Is massive student-loan forgiveness off the table? The insiders prefer long-term, income-based repayment plans and that's what student debtors are likely to get

Remember the heady days of the 2020 presidential primaries? Democratic nominees proposed massive student-loan forgiveness, and some promised a free college education. 

This is what Vice President Joe Biden promised last April:

The concept I’m announcing today will align my student debt relief proposal with my forward-looking college tuition proposal. Under this plan, I propose to forgive all undergraduate tuition-related federal student debt from two- and four-year public colleges and universities for debt-holders earning up to $125,000. . . . The federal government would pay the monthly payment in lieu of the borrower until the forgivable portion of the loan was paid off. This benefit would also apply to individuals holding federal student loans for tuition from private HBCUs and MSIs.

But the election is over, and the political insiders have had time to reflect on massive loan forgiveness. As the Washington Post editorialized just a few days ago,

[W]wholesale debt relief is actually the antithesis of progressive policy. Most benefits would flow to upper-income households, which, despite the undeniable burden of debt for lower-income families, actually owes a disproportionate share of the total [student-loan] dollars. 

 The Post disapproves of the relief plan put forward by Senators Elizabeth Warren and Charles Schumer.  They want Biden to forgive student-loan debt up to $50,000 per borrower.  Biden himself has trimmed back his April proposal and now only wants Congress to forgive $10,000 in student debt.

I think massive student-loan relief is off the table. Instead, I think the Department of Education--acting with or without Congressional action--is more likely to offer more generous income-based repayment plans.

In fact, that is exactly what the Washington Post is endorsing. Citing a study by Sylvain  Catherine and Constantine Yanellis, the Post says the feds should "mak[e] sure that everyone who qualifies enrolls in an existing plan that links repayment to a borrower's income."

But tinkering with income-based repayment plans (IBRPs) will not solve the student-loan crisis. 

Nine million people are in them now, and virtually none of them are paying down the principal on their loans.  College borrowers who stick it out will eventually get their student loans forgiven, but the canceled debt is considered taxable income by the Internal Revenue Service.

Making IBRPs more generous, which the new administration might do, is just a student-loan forgiveness program in disguise.  It would do nothing to change the status quo, allowing students to borrow too much money to attend college and the universities to charge tuition that is far too high.

As Steve Rhode argued in a recent essay, the solution to the student-loan crisis is to ease restrictions on bankruptcy relief for distressed college-loan borrowers.  All that needs to be done is to remove the "undue hardship" language from the Bankruptcy Code and allow student-loan debtors who are truly insolvent to discharge their loans in bankruptcy.

But perhaps that solution is too simple for the crafty minds of our politicians and our college leaders.  Instead of giving student borrowers a fresh start in bankruptcy,  they will likely concoct another complicated and labyrinthine IBRP.

Pew Foundation says one out of four student-loan borrowers default within 5 years: But we already knew that.

The Pew Foundation issued a report recently with this snoozer title: Student Loan System Presents Repayment Challenges.  Really? That's like saying that icebergs posed a challenge to the Titanic.

The Pew Foundation's most interesting finding--picked up by the media--was this: Almost one out of four student-loan debtors default on their loans within five years.  But this should not be a shocker. Looney and Yannelis reached basically the same finding five years ago in their report for the Brookings Institution. These researchers reported that the five-year default rate for the 2009 cohort of borrowers was 28 percent (p. 49, Table 8).

And the Pew study probably understates the crisis. The report itself acknowledged that for-profit colleges were underrepresented in its study (p. 5), and we know that almost half of the students who attend for-profit colleges default within five years.

Most importantly, the Pew study did not address the "challenge" faced by more than 7 million college borrowers who are in income-based, long-term repayment plans (IBRPs). IBRP participants are not paying off their student loans even though they are in approved repayment programs. Why? Because people in IBRPs aren't making monthly payments large enough to pay down loan accruing interest, and this interest is capitalized and rolled into their loans' principal.

As much as it pains me to say this, Education Secretary Betsy DeVos gave a clearer picture of the student-loan crisis than the Pew Foundation.  A year ago, DeVos publicly acknowledged that only one out of four student borrowers are paying down principal and interest on their loans and that 43 percent of student loans are "in distress."

For me, the most disappointing thing about the Pew report was its tepid, turgid, and tedious recommendations for addressing the student-loan crisis, which I will quote:

• Identify at-risk borrowers before they are in distress . . .
• Provide [loan] servicers with resources and comprehensive guidance . . .
• Eliminate barriers to enrollment in affordable repayment plans, such as program complexity . . .

Thanks, Pew Foundation. That was really, really helpful.

Note that the Pew Foundation said nothing about bankruptcy relief for distressed college borrowers, tax penalties for borrowers who complete their IBRPs, or the government's shameful practice of garnishing elderly defaulters' Social Security checks. Moreover, Pew said nothing about the Education Department's almost criminal administration of the Public Service Loan Forgiveness program.  And we didn't read anything about the out-of-control cost of higher education.

Let's face it.  College leaders, the federal government, and so-called policy organizations like the Pew Foundation refuse to acknowledge that the federal student-loan program is destroying the lives of millions of Americans. Instead, they are content to tinker with a system that is designed to shovel money to our bloated and corrupt universities.

America's colleges are addicted to federal money. Like a drug addict hooked on Oxycontin, they must get their regular fixes of federal cash.  After all, they've got to fund the princely salaries of college administrators and lazy, torpid professors.

