcy case, decided last year, a married couple in their late forties consolidated their student loans at an interest rate of 9 percent.  At the time of consolidation, the Murrays owed $77,000; and they paid back 70 percent of that amount. Nevertheless, there were periods when the Murrays did not make payments due to financial stress; and they now owe $311,000, with the growth largely due to their loan's high interest rate.

Likewise, Brenda Butler, whose bankruptcy case was also decided last year, borrowed $14,000 and paid back $15,000. Like the Murrays, Ms. Butler's loans were in deferment from time to time. By the time she entered bankruptcy--almost 20 years after graduating from college--she owed $33,000, more than double what she borrowed. Again, the growing loan balance was largely due to accrued interest.

As Senator Elizabeth Warren has pointed out, millions of student-loan debtors took out student loans at interest rates far above the federal government's current cost of borrowing money.  Therefore, if these people were permitted to refinance their loans at a lower interest rate, as Hillary Clinton proposed last year, their student-loan debt would be a lot easier to manage.

As I said, Hillary Clinton's idea is a good one, but I would like to propose an amendment.  In addition to allowing college borrowers to refinance their loans at lower interest rates, the government should forgive all the default penalties that have been assessed against student-loan  defaulters.

Currently there are 8 million people in default on their student loans, and most of them had a 25 percent penalty attached to the amount they borrowed plus accumulated interest. I have a friend whose daughter borrowed $5,000 to attend college, made loan payments for awhile and then defaulted. How much does she owe now? $12,000!

Are there any downsides to Hillary Clinton's proposal as I have amended it? Yes, the student-loan collectors who have gotten rich chasing down student-loan defaulters would make less money.

But there are no downsides for the government. Why? Because millions of student-loan defaulters and millions more in income-driven repayment plans will never pay off their student loans.  The income-driven repayment plans are nothing more than a fraud on the public that allows the government to claim that people in these plans are not in default.

But in actuality they are in default. Educational Credit Management Corporation, for example, wanted to put the Murrays into an income-drive repayment plan that would cost them around $900 a month. The bankruptcy judge, to his credit, rejected that idea, pointing out that the Murrays' debt was accruing interest at the rate of $2,000 a month. Even if the Murrays made regular payments for 25 years, their debt would balloon from $311,000 to about half a million dollars.

So here's my suggestion. Senator Elizabeth Warren should dust off Hillary Clinton's moratorium idea and propose it to the Trump administration, adding a proviso that default penalties would also be waived.

Donald Trump is not everyone's cup of tea, but I believe he comprehends the world of finance.  He will understand that the government is running a shell game, telling the public that the student loan program is under control when in fact it is a train wreck.

If Republicans, Democrats, and President Trump would adopt Hillary Clinton's amended plan, they would provide immense relief to millions of Americans who are being buried alive by their student loans.

Wouldn't that be a lovely outcome?



References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loansWashington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).

Ruth Tam. Warren: Profits from student loans are 'obscene.' Washington Post, July 17, 2013.




Sunday, February 19, 2017

For-profit college owner pleads guilty to "pay to stay" scheme, but perhaps he's not the only offender

Hee Sun Shim, who owns three for-profit colleges in Los Angeles's Koreatown, pleaded guilty to immigration fraud in federal district court a few days ago. Shim was accused of operating a "pay-to-stay" scheme whereby foreigners obtained study visas for a fee that allowed them to reside in the United States. However, according to federal prosecutors, some of these so-called students weren't attending classes.

Obviously, helping foreigners get visas under false pretenses is reprehensible, and Mr. Shim will probably do some jail time. But a great many reputable colleges and universities are doing something similar to Mr. Shim. They are admitting foreigners to graduate programs simply to capture the revenue and keep their enrollment counts up.

And here's a story that may be an example of what I'm talking about.  My university has a doctoral program in Educational Leadership. Awhile back we received an application to our doctoral program from an African man. The application form indicated that the man had received an undergraduate degree in law from an African university and a master's degree in law from a reputable law school in the Boston area.

I recall looking at the applicant's academic transcript for his undergraduate degree from the African institution. The grades were distinctly unimpressive--a lot C and D grades. How, I wondered, had this person gotten accepted to a graduate program in law from a respectable American law school? And how had he managed to get through the demanding American curriculum?

