Friday, October 31, 2014

Rohit Chopra and Rich Cordray Should Be Ashamed of Themselves: The Consumer Financial Protection Bureau's Timid Report on Distressed Private Student-Loan Borrowers

Rohit Chopra should be ashamed of himself.
Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB), issued a report earlier this month on the status of distressed private student-loan borrowers.  The report is so timid, so tepid, so lacking in real recommendations for reform that Chopra and Chopra's boss, CFPB Director Richard Cordray, should be ashamed of themselves.

Basically, Ombudsman Chopra's  report analyzed more than 5,000 student loan complaints directed at private lenders.  The report documents that many students who borrowed money from banks to attend college have been driven into default.  Chopra's reported identified these problems:
  • Borrowers who have trouble paying back their private loans receive little information from the banks about their options for modifying their loan terms.
  • People who borrow from the banks often find that there are no loan-modification options available.  
  • Private lenders are sometimes willing to offer borrowers a temporary forbearance from making their loan payments, but these forbearances often only delay default. Moreover, borrowers sometimes have to pay enrollment fees or experience processing delays in order to get nothing more than temporary relief. 
Chopra's report ends on a pathetic note. Although it professes to offer "new tools to help borrowers take action when they run into trouble [with private student loans]," the report offers nothing more than a sample letter "that consumers can edit and send to their student loan servicer to request lower monthly payments and information on available repayment plans."  That's all the CFPB has to offer--a crummy form letter!

Chopra and the CFPB Understate the Harm Caused by the Private Student Loan Industry

Chopra and the CFPB vastly understate the harm done to student borrowers who take out loans from private lenders to finance their college educations.

First of all, many students are ignorant of the difference between private loans and loans obtained through the federal student-loan program. Federal loans give distressed borrowers access to economic hardship deferments, income-based repayment plans, and loan consolidation options.  For the most part, these options are not available to people who borrow money from private lenders to finance their college studies. Moreover, federal student loans generally offer lower interest rates than private student loans.

Many students are so unsophisticated that they do not realize that they are taking out loans from private lenders rather than participating in the federal student loan program. Thus, students often pass up the opportunity to participate in the federal student loan program and fall into the clutches of private banks.

Second, unlike most federal student loan programs, private lenders generally require students to obtain co-signers for their student loans.  In most cases, the co-signer is a student's parent or other relative. Parents who co-sign their children's private student loans become personally liable for the debt--all of it.

Third, students and their parents may not realize that private student loans,like federal student loans, cannot be discharged in bankruptcy absent a showing of undue hardship, which is very hard to establish in a bankruptcy court. Students who take out private loans and are unable to pay them back may see their parents dragged down into financial ruin if their parents are not able pay back the debt. In most cases, the parents will have no recourse to the bankruptcy courts. 

The Federal Government Should Shut Down the Private Student-Loan Industry

The CFPB report is pathetic in terms of its advice to students and their families who find themselves unable to pay back their private student loans.  All Cordray and Chopra could think to do about the rapacious private student-loan industry was draft a form letter that students can use to beg for mercy when they find themselves unable to make their loan payments.

Students don't need sample letters to deal with the private student-loan industry; they need effective relief from private student-loans that many students did not fully understand when they signed the loan documents.

What needs to be done?

Congress needs to repeal the 2005 amendment to the Bankruptcy Code that has made it almost impossible for student borrowers and their co-signers (usually parents) to discharge their private loans in bankruptcy.  

If Congress would take this simple step, the private student-loan industry would almost immediately shut down, which would be a good thing.  The banks are happy to loan students money so long as students' parents co-sign the loans and bankruptcy relief is unavailable.  But if private student loans could be discharged in bankruptcy like any other unsecured debt, the banks would get out of the student-loan business in a hurry.