Like first-class passengers on the Titanic who were sipping champagne when their ship hit an iceberg, the higher education industry thinks the flow of student-loan money will go on forever.  But a crash is coming.

Unfortunately, the people who created the student-loan crisis will be the ones floating away in the lifeboats--living off their cushy pensions and obscene retirement packages. The people who were exploited by the federal student-loan program, like the third-class passengers on the Titanic, will go down with the ship.

Lifeboats reserved for college presidents and DOE senior administrators

It's Magic! Betsy DeVos' Department of Education allows Grand Canyon University to call itself non-profit while its parent company reports profit margin of 27 percent

David Halperin, the nation's best investigative reporter on the for-profit college industry, wrote an article recently on Grand Canyon University, which has been advertising itself lately as a non-profit university.

Well, sorta. As Halperin explained, Betsy DeVos' Department of Education "has blessed a series of troubling deals that allow a [not-]for profit college to be 'serviced by connected for-profit companies."

To what purpose?As Halperin reported:

The non-profit school benefits from the elimination of the for-profit stigma, reduced regulations, elimination of taxation, and eligibility for more state and charitable grants. Meanwhile, the for-profit, and its owners and executives, get to siphon off a lot of the revenue, much of it from taxpayer-funded grants and loans.

Thus in the fairyland world that Betsy DeVos has created, Brian Mueller wears two hats. He is president of Grand Canyon, a non-profit entity. He is also CEO of the university's parent for-profit corporation, Grand Canyon Education.  GCE trades on NASDAQ at $115 a share and reported a profit margin of 27 percent at the end of 2018.

Mueller conducted an earnings call to his investors recently in which he complained about non-profit colleges warning potential students not to enroll at a for-profit college. Through DeVos' mumbo jumbo, Grand Canyon can now call itself a nonprofit college, which has boosted its enrollment.

As Mueller boasted: "They see our ad & call Grand Canyon and within 72 hours everything is done. Applications filled out. Transcripts evaluated. Financial aid is done. They go to our website, they see who Grand Canyon is and say, 'this sounds good,' and they start."

As Halperin accurately observed, "the Donald Trump-Betsy DeVos Department of Education . . . has done everything possible to eliminate rules that protect students and taxpayers from predatory college abuses."

In fact, according to a Century Foundation report, which analyzed colleges with large online enrollments, Grand Canyon only spends 17 percent of its tuition money on educating students (as summarized by Halperin). Some non-profit!

I once thought that DeVos was simply incompetent and making decisions that benefited for-profit colleges out of ignorance. But DeVos knows exactly what she is doing, and she must know that the for-profit college industry as a whole is committing economic rape on unsophisticated young people, including first-generation college goers.

In a November speech, DeVos admitted that the student-loan program is in crisis. This is what she said:

• The federal government holds $1.5 trillion in outstanding student loans, one third of all federal assets.

• Only one in four federal student-loan borrowers are paying down the principal and interest on their debt.

• Twenty percent of all federal student loans are delinquent or in default. That's seven times the delinquency rate on credit card debt.

Of course, the for-profits aren't responsible for all the carnage in the student-loan program, but they are responsible for a lot of it. Adam Looney and Constantine Yannelis, writing for the  Brookings Institute, reported awhile back that the 5-year default rate for one cohort of students who attended for-profit colleges was 47 percent! Several for-profits have been shut down in a shower of fraud allegations.

But even for DeVos, this latest scheme, which allows a college to call itself non-profit while its for-profit parent reports a profit margin of 27 percent, is outrageous.

President of Grand Canyon University and CEO of Grand Canyon Education.

Cooking the Books: Federal Reserve Bank Says $166 Billion in Student Debt is Delinquent, But the Crisis is Worse Than That

Most Americans have confidence in what the Federal Reserve Bank says about the national economy. I know I do. But when the Federal Reserve Bank of New York reported that $166 billion in student debt is delinquent, it vastly understated the enormity of the student-loan crisis.

In its most recent quarterly household debt report, the Fed pegged total outstanding debt at $1.46 trillion as of the end of December. According to the Fed, about 11 percent of that debt ($166 billion) is delinquent or in default. That's a startling number. But the picture is far bleaker than that.

Just two months ago, Secretary of Education Betsy Devos stated publicly that only one out of four student borrowers (24 percent) are paying down the principal and interest on their loans. "As for FSA's portfolio today," DeVos said, "too many loans are either delinquent, in default, or are [in] plans on which students are paying so little, their loan balance continues to grow." In total, DeVos admitted, "43 percent of all loans are currently considered 'in distress,'" and 20 percent of all federal student loans are delinquent or in default.

DeVos also implicitly acknowledged that the federal government is cooking the books by classifying a lot of student debt as performing loans even though millions of people are not paying them back. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk," DeVos observed. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

In addition to the millions of people who have defaulted on their loans, millions more are in various plans that allow borrowers to skip their loan payments without being counted as defaulters. As of last summer, 7.4 million people were enrolled in long-term income-based repayment plans who are making payments so low that interest continues to accrue on their loans.

Think about that: 7.4 million people whose loans are labeled as performing even though their loan balances get larger with each passing month. You can label that scenario any way you like, but we're talking about 7.4 million additional defaulters.

The Department of Education has been scamming the public for a quarter of a century regarding student-loan defaults. For years, it only reported the percentage of loans that defaulted within two years of entering repayment. To keep their default rates down, colleges encouraged their former students to enter into economic-hardship deferments, which excused them from making payments without officially putting them in default.