Then I looked at the applicant's American law school transcript. He attend the law school for one year, but he had not been graded rigorously. Instead, all his course work was evaluated as either satisfactory or unsatisfactory; and all his grades were reported as "satisfactory." And after receiving a master's degree in law, this man then applied to a doctoral program at my university in a completely different field.

What is that about?

I can't say for sure, but I speculate that the law school offers a low-quality master's degree program in law that caters to foreign students who pay full tuition--almost $50,00 a year.  The program does not demand much in faculty time. These foreign students probably sit in the back of the class and patiently wait for their "satisfactory" grades and ultimately their degree.

This is not a "pay-to-stay" scheme exactly, but it is not a noble way for a university to generate revenue. I think if we looked closely we would see a lot of American graduate programs that are fighting declining enrollments by admitting foreign students with little aptitude and perhaps little interest in their studies. Many foreign students simply want to make their way to the United States, obtain an American academic credential of some kind,and perhaps find a way to obtain permanent residency.

Indeed academia's outrage about President Trump's travel restrictions might be as much about protecting their revenue streams as about concern for justice. But perhaps I am being too cynical.



References

Elizabeth Redden. College owner pleads guilty to immigration fraud. Inside Higher Ed, February13, 2017.


Saturday, February 18, 2017

Louisiana man gets 10 years in prison for stealing a toolbox from a church: A plea for bipartisan cooperation to promote justice

Michael Duplessis, age 34, was sentenced to 10 years in prison for stealing a toolbox from Holy Rosary Catholic Church in St. Amant, Louisiana. Duplessis was sentenced after he agreed to a plea deal to avoid the possibility of  a life sentence.

A life sentence for stealing a toolbox! How could that be?

Michael Duplessis: Sentenced to 10 years in prison for stealing a toolbox from Holy Rosary Church

Apparently, Duplessis is a repeat offender. He had previously been convicted of stealing a cellphone charger from a residence and later a boat battery. Under Louisiana's habitual offender law, Duplessis is a three-time loser and could have been sentenced to life in prison for lifting that toolbox. I imagine the plea bargain looked pretty good to him.

Obviously a law that can send a man to prison for the rest of his life for stealing a cellphone charger, a battery and a toolbox is unjust and inhumane. In fact, Pope Francis has said that life sentences are essentially death sentences.

Surely, reasonable people can work together to repeal such a barbaric statute.

So why aren't Republicans and Democrats working together to do that? In fact there are dozens of unjust laws that could be repealed. As I wrote awhile back, Senators Elizabeth Warren and Claire McCaskill introduced a bill to stop the federal government from garnishing the Social Security checks of elderly student-loan defaulters. Who in Congress could oppose such a bill?

Unfortunately, our elected representatives at the state and national level are so caught up in political warfare that nothing gets done. And the mainstream press has become so obsessed with criticizing President Trump that it has abandoned its traditional role of advocating for justice.

Just today, in my local newspaper, Richard Cohen, a syndicated columnist, published an essay that was nothing more than warmed over criticism of President Trump. In case the public had forgotten, Cohen reminded us that Trump unfairly criticized Senator John McCain and the Hispanic judge who presided over the Trump University litigation. Isn't there something more timely and important that Cohen can write about?

Enough already. Republicans and Democrats should look for problems they can solve together, and the press should resume its traditional roll of publicizing injustices like the one perpetuated on poor Mr. Duplessis. This is how democracy works after all, or how it used to work, before everyone in public life began behaving like children.

References

Richard Cohen. Can't anybody play this game? The Advocate (Baton Rouge), February 17, 2017, p. 5B.

David J. Mitchell. Man gets 10 years in burglary of church. The Advocate (Baton Rouge), February 17, 2016.

Kathy Schiffer, Pope Francis Opposes Capital Punishment; Calls Life Sentences for Violent Criminals "A Hidden Death Penalty." Seasons of Grace blog site, October 23, 2014.











