Let's admit it: Bernie Sanders' "College for All Act" proposal has some good ideas

Bernie Sanders' "College For All Act" proposal: "That's not gonna happen."

In an old episode of The Walking Dead, an armed wacko asks Sheriff Rick if he and his buddies can join Rick's tribe of survivalists. "That's not gonna happen," Sheriff Rick rasps with his impeccable Georgia accent.  And then Rick shoots the wacko dead with his trademark service revolver.

Something similar might be said about Bernie Sanders' "College For All Act" proposal. That's not gonna happen. Nevertheless, Bernie has come up with some good ideas that are worth examining.

First, and most importantly, Bernie proposes free college tuition for Americans to attend 4-year public colleges or universities. That's a great idea and would actually cost Americans much less than we are spending now in federal student aid.

But, as I said in a previous blog posting, the for-profit college industry and the private non-profits are happy with the status quo and couldn't survive a week without federal financial aid. The only way Bernie's free tuition plan could work would be to shut down the present student-aid program, and that's not gonna happen. So Bernie's College For All Act is--as I said earlier--Dead On Arrival.

Bernie's college funding proposal has some other good ideas, however. Along with a lot of other responsible people, Bernie proposes a simplified Student Aid Application process. Last year, Senators Lamar Alexander and Michael Bennett proposed a FAFSA form that only has two questions.  Almost everyone agrees that the present Student Aid Application process is confusing and overly complicated, so we should listen to Bernie when he says the process should be simplified.

Bernie also proposes lower interest rates and an unlimited opportunity for students to refinance their student loans at lower interest rates. This is a great idea because, as a recent New York Times article made clear, it is the accruing interest on student loans, not the amount that students originally borrowed, that is crushing millions of student-loan debtors. The Times told the story of Liz Kelly, who borrowed about $25,000 to get an undergraduate degree and then borrowed more to go to graduate school. The total amount Kelly borrowed was less than $150,000, but she now owes $410,000 due to the interest that accrued while her loans were in forbearance or deferment.

Critics will say that lower interest rates and easy loan consolidation will cost taxpayers billions, which is true. But let's face it: The people whose loans have ballooned out of control due to accrued interest and fees will never pay the loans back anyway. Do you think Liz Kelly will ever pay off the $410,000 she now owes?

There is one huge caveat to Bernie's proposal to allow students to refinance their loans. There are now 41 million outstanding student-loan debtors, and many of them took out multiple loans. Allowing millions of borrowers to refinance their loans would create an administrative nightmare. In my opinion, it would make more sense to just forgive the interest on those loans or give overwhelmed debtors reasonable access to the bankruptcy courts.

But, as Sheriff Rick said to the armed wacko, "That's not gonna happen." Apparently, our national government would rather create a real-life class of The Walking Dead than take responsible action to give honest but unfortunate student-loan debtors some relief.

The Walking Dead: These folks will never pay off their student loans.

References

Lamar Alexander & Michael Bennett. An Answer on a Postcard. New York Times, June 19, 2014, p.  A25. Accessible at: http://mobile.nytimes.com/2014/06/19/opinion/simplifying-fafsa-will-get-more-kids-into-college.html?_r=0

Kevin Carey. (2015, November 29). Lend With a Smile, Collect With a Fist. New York Times, Sunday Business Section, 1. Accessible at: http://www.nytimes.com/2015/11/29/upshot/student-debt-in-america-lend-with-a-smile-collect-with-a-fist.html?_r=0

Let's face reality: The federal student loan program is not a problem; it is a catastrophe.

We reached those last days when we could endure neither our vices nor their remedies.

 

                                                                                    Titus Livy, on the decline of Rome

 

 

 

If Congress does not act, interest rates for the federal student loan program will rise to 6.8percent in July of this year. 

 

Last week, three Republican senators published an op ed essay in the New York Times suggesting what they think is a better way for setting student loan rates than the current system.  Senators Lamar Alexander, Tom Coburn and Richard Burr proposed that student-loan interest rates be set at the fluctuating 10-year Treasury rate plus 3 percent.