Then DOE began reporting three-year default rates, which showed defaults ticking up slightly to the neighborhood of 11 percent. But the Brookings Institute (in a paper written by Looney and Yannelis) reported in 2015 that the 5-year default rate for a recent cohort was 28 percent--more than double the three-year rate.

In other words, for a cohort of borrowers that the Brookings researchers analyzed, more than one out of four student borrowers was officially in default after five years. According to the same Brookings report, the five-year default rate for students who attended for-profit colleges was 47 percent--nearly half!

Of course, loan default rates vary some from cohort to cohort, but there is no sign that the percentage of student borrowers paying off their loans is going up. In fact, the data show the opposite.

In short, the Fed's recent report may be technically accurate but it understates the magnitude of the student-loan crisis. When the Department of Education finally comes clean and gives us some accurate figures, I think we will find that half of all outstanding student loans are not performing--about 20 million borrowers with collective debt totally three quarters of a trillion dollars.

 

Ben Miller, where the hell ya been? Center for American Progress finally wakes up to the magnitude of student-loan crisis

Ben Miller, senior director of the Center for American Progress, reminds me of a fuddy duddy who falls asleep at a wild party in a friend's apartment.  Just as the party starts to get interesting, he nods off on a pile of party goers' coats.

 Meanwhile, the party spins out of control: fights break out, spontaneous trysts are consummated in closets and spare bedrooms, furniture is broken, lamps are shattered. When the fuddy duddy awakes, the apartment is in shambles and the police are cuffing drunken revelers and hauling them off to jail.

"Did I miss something?", the fuddy duddy asks as he rubs the sleep from his eyes.

Miller wrote an op ed essay for the New York Times on August 8 titled "The Student Debt Problem is Worse Than We Imagined?" Ya think? Where the hell have you been, Mr. Miller?  You're like the guy who went out to buy popcorn just before the steamy scene in Last Tango in Paris.

So here is what Mr. Miller said in his op essay: student loan default rates are much higher than the Department of Education reports. I hate to break it to you, Ben; but people have known that for years. Everybody knows the for-profit colleges have been hiding their default rates by pushing their former students into deferment programs to disguise the fact the suckers weren't paying on their loans.

In fact, the problem is probably worse that Miller described it in the Times. Looney and Yannelis reported in 2015 that the five-year default rate for the 2009 cohort of student borrowers was 28 percent (Table 8).  And the five year default rate for the 2009 cohort of for-profit students was 47 percent--almost double what Miller reported for the 2012 cohort--only 25 percent.

Admittedly, Miller is looking at the 2012 cohort of debtors, while Looney and Yannelis analyzed the 2009 cohort. But surely no on believes the student-loan problem got better in recent years. Everyone knows the crisis is getting worse.

Miller's analysis briefly mentions the federal push to put student borrowers in deferment plans,  but that problem is more serious than Miller intimates. In fact 6 million student borrowers are in income-based repayment plans (IBRPs) and are making payments so small their loan balances are getting larger and larger with each passing month due to accruing interest.  For all practical purposes, the IBRP participants are also in default.

But Mr. Miller can be forgiven for waking up late to smell the coffee. Perhaps Miller, like the New York Times that published his essay, was so distracted by Stormy Daniels and the Russians that he was late to notice that American higher education is going down the toilet.  And surely, we can all agree that the person pressing down on the toilet-bowl handle  is Betsy DeVos.

What happened while Center for American Progress was snoozing?

References

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 rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Ben Miller. The Student Debt Problem is Worse Than We Imagined. New York Times, August 8, 2018.

Baby Boomers are stealing from the Millennials: Stocks and bonds for grandma and grandpa; perpetual debt for their grandchildren

Baby Boomers are stealing from the Millennials. People in their 60s and 70s are retiring comfortably in sunny Florida or taking luxury river cruises down the Danube. Meanwhile, their grandchildren are struggling with massive student-loan debt they will never pay off.

As John Rubino put it, "we baby boomers have rigged the system in our favor at the expense of pretty much everyone else," forcing younger generations to take out student loans to get their college degrees. "[S]tudent loans--barely necessary when most boomers graduated 40 years ago--have become a life-defining problem for our kids and grandkids."

Rubino is right. The people who run this country--judges, legislators, college presidents, and the captains of industry--got their college degrees for a modest sum; and most graduated with little or no student debt. But their grandchildren will take out massive student loans to get their postsecondary credentials, and many will remain indebted for decades.

According to a Brookings Institution report, most student borrowers with large loan balances are not defaulting on their loans; they just aren't paying them back. Millions have their loans in deferment, allowing them to skip their loan payments without being put into default.  Six million are now enrolled in some type of income-based repayment plan (IBR) that allows them to make smaller loan payments but keeps them indebted for 20 or 25 years.

Millions more are simply defaulting on their loans--which means their credit is shot and their loan balances have shot upward due to default penalties and accrued interest on their unpaid debt. According to the New York Times, college borrowers defaulted at the rate of 3,000 a day in 2016.

Rubino sees only one solution to this mess:"massive devaluation" of our currency to allow student debtors to pay off their loans with cheaper money. But that won't work unless Millennials' salaries rise high enough so that current debt loads are no longer burdensome. And there is no sign this is happening.

Total outstanding student-loan indebtedness is now about $1.5 trillion, or $1.6 trillion if you include private student-loan debt. About half of this amount will never be paid back. We really only have two options. We can forgive billions of dollars in uncollectable student-loan debt or we can continue to allow millions of Americans to slip out of the middle class--dragged down by their student loans and unable to buy homes or save for their retirement.