Wednesday, February 15, 2017

"Debt and Introspection Are More Related Than You Think": Essay by Steve Rhode

This excellent essay by Steve Rhode originally appeared on the Personal Finance Syndication Network, PFSyncom.  Mr. Rhode also maintains a web site titled Get Out of Debt Guy that contains a variety of good advice and information about all manner of consumer debt problems, including student loans.  You can learn more about Steve Rodes here.

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Debt and Introspection Are More Related 

Than You Think

by Steve Rhode

Steve Rhode
Why are people victims? Why are some people always the brunt of pranks, jokes, gaffes and catastrophes and others are not? Over the years of helping people with financial problems I’ve observed that many people experience not only a financial disaster event but also difficulties in other areas of their life. Is this a coincidence or are there underlying issues that cause us to sabotage our ability to achieve happiness and financial success? Are some people just victims of affairs that involve credit, debt and money? They answer is yes, but why?

There has been little study of victim profiling and when we think of someone as a victim the first thoughts that are present are those of people who have suffered a terrible misfortune beyond their control at the hands of some external event. There are people who are victims of events and situations beyond their control.

For example, people who are randomly murdered, raped, abused, injured or harmed, physically or emotionally. Take disorganized killers for example, their victims are selected because of the opportunity to carryout their act rather than because of anything unusual about the victim themselves. A disorganized killer, as categorized by a serial killer profile, may simply walk up to the next door they come to, ring the bell and kill whoever answers the door. If your time is up, it’s up.

A rape victim may just have simply been the next target of opportunity. Sometimes there is no greater explanation or rationale for their misfortune other than “wrong place, wrong time.” And while we search for a deeper or greater meaning why their life was altered in such a fundamental way by grotesque violence, sometimes life is simply random and chaotic.

Victims of financial problems present similar rationales, Sometimes they were truly disadvantaged by people who duped them.

Recently, a furniture store went out of business, there was no indication that it was in trouble. Every outward sign indicated that the company was stable. Suddenly they go out of business and furniture that previous customers ordered will not be delivered and the status of the deposits left for those orders is undetermined. These folks are truly victim of the transaction. There is no doubt that sometimes events are random and can leave you in financially deficient position. Here is an example that almost everyone has experienced where we lose 100% of our money, vending machines. Sometime they just take your money and don’t deliver the goods. Some people attempt to deliver a couple of well placed smacks and move on. We just accept that it happens sometimes because it does.

In my work helping people with financial problems I’ve observed that while some people suffer from random financial misfortune, there truly is a pattern of financial victims who are often found to repeat the same or similar financial mistakes over and over again. Rather than learn from the situation, they can be seen waving the flag of entitlement and summoning up an army of excuses for this weeks episode of financial misfortune. Can’t you picture the commercial for next weeks show? Stay tuned for up scenes from next weeks show when Bob will lose his job and not have any savings to fall back on because he blew it all on day trading last week. What will Mary say when she finds out? Tune in Tuesday at 8 PM Eastern Time.
What is striking is the number and severity of poor financial decisions some people make. It’s too frequent to just be a random happenstance.

To what degree do we hold people accountable for their individual actions? Is the recipient of misfortune ever to be responsible for their misfortune? Early victim theory in the 1940s actually labeled the person to whom misfortune befouled as a hapless person who brought it on. Since then victim theory has swung to the opposite direction and essentially anyone who is the recipient of anything negative or unexpected is to be cuddled and cajoled and not accept any responsibility for their actions. But it that realistic or healthy? Whatever happened to personal responsibility?

I’ll be honest with you. I hate personal responsibility. I don’t mind accepting responsibility for my actions and the way things turn out. Certainly, life is not always rosy and we don’t always make the best decisions but cut me some slack.

Modern American life not only does not encourage you to be personally responsible, it makes you run from it. We live in such a litigious society that I’m wondering when toilet paper manufactures are going to get sued for excessive chafing. I’m sure they have been already. Maybe toilet paper made out of sawdust wasn’t such a good idea after all gentlemen. Not that I’m bitter about it but ouch, that’s all I’ve got to say on the subject.
My office overlooks the 18th hole on a golf course. I’ve seen all sorts of unusual things on that course. I’ve seen guys playing golf in the dark, near typhoon weather, wearing shorts in sub zero weather and there is even this woman who walks down the center of the fairway from the green to the tee during lunch. For some unexplained reason she has a golf ball, throws it up in the air and smacks it with her hand. She walks to where it lands, picks it up and continues towards the tee. I keep waiting for her to get hit with an oncoming golf ball one day. In my past life, when I was in ophthalmology, I had a patient who was stuck in the eye with a tee shot. It ruptured the eye and she was blind. This is why I never look back on the golf course or in life. I’d much rather get hit in the back with a ball than lose my sight.