In the meantime, Rohit Chopra, Rich Cordray and the CFPB need to issue dire warnings to college students and their families not to take out private loans to attend college.  Such loans may make sense for people who are enrolling in expensive but high-quality professional programs in law or medicine. But low-income students have no business taking out student loans from banks and other private lenders.  Too often, taking out a private student loan leads to financial disaster not only for the student but for the student's parents as well.

Mr. Chopra and Mr. Cordray are fully aware of the harm being caused by private student-loan financiers.  “Struggling private student loan borrowers are finding themselves out of luck and out of options," Mr. Cordray acknowledged.  Unfortunately, Mr. Chopra, Mr. Cordray, and the CFPB do not have the courage to propose effective reforms.

Mr. Cordray should be ashamed of himself too.
References

CFPB Report Finds Distressed Private Student Loan Borrowers Driven Into Default. Consumer Financial Protection Bureau, October 16, 2014.




Sunday, October 19, 2014

The New York Times publishes another witless editorial about the student loan crisis

If you don't think the federal student loan program is in crisis, you haven't been paying attention. And speaking of people who aren't paying attention, the New York Times recently published an editorial entitled "What to Do About Student Loan Defaults," which demonstrates that the Times editorial board is totally clueless about the student loan crisis.

The Times began by saying that the student-loan default rate dropped a bit from last year. The Department of Education's most recent three-year cohort default rate (the percentage of people in a cohort  who default within three years of beginning repayment) was 13.7 percent, which is down a percentage point from last year's rate.

The Times neglected to report that the Department of Education calculated a special rate for several schools that were in danger of being kicked out of the federal student aid program because of high default rates in order to bring their default rates down. Which schools received this special favor? The Department of Education won't say.

The Times also neglected to note that the student loan rates are probably going down because colleges with the highest default rates have hired default-management companies to help bring their default rates down. These firms contact former students who are in danger of default and urge them to apply for economic hardship deferments.

Former students who have economic hardship deferments are not obligated to make loan payments but they are not counted as loan defaulters. This keeps colleges' default rates down during DOE's three-year measurement period.

Of course the bad news for student-loan debtors who have economic hardship deferments is that interest continues to accrue on their loan balances. People who defer payments for several years because they are on economic hardship deferments will wind up owing a lot more than they borrowed.

In fact, we really don't know that the true student-loan default rate is. Millions of people have received economic hardship deferments and millions more have signed up for income-based repayment plans that obligate them to make monthly student-loan payments over 25 years.  Almost all of these people are seeing their loan balances negatively amortize--in other words, the amount they owe is getting larger.

The Times knows that millions of student-loan borrowers are in trouble, but what is its solution? More education!

Yes, the Times said that "[t]he government needs to continue pressing both schools and loan servicing companies to educate students on affordable partial payment plans that can keep them out of default." And at the end of the editorial, the Times urges the government to "get out the news about affordable repayment plans that set payments according to borrowers' income, allowing them to eat and pay the rent without falling into default."

So basically what the Times is saying is this: People need to sign up for income-based repayment plans that will negatively amortize for most borrowers and obligate student-loan debtors to make monthly payments for 20 or 25 years!

Of course this is lunacy. And it is deeply discouraging that the New York Times, which bleats continually about income-inequality and the plight of the poor, offers such unimaginative and ineffective solutions to the student-loan crisis, which is destroying the economic future of millions of Americans, not to mention the integrity of America's colleges and universities.

References

What to do about student loan defaults. New York Times, October 2, 2014. Accessible at: http://www.nytimes.com/2014/10/03/opinion/what-to-do-about-student-loan-defaults.html?_r=0








Thursday, October 2, 2014

Senator Tom Harkin is Like a Shade-Tree Mechanic--He Can Tell You What's Wrong With the Student Loan Program, But He Can't Fix It: Veterans, The New GI Bill and the For-Profit Colleges

Photo credit: autoguide.com
Senator Tom Harkin reminds me of the shade-tree mechanics I patronized when I was young and poor and drove old cars,  I would drive my junker up to some Mom-and-Pop mechanic shop, the mechanic would accurately diagnose what was wrong with my car, and then he would say he couldn't fix it.