References

Adam Looney & Constantine Yannelis. Most students with large loan balances aren't defaulting. They just aren't reducing their debt. Brookings Institution, February 16, 2018.

Josh Mitchell. The Rise of the Jumbo Student Loan. Wall Street Journal, February 16, 2018.

John Rubino. Loan Shark Nation: Forcing Our Kids To Choose Between Student Loans And Everything Else.

The Wrong Move on Student Loans. New York Times, April 6, 2017.

Student Loan Default Crisis grows worser and worser: Brooking Institution says minorities and for-profit students are hardest hit

First of all, I realize that the word "worser" is not standard English. Nevertheless, "worser" appears in Hamlet (act 3,scene 4). If it is good enough for Shakespeare, it is good enough for me.

Now to the topic at hand. Judith Scott-Clayton recently published a report for the Brookings Institution on the student-loan default crisis. Twelve-year default rates are going up--with minority students and for-profit-college attenders experiencing the highest default rates.

For the 2004 cohort of borrowers who attended a for-profit college, the 12-year default rate was 46.5 percent (darn near half). For African American borrowers from the same cohort, 37.5 percent defaulted within 12 years. The black default rate was three times higher than the white default rate (12.4 percent) and six times higher than the rate for Asians (only 6.2 percent).

Scott-Clayton's report makes clear that the crisis in student-loan defaults among African Americans is acute. Based on the current trajectory, she projects 70 percent of black borrowers will default on their student loans by the end of 20 years.

Scott-Clayton points out that African American default rates are high even for black students who graduate from college. The default rate for African American graduates is five times higher than the default rate among white graduates.  In fact, she points out, the default rate for black college graduates is higher than the default rate for white college dropouts.

African Americans also borrow more money than white students. For the 2004 entry cohort, black students borrowed twice as much as white students for their undergraduate education.

The Scott-Clayton report is alarming, but a 2015 Brookings report (which Scott-Clayton referenced) is even more alarming. Looney and Yannelis, authors of the 2015 report, found that 47 percent of the people in the 2009 cohort of borrowers who took out loans to attend for-profit colleges defaulted within 5 years. For the cohort as a whole, the default rate was 28 percent.

Basically, however, the Scott-Clayton report and the Looney-Yannelis report told us what we already knew.  Student borrowers who attend for-profit colleges have shocking student-loan default rates; and African American students have much higher default rates than white students.

Scott-Clayton concluded her report with some tepid suggestions, which I will quote:

[T]he results suggest that diffuse concern with rising levels of average debt is misplaced. Rather, the results provide support for robust efforts to regulate the for-profit sector, to improve degree attainment and promote income-contingent loan repayment options for all students, and to more fully address the particular challenges faced by college students of color.

Frankly, I disagree with Scott-Clayton's bland recommendations. First, of all, we should be very concerned about the rising level of student debt across all sectors of higher education--not just the for-profit sector.  Millions of student borrowers are suffering, and some of those sufferers are white graduates of Ivy League colleges.

Secondly, although it is easy to call for more "robust" regulation of the for-profits, Betsy DeVos is headed in the opposite direction. DeVos is doing all she can to prop up the corrupt for-profit college industry and to lift all regulatory constraints against the for-profit institutions.  In my view, the best way to deal with the for-profit colleges is to cut off their federal funding and shut them down.

And I stridently disagree with Scott-Clayton's blithe call to promote income-contingent repayment plans. Most of the people in those plans are not making monthly payments large enough to service accruing interest.  At the end of their 20- or 25-year repayment plans, many will owe more than they borrowed.

Moreover, although people who complete long-term repayment plans will have any remaining debt forgiven, the amount of the forgiven debt will be taxable to them.

I suspect the Brookings Institution is advancing a hidden agenda with its reports on the student-loan crisis. Brookings wants the public to focus on minority students and the for-profit colleges while ignoring the fact that debt levels are rising across all sectors of higher education and injuring millions of student borrowers--not just students of color.

Let's face facts. The for-profit colleges are not the only institutions ripping off their students. The Ivy League schools are exploiting students as well. And with each passing day, the crisis gets worser and worser.

References

Adam Looney and Constantine Yannelis. A crisis in student loans? How changes in the characteristics of borrowers and the institutions they attended contribute to rising loan defaults. Brookings Papers on Economic Activity, 2015.

Judith Scott-Clayton. The looming student loan default crisis is worse than we thought. Brooking Institution, January 11, 2018.

Alan and Catherine Murray are Poster Children for the Student Loan Crisis: Income-Driven Repayment Plans for Distressed Student-Loan Debtors are Insane

In a recent post, I wrote about Alan and Catherine Murray, who won a partial discharge of their student-loan debt in a bankruptcy case decided in December 2016.  Educational Credit Management (ECMC), the creditor in their case, is appealing the decision. We should all hope ECMC loses the appeal, because the Murrays are the poster children for the student-loan crisis.

Alan and Catherine Murray: Poster Children for the Student-Loan Crisis

Alan and Catherine Murray, a married couple in their late forties, took out 31 federal student loans to get bachelor's degrees and master's degrees in the early 1990s. In all, they borrowed about $77,000, not an unreasonable amount, given the fact that they used the loans to get a total of four degrees.