When the weather is dangerous, like a big electrical storm, the course blows a siren to warn golfers to get off the course. Most golfers do, some don’t. Some just continue to play so let’s take the golfer who stands with his metal club (lightning rod) pointing skyward during a tremendous electrical storm. If he is struck by lightning, is he partially to blame or is the gold course going to get sued also? Other golfers sought appropriate shelter during the storm by this one places himself in a position of danger, greatly increasing his chances of getting struck and does. Can a victim contribute to the outcome and if so do we serve the victim by simply saying, “don’t worry” or “that’s OK”?

Wouldn’t we serve the victim more by consoling them in their time of need and help them to accept responsibility for their actions which allowed them to be harmed in the first place? Hopefully, they will learn from the error of their ways and not repeat the same mistake again in the future. We do this with children, why not adults?

Financial victims often cry foul because of the actions of others. In fact, they frequently contribute to their misfortune by simply not participating in their financial lives.

For many years I worked in an office. One day in the late 1980’s I decided to pursue my dream and left. I started a real estate company, The Great Virginia Land Company. I thought it would be really cool to work outside all day long. Walking through the country, enjoying nature and making money at the same time. I bought and sold country acreage. When my real estate company was going full force I wanted to make very sure that purchasers of property from me clearly understood the contract they were about to sign which included financing. At first, I would read the contract with them, explain every detail and be available to answer any questions they had. They typically glazed over by the third paragraph. That approach wasn’t working so I made myself available as they read the contract to answer any questions they had. Nobody asked questions and just wanted to know where to sign. I even asked them questions to make sure they had read the contract. Most were put off by my inquisition. Finally, they trained me to just hand them the contract. They would look up and before they could say anything I’d say “here” and point to the signature line. They would look up again and I’d say “here” and hand them a pen.

I used to get excited when I thought someone was going to ask a question about the financing, I wanted to explain it all to them but finally I was beaten into submission by the public’s lack of caring about the contract or financing. The prevailing question was never what the total cost would be, but “what will my monthly payment be?” They didn’t want to be bothered by actually reading or understanding the damn thing. They just wanted what they perceived to be the benefit once they signed the contract.

One day I sold fourteen pieces of property at one time. There were so many people wanting to purchase property from me that I passed out blank contracts, stood on the trunk of my car and as the purchasers all gathered around, like a concert in the park, I shouted out instructions on how to fill in the blanks. “In the first blank, put today’s date.” It was insane but I could not stop the frenzied action. If I had not done it this way, it is very possible that I could have been physically injured. People would get in such a tizzy if they could not sign the contract as quickly as possible. It was frightening at times. One day two people wanted to buy the same piece of property. One person decided to buy it first and the other said they were going to kill me and he had a gun in the back window of his truck. I decided it would be a good time to leave so I calmly walked to the car, jumped in and turned the ignition. Trust me, wrrr-wrrr-wrrr is not the kind of sound you want to hear at a moment like this, the car would not start, the battery was dead and I didn’t want to be. The guy in the pickup truck pulled up and said, “I kill city boys.” To which I could only respond, “Awesome but can I get a jumpstart first?” He gave me the jumpstart and I drove away.

So what did I learn from my experience. I learned people don’t like to see snakes in the grass when they are walking through the woods and they aren’t that interested in understanding consumer transactions.
Inevitably, if a problem ever latter arose from the transaction; the perception was always that they, the purchaser, were the victim, even when the exact and specific situation was clearly spelled out in the contract that they refused to read.