Senator Harkin did the public a major service when he chaired the committee that reported on the for-profit colleges a couple of years. In a massive report--over a thousand pages when the appendices are included, the Harkin committee spelled out the many abuses in the for-profit college industry.

Since that report was issued, almost nothing has been done to rein in the rapacious for-profit colleges, which suck up about a quarter of all federal student aid money and only enroll about 11 percent of the students.

Last July, Senator Harkinn's Senate Committee has issued a second important report. This one focuses on the way the for--profits have made out like bandits with programs targeted at veterans who have gone to college under the Post-9/11 GI Bill.

Here is a summary of the Harkin Report's findings:

  • Eight of the 10 top recipients of Post-9/11 GI Bill benefits are large, publicly traded companies that operate for-profit colleges. These eight companies received 23 percent of all the Post-9/11 GI bill money for 2012-2013.
  • Seven of those 8 companies are currently under investigation by state attorney generals offices or the federal government for deceptive or misleading recruiting or possible violations of federal law. 
  • The number of veterans attending public colleges has declined between 2009 and 2013 while the number of veterans who attend for-profit colleges has increased.
  • Although overall enrollment at the eight top for-profit beneficiaries of the Post-9/11 GI Bill has declined in recent years , the number of veterans who enrolled at these schools has increased.
Why are veterans so attractive to the for-profit colleges? As the Harkin Report explains, the Higher Education Act requires that the for-profits operate under the 90/10 rule. In other words, they can only receive 90 percent of their revenue from federal student aid money.  However, money received under the Post-9/11 GI Bill is not counted as part of the 90 percent.

Thus, for-profits who are getting 90 percent or close to 90 percent of their revenue from the general federal student-aid program can get that last ten percent of their by enrolling veterans under the Post-9/11 GI Bill.

This would be fine, I suppose, if the for-profits were doing a bang-up job of educating veterans and preparing them for good post-military jobs. But apparently they are not. 

The Harkin Report found that "[a]t the for-profit colleges currently receiving the most benefits, up to 66 percent of students withdrew without a degree or diploma" (p. ii).  The Report also found:
Between 39 and 57 percent of the programs offered by four of the companies receiving he most Post-9/11 GI bill benefits would fail to meet the proposed gainful employment rule, suggesting that the students who attend these institutions do not earn enough to pay back the debt they take on.  (p. ii)
As the Harkin Report put it, some for-profit colleges "appear to be taking advantage of a loophole to use Post-9/11 GI Bill funds to comply with the federal requirement that no more than 90 percent of revenue come from federal student aid" (p. ii).

And of course, this cozy arrangement for the for-profits is costing tax payers, "who are paying twice as much on average to send a veteran to a for-profit college for a year compared to the cost at a public college or university ($7,972 versus $3,914)" (p. ii).

The Harkin Committee Report makes interesting reading, but the Committee made no significant recommendations.  It is the latest in a series of reports showing that students are being ill-served by and large by the for-profit college industry.  These schools charge far more for their programs than comparable programs offered by public universities and community colleges. They have very high student-loan default rates and high student dropout rates, and very often they are enrolling students through deceptive recruiting practices and are putting students into programs that are not likely to lead to well-paying jobs.

Why don't we do something about this?  Because the for-profits have very good lobbyists and lawyers sand they make strategic campaign contributions to key federal legislators.

Thus, in the end, the latest report by Senator Harkin's Committee is very much like my fruitless conversations with the shade-tree mechanics of my youth.  "Buddy, your car is in dire need of repair, but we can't fix it."

References

Health, Education, Labor, and Pensions Committee (Senator Tom Harkin, Chairman). Is the New GI Bill Working?: For-Profit Colleges Increasing Veteran Enrollment and Federal Funds, July 30, 2014.   Washington, DC: United States Senate. Accessible at http://www.harkin.senate.gov/documents/pdf/53d8f7f69102e.pdf