In 1996, the Murrays consolidated all those loans, a sensible thing to do; and they began making payments on the consolidated loans at 9 percent interest.  Over the years they made payments totally $58,000--or 70 percent of what they borrowed.

Nevertheless, during some periods, the Murrays obtained economic hardship deferments on their loans, which allowed them to skip some payments. Interest continued to accrue, however; and by 2014, when the Murrays filed for bankruptcy, their $77,000 debt had ballooned to $311,000!

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

 Educational Credit Management Corporation (ECMC), the Murrays' student-loan creditor, appealed Judge Somers' ruling. The Murrays should have been placed in an income-driven repayment plan (IDR), ECMC argued, which would have required them to pay about $1,000 a month for a period of 20 years.

Obviously, ECMC's argument is insane. As Judge Somers pointed out, interest was accruing on the Murrays' debt at the rate of almost $2,000 a month. Thus ECMC's proposed payment schedule would have resulted in the Murrays' debt growing by a thousand dollars a month even if they faithfully made their loan payments. By the end of their 20-year payment term, their total debt would have grown to at least two thirds of a million dollars.

The Murrays' case is not atypical: Billions of dollars in student loans are negatively amortizing

You might think the Murray case is an anomaly, but it is not. Millions of people took out student loans, made payments in good faith, and wound up owing two, three, or even four times what they borrowed. In other words, millions of student loans are negatively amortizing--they are growing larger, not smaller, during the repayment period.

For example, Brenda Butler, whose bankruptcy case was decided last year, borrowed $14,000 to get a bachelor's degree in English from Chapman University, which she obtained in 1995. Like the Murrays, she made good faith efforts to pay off her loans, but she was unemployed from time to time and could not always make her loan payments.

By the time Butler filed for bankruptcy in 2014, her debt had doubled to $32,000, even though she had made payments totally $15,000--a little more than the amount she borrowed.

Unfortunately for Ms. Butler, her bankruptcy judge was not as compassionate as the Murrays' judge. The judge ruled that Butler should stay on a 25-year repayment plant, which would terminate in 2037, 42 years after she graduated from Chapman University.

Here is sad reality. Millions of people are seeing their total student-loan indebtedness go up--not down--after they begin repayment. According to the Brookings Institution,  more than half of the 2012 cohort of student-loan borrowers saw their total indebtedness go up two years after beginning the repayment phase.  Among students who attended for-profit colleges, three out of four saw their loan balances grow larger two years into repayment.

An analysis by Inside Higher Ed concluded that less that half of college borrowers (47 percent) had made any progress on paying off their student loans 5 years into repayment. In the for-profit sector, only about a third (35 percent) had paid anything down on their student loans  over a 5-year period.

And the Wall Street Journal reported recently that half the students at more than a thousand colleges and schools had not reduced their loan balances by one dime seven years after their repayment obligations began.

The Federal Student Loan Program is a Train Wreck

Awhile back, Senator Elizabeth Warren accused the federal government of making "obscene" profits on student loans because the interest rates were higher than the government's cost of borrowing money. Warren's charge might have been true if people were paying back their loans, but they are not.

Eight million people are in default and millions more are seeing their student-loan balances grow larger with each passing month.  The Murrays are the poster children for this tragedy because they handled their loans in good faith and still wound up owing four times what they borrowed.

In short, the federal student loan program is a train wreck. Judge Somers' solution for the Murrays was to wipe out the accrued interest on their debt and to simply require them to pay back the principle. This is the only sensible way to deal with the massive problem of negative amortization.

References

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

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

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 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 rates. Washington, DC: Brookings Institution (2015).

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.

Susan Dynarski's Fix for the Student Loan Crisis: Simplistic, Dangerous, and Ineffective

Susan Dynarski published an essay recently in the Business section of the Sunday Times with the provocative title of "America Can Fix Its Student Loan Crisis. Ask Australia." Her prescription is simplistic, dangerous, and ineffective.

Essentially, Dynarski recommends putting American student borrowers into income-based, long-term repayment plans. She doesn't say how long, but she wrote approvingly of the English system--which, she attests, gives students 30 years to pay off their loans.

She also recommends putting student borrowers into a payroll withholding system whereby
debtors have their monthly loan payments deducted from their paychecks based on a percentage of their income.  When borrowers' incomes go up, their payments would be larger; if their incomes go down, their payments would be reduced as well.

Dynarski's proposal is very close to what the Obama administration is already doing--pushing millions of student borrowers into income-based repayment plans that stretch out over 20 or 25 years.

Dynarski says long-term student-loan repayment plans make sense because college graduates benefit from their college experience over their entire lives. "A core principle of finance is that the length of debt payments should align with the life of the asset," she writes didactically. "We pay for cars over five years and homes over 30 years because homes last a lot longer than cars." Likewise, Dynarski reasons, "[a]n education pays off over a lifetime, so it makes sense that student loans should be paid off over a long term."

Dynarski urges the United States to follow the example of those savvy Europeans, who give students longer to pay off their student loans than we do here in the U.S. "All the international student loan experts I have spoken with are shocked by how little time American students are given to pay off their student loans," she informs us. Shocked!

Simplistic

Dynarski's simplistic proposal is based on erroneous premises.  First of all, contrary to Dynarski's view, many student borrowers do not have college experiences that benefit them over a lifetime. Students who borrow to attend for-profit colleges and have substandard experiences don't receive a lifetime of benefits. Perhaps that is why almost half of a recent cohort of students  who attended for-profit colleges defaulted within five years. People who drop out of college before graduating don't receive a lifetime of benefits either, although they may acquire a lifetime of debt.