The same is true for almost all consumer credit transactions. People don’t read the agreements they sign and if they do read them they will not or do not ask questions and if they even ask a question and understand the answer, the vast majority of people will sign the agreement anyway as long as they want what they get when they do sign it. So, what level of responsibility do we have to adequately prepare for our financial lives?
Legislators and lawmakers think consumers are too stupid to accept responsibility for their situation. They feel that people don’t read the agreements they sign so we need to protect people from themselves. Is that really how we want to be treated, as stupid lemings?

Recently, I spoke to Richard. I’d had the opportunity to review his credit report before we spoke so it was clear to me that Richard had experienced two episodes of financial trouble in his life. The first about four years ago, the second about two years ago, but why? The debts were for unsecured credit cards, some utilities and local stores. Generally, that indicates someone moving into or out of a new area that is unprepared financially for the event. Clearly Richard’s credit report reflected an episodic history of financial trauma. After talking with Richard I learned that about four years ago he had relocated from Illinois to Iowa. He left behind some unpaid bills and had increased his debt load through the move to a point where he could not repay his bills. Once Richard found a job in Iowa he was able to stabilize his finances and repay most of his debts, he still had some old, very small debts outstanding. He also had some utility bills that were unpaid from his stay in Illinois. Richard said he forgot to change his address so the old bills did not follow him to his new address. In spite of Richards’s inability to notify his creditors, he feels it is unfair that they are hounding him and sent him to collections.

Richard said that he learned his lesson from that move and said he believed he would prepare better next time he relocated. Guess what, Richard did the exact same thing two years latter. He up and moves to California without prior planning. He leaves behind a wake of unpaid obligations and is again unable to find suitable employment in the area he has relocated to. Richard moves back to Iowa. Now, the first time Richard made the mistake of impulsively up and moving, you might say he was young, a few years out of college, and inexperienced in the ways of the world. How can we rationalize making the exact same financial mistakes again? Richard clearly knew what the results of his actions would be. He had lived through them once but yet he did not learn from his mistake and repeated it.
When I spoke to Richard he was clearly angry at his creditors for not being more reasonable when he fell behind on his bills. He was angry and belligerent and felt they should be more understanding.
When Richard moved from Iowa to California, he did not make any prior effort to find employment before he left. He just moved. When Richard arrives in California he is unable to find jobs that pay him even half of what was making before in Iowa. Big surprise. Bet you didn’t see that one coming did you? Now, not only does Richard have to pay for the cost of his move and getting started in a new area, he also has previous obligations he had not yet satisfied.

Soon Richard becomes dissatisfied with California, gives up and decides to move back to Iowa. During the course of his move out and back Richard accumulates approximately 25 thousand dollars of debt on credit cards. He financed his move with credit since he did not have any available cash. He stated “I had to use the cards to live on.” Again, Richard leaves and does not notify his creditors where he is going. Again, Richard ends up on the other end of a collection telephone calls and is sought after for unpaid bills. Is Richard really a victim of his creditors?
Richard has a responsible job but yet cannot exhibit responsible behavior in other parts of his life. Sadly, Richard will probably live through another couple of similar events until his financial situation becomes so fucked up that he files bankruptcy (aka financial cleansing) and possibly begins his cycle of debt over again.
I’ve even had one client who had 78 unsecured credit card accounts totaling a million dollars of outstanding credit card debt. This does not include his other outstanding indebtedness. Is he a financial victim or a credit predator? At what point does a reasonable person stop applying for additional credit?

Consider the following story from Carla who contacted me recently. “My car was repossessed on the 31st of January, on Monday I spoke with the bill collector from the car lender, I informed him of my job, the location, everything down to what I did. He demanded that I Western Union him $126 to him within the hour, even though I told him I get paid on the 1st of Feb. (which was only 5 days from that point) he told me this before just as I have twice promised a payment by Western Union and did not comply. I understand that the bank must repossess the car and I’ve heard horror stories of individuals losing personal items kept in the car at the time of repossession. To the repo man himself or whomever else may like that “pink sweater” for their neighbor. I had piles of clothes in my backseat, a satchel, a stethoscope, a sweater of the utmost sentimental value, a gun, college books, and a CD player that I’m sure they plan on selling to make the money while the factory stereo is in the trunk. (also a gift from a friend.) I will be 21 years old this month and am already in a bad situation, forced to live with a man twice my age, which in the beginning was and I suppose still is by my choice. I recently got a job and had thought things were beginning to look up for me, now I don’t even know where my car is, which impound lot or where I mail payments to? My makeup bag was also in there with around $200.00 worth of makeup not to mention documentation and things of that nature I had in a backpack.”