 

Keeping interest rates low for student loans is obviously a good thing for students. But let's face it, the student loan program is a catastrophe, and low interest rates for student loans won't fix this enormous problem.

 

First of all, although the federal government has never revealed the true default rate on student loans, evidence from many sources shows that it quite high. For students who attend for-profit institutions, the default rate over the lifetime of the repayment period is probably 40 to 50 percent.  Lowering interest rates is not likely to shrink the default rates--especially in the for-profit sector.

 

Second, income-based repayment plans, which are being pushed as a way to ease the burden on overstressed student-loan debtors, are making the default problem worse.  Lowering default rates will provide some marginal relief to former students in IBRPs, but it won't solve their underlying problem, which is that they borrowed more money than they can pay back.

Under an IBRP, students pay back their loans over a long period of time--20 to 25 years--based on a percentage of their income.  Any unpaid amount at the end of the repayment period is forgiven.

 

This may sound like a great idea, but this is the harsh reality:  A lot of student-loan debtors who participate in IBRPs, probably a majority of them, will never pay back their total loan obligations even if they make every loan payment on time.

Why? Because under an IBRP, the monthly loan payment will not be enough to cover accruing interest for many student-loan debtors. Thus, their debt will continue to grow even if they faithfully make their monthly payments.

 

A recent New York Times story illustrates this problem. The Times reported on a veterinary school graduate who borrowed $300,000 to attend a for-profit veterinary school in the Caribbean.  She obtained a job as a veterinarian--which is a good thing, and she is paying back her loans under an income-based repayment plan.

 

Unfortunately, her loan payments are not enough to pay back the accruing interest on her loans.  The New York Times estimated that the total amount of her debt will grow to $600,000 by the time her loan repayment obligations end even if she makes every payment on time!

 

Back when I was practicing law, my senior law partner told me I should admit my mistakes as soon as I realized I had made an error.  The longer I went without acknowledging my mistakes, my partner stressed, the bigger my problems would become. 

 

Over the years, I have found my former law partner's observation to be true 100 percent of the time.  The whole premise of the federal student loan program is flawed.  Over time it has grown into a $100 billion a year industry that has benefited colleges and universities but has hurt a lot of students. Total outstanding indebtedness is now over $1 trillion--making student loan debt the second biggest consumer-debt sector in  the American economy after home mortgages.

 

Fixing this mess won't be easy, and it will be painful.  But if we don't take drastic action, the federal student loan program (and the accompanying private student loan industry) will destroy American higher education. Indeed, it has already seriously undermined legal education.

 

What must we do? 

 

First, we must allow overstressed student-loan debtors reasonable access to the bankruptcy courts.  Let's face facts: most defaulting student-loan debtors are never going to pay back their loans, even if they are denied bankruptcy relief.  It would be far better both for debtors and the national economy if these unfortunate people were permitted to clear their debts in bankruptcy and go on with their lives.

 

Second, we must stop allowing for-profit colleges and universities to participate in the student loan program.  Even if all for-profit institutions were acting in good faith--and some of them are not--the default rate in this sector is simply too high to justify for-profit participation in the student loan program.

 

Furthermore, the U.S. has plenty of non-profit and public institutions to serve the needs of postsecondary students. In my opinion, postsecondary students would have plenty of good options for obtaining a college degree even if the University of Phoenix, Kaplan University and Capella University did not exist.

 

Finally, every college and university in the United States must be obligated to freeze tuition and fees at the current level as a condition of participating in the federal student loan program: and they must be further obligated to freeze salaries and benefits of their top executives.

 

President Obama, Congress, and the higher-education industry want to tinker with the student-loan problem, which is growing bigger every day. But lowering interest rates and encouraging students to go into income-based repayment programs will not fix this problem.  The solutions must be drastic, and they must be painful.

References

Lamar Alexander, Tom Coburn and Richard Burr. Playing Politics With Student Debt. New York Times, June 5, 2013, p. A21.

David Segal, High Debt and Falling Demand Trap Vets. New York Times, February 23, 2013, p. A1.