And many people who borrow money to obtain liberal arts degrees are not receiving much benefit. I for one received almost no benefit from the sociology degree I obtained from Oklahoma State University many years ago. But at least I didn't borrow money to pay for it.

People who borrow $100,000 or more to get degrees in sociology, history, women's studies, religious studies, etc. generally are paying far more than their degrees are worth.  In fact, 45 percent of recent graduates take jobs that don't even require a college degree.  And in the workplace as a whole, about a third of college graduates are in jobs that don't require a college education.

Moreover, Dynarski's comparison between American college financing and Europe is not very useful. As she herself points out, higher education in many European countries is free, and most European countries have a bigger social safety net for their citizens than the U.S. does. It is one thing to pay on student loans for 20 years if health care is free and an old-age pension is assured. It is quite another thing for people to pay on their student loans over a majority of their working lives while saving for retirement and paying for health insurance.

Ineffective

If we think about Dynarski's proposal for just a few moments, we can see how ineffective it is for solving the student loan crisis. American higher education is the most expensive in the world, and stretching out students' loan repayments for 25 or 30 years will do nothing to get those costs under control. In fact, the reason so many higher education insiders favor long-term income-based repayment plans is because it enables them to continue jacking up tuition prices.

And Dynarski's plan takes no account of accruing interest.  Borrowers who make small monthly loan payments due to their low salaries won't be paying off interest as it accrues. Most Americans who enter these plans will never pay off their loan balances even if they faithfully make their monthly loan payments for 300 consecutive months.  Isn't it also a core principle of finance that people should actually pay off their loans?

Dangerous

Finally, Dynarkski's proposal is simply dangerous to the long-term well being of Americans who go to college.  Basically, she is proposing a special tax that everyone who borrows to attend college must pay over the majority of their working lives. Student loan payments will just be another deduction from people's paychecks--like federal income tax withholding and Social Security contributions.

Essentially, Dynarski is proposing a modern-day sharecropper system very much like the one that prevailed in the American South prior to World War II. The sharecropper system of the 1930s required tenant farmers to pay a portion of their crops to Southern plantation owners; the modern system forces college students to pay a portion of their future wages to the government over a majority of their working lives.

Both sharecropper systems are unjust: and Dynarski, by pitching the new sharecropper system in the Business section of the  New York Times, has become an apologist for exploitation.

References

Mathew Boesler. More College Grads Finding Work, But Not in the Best Jobs. Bloomberg.com, April 7, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-04-07/more-college-grads-finding-work-but-not-in-the-best-jobs

Susan Dynarski. American Can Fix Its Student Loan Crisis. Ask Australia. New York Times, July 10, 2016. Business  Section, p. 6.

The Labor Market for Recent College Graduates. Federal Reserve Bank of New York, 2016. Accessible at https://www.newyorkfed.org/research/college-labor-market/index.html

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 rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Student-Loan Default Rates Go Down As Enrollment in Income-Driven Repayment Plans Goes Up:" It Hurts So Much To Face Reality"

Earlier in the week, the Department of Education issued a press release that contains good news about the student loan program. Or does it?

DOE reported that enrollment is increasing in the Department's various income-driven repayment plans (IDRs), including PAYE, REPAYS and six other income-based student loan repayment programs.  About 5 million are now enrolled in IDRs, up 117 percent from March of 2014.

At the same time, student-loan hardship deferments, loan delinquencies, and new defaults are going down.  According to DOE:

As of March 31, 2016, about 350,000 [Direct Loan] recipients were deferring their payments due to unemployment or economic hardship, a 28.6 percent decrease from the prior year. In that same time period, there was a 36.6 percent decrease in the number of FFEL recipients in a deferment status due to unemployment or economic hardship.

DOE also reported that delinquency rates are down 10.6 percent from last year, and student-loan default rates are also down.

Is this good news? Yes and no.

Obviously, a trend toward fewer economic-hardship deferments, fewer student-loan defaults, and fewer lower delinquencies is a good thing. It is especially heartening to see a decline in the number of people who have loans in deferment, because these people see their loan balances go up due to accruing interest during the time they aren't making loan payments.

But this good news comes at a cost. DOE's report is a clear indication that more and more people are signing up for long-term income-based repayment plans that stretch out their repayment period for as long as 20 to 25 years.  According to DOE, five million people are in IDRs now, and DOE hopes to enroll 2 million more by the end of 2017. Clearly, long-term repayment plans has become DOE's number one strategy for dealing with rising student-debt loads.

What's wrong with IDRs? Four things.

Growing Loan Balances. First, as I have said many times, most people in IDRs are making payments based on a percentage of their income, not the amount of their debt; and most people's payments are not large enough to cover accruing interest on their loan balances. Thus, for almost everyone in a 20- or a 25-year repayment plan, loan balances are going up, not down.

This was starkly illustrated by a recent Brookings Institution report. According to a paper published for Brookings by Looney and Yannelis, a majority of borrowers (57 percent) saw their loan balances go up two years after beginning the repayment period on their loans. For students who borrowed to attend for-profit instiutions, almost three out of four (74 percent) saw their loan balances grow two years after entering the repayment phase

Reduced Incentives for Colleges to Rein in Tuition Costs.  As more and more borrowers elect to join IDRs, the colleges know that tuition prices becomes less important to students.Whether students borrow $25,000 to attend college or $50,000, their payment will be the same.