As an impartial third party, you’ve have to marvel at the dysfunction in this persons financial life. I think the most startling statement is the admission of previous failed promises to pay. Can you really be surprised that the collector ordered the repossession of the vehicle after Carla clearly had make promises to pay and then did not honor them. Several other facts in her email are telling also.

Broken promises are going to come back to bite you in this situation. Did she not understand that when she made payment arrangements with the creditor and failed to meet them that it had a higher probability of not turning out well?

She kept personal items in the car in spite of knowing that a number of payments had been missed and repossession was a definite possibility and imminent.

She keeps a gun in the car. Is she feeling vulnerable and unprotected?

Carla mentions living with a man twice her age and that in the beginning it was her choice. Is she a victim of her relationship? It truly sounds like a relationship of convenience. Carla seems to indicate that she is a victim of the relationship since she is “forced” to live with him. She has created a situation where she has no other place to go so she lives with someone she does not care for simply because he took her in. She admits it was and is her choice to be there, so is she forced?

She got a job and thought things were beginning to look up. This is irrational optimism when it comes to the vehicle situation. Things will only look up when either the missed payments are brought current or an agreed repayment plan is in place. Just because she secures employment she feels the lender should back off. A good example of fantasy thinking.

Carla appears to be helpless in the situation. Does not know where to send payments and has not thought to contact the lender to ask.

She has also been damaged by the loss of stuff in the car. How about the damage caused to the lender by the loss of payments not received? This is not a consideration or point of view of Carla’s.

People commonly refer to “being forced” to do things in their financial lives. Certainly “being forced” is an example of victim thinking. “I was forced to hand him the money.” Generally, people who are forced are not operating under their free will and are under duress.




 

Tuesday, February 14, 2017

Has higher education become a criminal enterprise? "It's a cheating situation"

 I am not a doomsayer or a survivalist, and I try to stay away from apocalyptic bloggers. But James Howard Kunstler, whose blog site goes by the name of Clusterfuck Nation, is making persuasive arguments that our postmodern economy, hopped up on cheap energy and enormous debt levels, is unsustainable. In fact, he predicts an economic  meltdown sometime this spring.

Kunstler's focus is on broader economic issues than student loans, but he made a trenchant observation about higher education in his latest blog essay, which struck a nerve with me.  Pervasive accounting fraud in the national economy, Kunstler writes,"bleeds a criminal ethic into formerly legitimate enterprises like medicine and higher education, which become mere rackets, extracting maximum profits while skimping on delivery of the goods."

And of course Kunstler is right. The Department of Education shovels $150 billion a year in federal student aid to prop up the higher education industry, which is becoming nothing more than a racket. Higher education apologists stress the value of a college education, but 45 percent of recent college graduates are in jobs that do not require a college degree. 

No wonder 8 million college borrowers are in default and millions more are not paying down their student loans.  DOE knows the score but it continues to deceptively downplay the student-loan default rate, stuffing debtors into economic hardship deferments and income-driven repayment plans that hide the fact that a large percentage of student borrowers will never be free of their loans. 

Meanwhile, the for-profit college sector, which might fairly be labeled a criminal culture, rips off poor and minority Americans and gives them educational credentials that are damned near worthless. Now they are beginning to shut down and go bankrupt, leaving their former students with mountains of debt. 

The public universities, bloated and lazy, limp along by raising student tuition as state subsidies dry up.  Public university leaders are motivated solely by politics, terrified by the possibility they might inadvertently do or say something politically incorrect.

State higher education leaders refuse to reorganize public colleges to be more efficient. In my own state of Louisiana, we have regional public colleges with declining enrollment in every corner of the state, but no one has the political courage to close any of them. Many Southern states support historic black colleges at public expense, although there is absolutely no need for university systems that cater to only one race. Louisiana even has a black law school, which operates in a substandard way just a few miles away from the state's flagship school of law. 

As for the nonprofit public institutions, they now fall into two camps. The ultra elite institutions--Harvard, Yale, Stanford, etc.--have brand names so strong they can charge what ever tuition rate they want. They also have fat endowments that insulate them from economic forces. 

On the other hand, small, obscure liberal arts colleges are under severe financial stress, and quite a few will close within the next five years. Parents are refusing to pay $50,000 a year for their offspring to attended a nondescript private school.  The little colleges have been forced to offer huge discounts--approaching 50 percent--to lure new students through the door. 

In short, every sector of higher education has been living in a fools paradise, but the data are now coming in, and they are alarming.

Nearly half the people who took out student loans to attend for-profit colleges default within five years. Millions of college borrowers whose loans are in repayment are seeing their student-loan balances grow larger, not smaller, due to negative amortization. Their token monthly payments keep borrowers out of default but are so small they don't cover accruing interest.

Nationwide, more than half of student borrowers owe more than they borrowed just two years into repayment. And, as the Wall Street Journal reported just a few weeks ago, half the students who took out student loans to attend more than 1000 schools and colleges have not paid down even one dollar on their loans seven years after their repayment obligations kicked in.

Kunstler is right. Evasiveness, almost criminal in its proportions, pervades almost every sector of higher education. As a classic country-and western-song might put it, "there's no use in pretending there'll be  a happy ending." Colleges and universities are in a cheating situation, refusing to recognize that the golden age of American higher education is coming to an end.



References

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

James Howard Kunstler. Made for Each Other. Clusterfuck Nation, February 13, 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).

Monday, February 13, 2017

The Student Loan Bubble That Many Don’t Want to See by Steve Rhode

This excellent essay by Steve Rhode originally appeared on Mr. Rhode's web site, Get Out of Debt Guy.  Rhode's web site contains a variety of good advice and information about all manner of consumer debt problems, including student loans.  You can learn more about Steve here.

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Steve Rhode

I can’t help but see the incredible irony in the mortgage collapse that many said would never happen, and the student loan bubble.
The collapse created by the student loan bubble is different but just as catastrophic. As the average debt per student loan borrower continues to climb and federal and private student loan debt grows, the consequences of not dealing with this bubble will be as traumatic as the mortgage failure recession.

The worst thing about these big economic bubbles is the data stares us in the face but most don’t see it.
Unlike the subprime mortgage failure that caused the foreclosure rate to explode and massive job loss, the bursting of the student loan bubble will cause more systemic issues.
When this bubble bursts, and it will, it won’t lead to an immediate collapse but a collapse of the United States to excel in a future world economy. A collapse in the student loan market will place real eduction out of reach of many and put a drag on the overall economy as fewer and fewer people will be able to pay for tuition that outpaces inflation.
Without easy access to student loans and a shrinking student base, schools will have to cut costs to bring tuition back inside available lending. Many schools, public and private, will fail. Public schools will fail as long as states continue to cut state funding for education.
It seems the thing we value least, at times, is education and opportunity for all. States cut funding for public colleges, teacher salaries remain flat, and education lotteries are a misnomer. They don’t really benefit education.
Like the crazy mortgage asset backed securities (ABS) or collateralized debt obligations (CDO) the private student loan industry had been packaging up student loans into trusts an student loan asset backed securities (SLABS).
Like CDOs that Wall Street rating agencies rated, ABS products have ratings as well. Moody’s Investors Service recently downgraded a bunch of these products.
“Moody’s placed 266 tranches in 141 transactions ($44.9 billion) on review for downgrade, 89 tranches in 59 transactions ($3.1 billion) on review for upgrade and 45 tranches in 34 transactions ($2.8 billion) on review with direction uncertain. Moody’s also confirmed the ratings on three tranches ($1.5 billion).
In addition, 101 tranches ($30.7 billion) previously placed on review for downgrade will remain on review for downgrade and four tranches ($1.4 billion) previously placed on review for upgrade will remain on review for upgrade.”
Moody’s goes on to say, ” For most tranches, Moody’s projects cash inflows to be less than sufficient to repay the notes by their final maturity.”
Moody’s also says that the quality of these securities will continue to decline if there is “growing borrower usage of deferment, forbearance and IBR.” – Source
But other people are seeing the same things and making the same connections as well when it comes to the issues created by federal loans.
Jack Du said, “Unlike private lenders, the federal government doesn’t check credit records for student loan borrowers. This leads to many uncreditworthy borrowers qualifying for loans and then being saddled with debt indefinitely with little hope of paying it back. This harkens back to the sub-prime housing loans that drove up the housing bubble. Investors should be wary of how much longer these aggressive student loan lending strategies can be sustained.” – Source
Du also observed, “student loan asset-backed securities seem to be a valuable asset to the economy. However, whether this industry can sustain itself will come down to whether enough borrowers can eventually pay their debt obligations and that is looking like a slim prospect.”
For a college student himself, he’s pretty smart.
So the situation we have is easy to access federal student loans are becoming lifelong debt and lead people to problematic income driven repayment programs.
The private student loan industry is a mess with fractionalized SLABS and the hooks into co-signers they most often won’t release.
It’s a bubble and a mess, all at the same time.

Sunday, February 12, 2017

St. Joseph's College is closing: Is the bell tolling for small liberal arts colleges?

St. Joseph's College, which was founded in 1889, is  shutting its doors in May. Officials cited several reasons for  closing: fierce competition for students, accreditation problems and increased federal regulation. St. Joseph's president, Robert Pastoor, said the college will need $100 million to reopen; and the college's friends and alumni are hoping to raise the funds.

Students organized a vote of no confidence against Pastoor and four other college leaders, but St. Joseph's decline and fall may not have been their fault. Small liberal arts colleges are in a precarious position all over the United States. The U.S. Department of Education has 500 colleges on its heightened-cash-monitoring watch list; and many of the schools on that list are small liberal arts colleges.

St. Joseph's, with only 900 students, just didn't have the resources to successfully navigate its way through rough financial waters. St. Catharine College, another small Catholic liberal arts college, announced it is closing less than a year ago. Like St. Joseph's, St. Catharine College cited increased federal regulation as one of the factors that brought it down.

By and large, the higher education community is made up of liberal Democrats; and almost no one protested the deluge of regulations that came out of the Department of Education during the Obama administration. Public universities, large private universities, and institutions with healthy endowment funds have been able to weather the tightening regulatory environment. Indeed, they have no choice. Virtually no college or university can survive without regular infusions of federal student aid money--and that money comes with regulatory strings attached.

Without question, many small liberal arts colleges are going to be squeezed out of existence over the next few years due to the same challenges that St. Joseph's and St. Catherine faced. Those that survive will have this profile:
  • Tuition rates below their competition; 
  • Strong academic programs that lead to good jobs such as jobs in medicine, health sciences, or criminal justice; 
  • High teaching standards; and
  • Endowment funds to buffer economic stress.
Many college and university leaders deplore the appointment of the new Secretary of Education, Betsy DeVos.  You can probably count DeVos's higher-education supporters on the fingers of one hand.

But maybe college leaders should give DeVos a chance to address the financial crisis in higher education before attacking her. If she acts sensibly to trim the thicket of federal regulation, it is quite possible that more small liberal arts colleges will survive.

And surely that would be a good thing.



References

Meredith Colias. Rensselaer stunned after announcement of St. Joseph's closure. Chicago Post-Tribune, February 10, 2016.

Alexandra Kruczek & Alexis Moberger. St. Joseph's College president will call it quits in May. WLFI.com, February 9, 2017.

Another Small Private Closes Its Doors. Inside Higher Ed, June 1, 2016. Accesible at https://www.insidehighered.com/quicktakes/2016/06/01/another-small-private-closes-its-doors-dowling-college?utm_source=Inside+Higher+Ed&utm_campaign=a0fafeb056-DNU20160601&utm_medium=email&utm_term=0_1fcbc04421-a0fafeb056-198564813

Paul Fain. The Department and St. Catharine.  Inside Higher Ed, June 2, 2016. Accessible at https://www.insidehighered.com/news/2016/06/02/small-private-college-closes-blames-education-department-sanction?utm_source=Inside+Higher+Ed&utm_campaign=3d1c6eed79-DNU20160602&utm_medium=email&utm_term=0_1fcbc04421-3d1c6eed79-198565653