In fact, some IDRs actually may act as an inverse incentive for students to obtain more postsecondary education than they need.  I have several doctoral students who are collecting multiple graduate degrees. I suspect they are enrolled in the 10-year public-service loan forgiveness plan, the government's most generous IDR. Since monthly loan payments are based on income and not the amount borrowed, I think some people have figured out that it makes economic sense to prolong their studies.

Psychological Costs of Long-Term Repayment Plans. Third, there are psychological costs when people sign up for repayment plans that can stretch over a quarter of a century, a cost that some bankruptcy courts have noted. And these psychological costs are undoubtedly higher for people who sign up for IDRs in mid-life. Brenda Butler, for example, who lost her adversary proceeding in January of this year, signed up for a 25-year income-based repayment plan when she was in her early 40s, after struggling to pay back her student loans for 20 years. As the court noted in Butler's case, her loan obligations will cease in 2037--42 years after she graduated from college. That's got to be depressing.

A Drag on Consumer Spending. Finally, people who are making loan payments for 20 years have less disposable income to buy a home or a car, to marry, to have children, and to save for their retirement.  In fact, in the Abney case decided in late 2015, a bankruptcy court in Missouri rejected DOE's argument that a 44-year old truck driver should enter a long-term repayment plan to service loans he took out years ago for a college education he never completed.

As the court pointed out, Mr. Abney was a truck driver who was not likely to see his income increase markedly. Forcing him into a long-term repayment plan would diminish his ability to save for retirement or even to buy a car.

"It Hurts So Much To Face Reality"

As Robert Duvall sang in the movie Tender Mercies (the best contemporary western movie of all time), "it hurts so much to face reality."

Without a doubt, DOE is refusing to face reality by huckstering college-loan debtors into long-term student-loan repayment plans. DOE has adopted this strategy to keep student-loan defaults down, but IDRs do not relieve the burden of indebtendess for millions of student borrowers. Lowering monthly loan payments by stretching out the repayent period makes rising tuition more palatable, but it does nothing to check the rising cost of a college education--which has spun out of control.

In short, IDRs are creating a modern class of sharecroppers, whereby millions of people pay a percentage of their incomes over the majority of their working lives for the privilege of getting a crummy education from a college or university that has no incentive to keep tuition costs within the bounds of reason.

"It hurts so much to face reality."

References

Abney v. U.S. Department of Education, 540 B.R. 681 (W.D. Mo. 2015).

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 rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

U.S. Department of Education, Education Department Announces New Data Showing FAFSA Completion by District, State. Press release, June 16, 2016. Accessible at http://www.ed.gov/news/press-releases/education-department-announces-new-data-showing-fafsa-completion-district-state

NY Times Urges "Speedy Help for Victims of College Fraud," but the Times Does Not Go Nearly Far Enough

Let's give the New York Times credit: it is on the right side of the argument regarding the federal student loan program. The Times editorializes repeatedly about the plight of people who cannot pay back their college loans. The newspaper has published several fine news articles about individuals who are overwhelmed by student-loan debt. And again and again, the Times editorial writers demand action by the federal government to bring relief to desperate student-loan borrowers.

Unfortunately, the Times does not grasp this simple fact: True relief for student-loan debtors will require radical action, far more radical than the Times is willing to contemplate.

Last Sunday, a Times editorial addressed the issue of fraud in the for-profit college sector. As the Times pointed out, "The federal government's decades-long failure to curb predatory behavior in the for-profit college industry has left untold numbers of Americans with crushing debt while providing useless degrees--or no degrees at all--in return."

The Times then went on to praise the Obama administration for creating new oversight rules for the  for-profit college industry. And the Times expressed approval of the Department of Education's decision to forgive the student-loan indebtedness of some individuals who attended Corinthian Colleges (about 3,000 people so far).

But, as the Times pointed out, DOE has yet to grant relief  to any of the 4,000 people who claim they were defrauded by Corinthian and have asked to have their student-loans forgiven.

The Times expressed the fear that DOE's "legendary bureaucracy will drag its feet and make it difficult for deserving plaintiffs to get relief." And the Times ended its rather tepid editorial by stating vaguely that "the department needs to do a much better job of reaching out to people who have potential [fraud] claims."

The Times editorial is on the right track; obviously DOE needs to speed up the process of reviewing fraud claims by students who attended for-profit colleges. But I don't think the Times recognizes the enormity of the student-loan problem in the for-profit college sector.

A recent study by the Brookings Institution reported that there are almost 1.2 million people who attended the University of Phoenix who have more than $35 billion in outstanding student loans.  According to the Brookings study, 45 percent of a recent cohort of former University of Phoenix students defaulted on their loans within five years.

More alarmingly, for the for-profit sector as a whole, nearly three quarters of students who attended for-profit schools  (74 percent) owed more than they originally borrowed two years after beginning repayment (for the 2009 cohort).  And nearly half the students who attended for-profit schools (47 percent) defaulted within five years of beginning repayment.

And Brookings default data did not take into account the fact that many former students have obtained economic-hardship deferments and are not making their student-loan payments. Those people are not counted as defaulters even though they are not paying down their loans.

For-profit colleges are encouraging their former students to  sign up for economic-hardship deferments as a strategy for keeping their institutional default rates down. Tragically, most of the people who obtain economic-hardship deferments receive only phantom relief because the interest continues to accrue on their unpaid debt. When those economic-hardship deferments come to an end, the people who held them will find that the principal of their loans went up during the deferment period.

IN SHORT, IT IS INDISPUTABLE THAT HALF OF THE PEOPLE WHO TOOK OUT STUDENT LOANS TO ATTEND FOR-PROFIT COLLEGES WILL DEFAULT AT SOME POINT IN THE LOAN REPAYMENT PERIOD. In other words, about half of the federal student-aid money flowing into for-profit colleges will never  be paid back.

If the Times grasped the magnitude of the student-loan crisis in the for-profit college sector it would surely recommend more aggressive action by the Feds.  What is needed is not a more streamlined fraud review process (as the Times recommended), but something close to blanket amnesty for at least half of the people who borrowed money to attend for-profit colleges.

Put another way, DOE needs to craft a secular version of Pope Francis's "Year of Mercy," whereby millions of people who attended for-profit colleges can have their loans forgiven with little or no red tape.

Obviously some case-by-case review needs to occur to make sure student loans aren't forgiven for students who got good value from attending for-profit colleges and can afford to pay back their loans. But--based on the default rates--a majority of the people who attended for-profit colleges should have their loans forgiven.

What is the best process for sorting through this mess? Bankruptcy. Student-loan defaulters who attended for-profit institutions should have their loans forgiven by bankruptcy courts without the necessity of adversary hearings. If a bankruptcy court concludes that a student-loan debtor is insolvent, that person's loans should be forgiven unless the government can show fraud or bad faith.

But the burden should be on the government to show that an insolvent student-loan debtor who attended a for-profit college is not entitled to bankruptcy relief--not on the debtor.

Obviously, I have painted an ugly picture: massive student-loan forgiveness and default on billions and billions of dollars in student-loan debt. But most of the defaulters who attended for-profit colleges will never pay their loans back,  whether or not their loans are forgiven.

It is time to wipe the slate clean. The for-profit college industry should be shut down and the people who were injured by it deserve a fresh start.  We can take action now or we can take action later. But eventually, the federal government will have to face facts: the for-profit colleges are a rogue industry and have ruined the economic prospects of millions of people.

References

Kelly Field, "U.S. Has Forgiven Loans of More Than 3,000 Ex-Corinthian Students, Chronicle of Higher Education, September 3, 2015. Accessible at: http://chronicle.com/article/US-Has-Forgiven-Loans-of/232855/?cid=pm&utm_source=pm&utm_medium=en

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 rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Tamar Lewin, "Government to Forgive Student Loans at Corinthian Colleges," New York Times, June 8, 2015. Accessible at: http://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-college-students.html?_r=0

Speedy Help for Victims of College Fraud. New York Times, September 27, 2015, Times Review Section, p. 10.

The deluge is upon us: University of Phoenix students owe the taxpayers $35 billion; and 45 percent default within five years

Earlier this month, the Brookings Institution published a report on student-loan default rates; and some of its findings are truly shocking.  The report ranked institutions based on their students' total accumulated outstanding loans. University of Phoenix, a for-profit college company, ranked number 1; almost 1.2 million University of Phoenix students have racked up more than $35 billion in outstanding student-loan obligations.

And ponder this: 45 percent of the students in the University of Phoenix's 2009 cohort defaulted on their student loans within five years  (Looney & Yannelis, 2015, table 5).

Brookings' researchers also reported that about three quarters of students (74 percent) who attended for-profit schools owed more than they originally borrowed two years after beginning repayment (for the 2009 cohort).  And nearly half of students who attended for-profit schools (47 percent) defaulted within five years of beginning repayment.

These are astonishing figures. And when we consider that a lot of former students who attended for-profit schools are enrolled in economic-hardship deferment programs and are not making loan payments, this sobering fact seems indisputable: more than half of the people who borrow money to attend for-profit colleges eventually default on their loans.

The Brookings Institution argues that the nation's high student-loan default rate can mostly be attributed to students who are "non-traditional borrowers," which it defines as students who attended for-profit colleges or two-year schools. Among all students who began repayment on their loans in 2011 and defaulted by 2013, 70 percent were nontraditional borrowers.

Loaning money for students to attend for-profit schools is irresponsible.

Based on these numbers, even a child can conclude that the federal government should not be loaning money to students who enroll in for-profit programs because taxpayers are going to get less than half of it back.  And--what is far worse--a lot of minority students and students from disadvantaged backgrounds will have student-loan debt hanging around their necks for the rest of their lives.  For these students, attending a for-profit school did not improve their lives; attending a for-profit school made their lives worse. 

Arne Duncan's Department of Education knows that the for-profit college sector is out of control, and it is made some efforts to provide student-loan debtors a little relief. For example, DOE granted loan forgiveness to about 3,000 students who attended one of Corinthian Colleges' campuses after Corinthian went bankrupt earlier this year. But there are more than 300,000 former Corinthian students.

Reasonable bankruptcy relief is the only humane remedy for non-profit students who default on their loans.

I do not think Congress or the Department of Education will ever shut off the federal-loan spigot to the for-profit colleges. This industry has protected itself with lobbyists, attorneys, and strategic campaign contributions.  Year after year, misguided students will continue to enroll at for-profit schools, and at least half will eventually default.

But  in the name of common decency, can't we at least give student-loan defaulters, who are suffering by the millions, some effective relief?  Do we have to make it so difficult for student-loan defaulters to file for bankruptcy and get a fresh start? Do we really want to force them into 25-year repayment plans, basically turning them into economic serfs for the balance of their working lives?

References

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 rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults