A little good news: COVID Relief Act includes tax relief for student debtors whose loans are forgiven

 A little good news. The COVID relief bill that Congress passed a few days ago includes modest tax relief for student debtors whose college loans are forgiven.  

Senators Bob Mendez and Elizabeth Warren introduced the Student Loan Tax Relief Act in the U.S. Senate as a provision of the $1.9 trillion COVID relief legislation. 

Thanks to the passage of the Mendez-Warren bill, student debtors who complete income-driven repayment plans (IDRs) and have their college loans forgiven will not get a tax bill.

In most circumstances, the Internal Revenue Service considers a forgiven debt to be taxable income. Until the Mendez-Warren bill became law, this was a problem for student debtors in IDRs.

Indeed, most college-loan debtors in IDRs will have substantial loan balances when they finish making monthly payments under a 25-year IDR because their payments weren't large enough to cover accruing interest.  

The U.S. Department forgives the remaining student-loan debt for individuals who complete IDRs, but the IRS has treated the forgiven debt as taxable income.  Under the terms of the Mendez-Warren bill, that forgiven debt is no longer taxable.

This is a good development, but the Student Loan Tax Relief Act offers is only a modest reform. 

First of all, the IRS does not tax forgiven debt if the debtor is insolvent when the debt is forgiven. Since most student debtors who complete 25-year IDRs will be insolvent, their forgiven debt would not have been taxable even before the Mendez-Warren bill became law.

Second, for reasons I do not understand, the tax-relief measure expires on January 1, 2026.  After that date, forgiven debt will again be treated as income by the IRS.

Third, as the National Consumer Law Center reported earlier this month, only 32 people who completed IDRs have had their loan forgiven. If this low IDR-completion rate continues, the Mendez-Warren measure will impact very few people.

In short, the Mendez-Warren legislation is a welcome development but is no reason for student debtors to start popping the champagne corks. Save the champagne for the day Congress repeals the undue-hardship language in the Bankruptcy Code and allows distressed student debtors to discharge their student loans in bankruptcy.

Don't pop the champagne corks over the Student Loan Tax Relief Act.

Betsy DeVos sued for seizing student borrowers' paychecks in violation of the CARES Act: "We don't care. We don't have to."

Betsy DeVos, President Trump's Education Secretary, doesn't just think she's above the law. She IS above the law.

A few days ago, the National Consumer Law Center filed a class-action suit against Betsy DeVos and the U.S. Department of Education asking a federal judge to stop DeVos and DOE from garnishing student borrowers' paycheck in violation of the CARES Act.

Congress passed the CARES Act, you may recall, in response to the coronavirus pandemic, and the law explicitly put a temporary moratorium on collection efforts against student debtors who are in default.

According to the NCLC, the Department of Education, either directly or indirectly, kept on garnishing paychecks in defiance of federal law.  Elizabeth Barber, the lead plaintiff, makes $12.89 per hour working as a home health care aide. She says DOE garnished her paycheck, even though the CARES Act gave her a six-month reprieve from making student-loan payments.

This isn't the first time DeVos and her DOE cowboys have been accused of ignoring the law. Just last fall, Judge Sallie Kim held DeVos and the Department of Education in contempt for failing to stop collection efforts against student borrowers who had attended one of the Corinthian Colleges.  Judge Kim had enjoined DOE from trying to collect from those students, but the agency did not abide by her order. Judge Kim fined DOE $100,000 for its wrongful collection efforts.

DeVos reminds me of Ernestine, Lily Thomlin's telephone-operator character in those Saturday Night Life sketches from the 1970s.  When people complained about their telephone service, Ernestine's response was, "We don't care. We don't have to. We're the phone company."

Betsy DeVos apparently doesn't care about downtrodden student-loan debtors. When participants in the Public Service Loan Forgiveness Program applied for student-debt relief, her agency denied 99 percent of the applications.

And now, NCLC says, DeVos and DOE have violated the CARES Act, continuing to collect on student-loan defaulters in open violation of a law that Congress passed less than two months ago.

I don't get it. DeVos is either astonishingly incompetent, or she just doesn't give a damn.

We don't care. We don't have to. We're the Department of Education.

National Consumer Law Center Report on Sallie Mae: Good Recommendations But They Don't Go Far Enough

The National Consumer Law Center (NCLC) published a report this week on Sallie Mae, the nation's largest lender of private student loans and a major servicer of federal student loans.  The report documents a long history of poor performance and allegations of wrong-doing. As documented by NCLC, Sallie  Mae was under investigation by both the Consumer Financial Protection Bureau and the Justice Department during 2013.

NCLC has produced a very useful and interesting report--but like most reports on the student-loan industry, it does not go far enough with its reform recommendations. In this blog, I will briefly summarize the NCLC  report and give my own recommendations for reform.

Sallie Mae: A Summary of the NCLC Report

The Student Loan Marketing Association--commonly called "Sallie Mae"--began as a government-sponsored enterprise during the Nixon administration. Today it is a publicly traded corporation involved in nearly every aspect of the student loan business.

Sallie Mae is incredibly profitable.  According to NCLC, it enjoyed a return of 30 percent on equity in 2006, and its income nearly tripled between 2010 and 2013. As of September 30, 2011, it has received almost $100 million from the federal government for servicing federal loans.

Sallie Mae's CEO, Albert Lord, received more than $200 million in compensation between 1999 and 2004 (NCLC Report, p.2).  According to Salary.com, Mr. Lord made more than $7 million in total compensation in fiscal year 2012.

Albert Lord, CEO of Sallie Mae
photo credit: Sallie Mae

How does Sallie Mae make its money? Besides servicing federal student loans, it lends money to student borrowers at high interest rates--often much higher than the rates charged under the federal student loan program.

In NCLC's view, Sallie Mae's activities are often not in the interest of student-loan borrowers.  Its private student-loan business offers loans at higher interest rates than loans offered through the federal student loan program and these loans do not provide options for forbearance and long-term repayment that are available to students who borrow from the federal program. Default rates are high for Sallie Mae's "nontraditional" loan, including loans made to students with poor credit ratings who attend for-profit schools.

NCLC also criticizes Sallie Mae's work as a servicer of federal student loans.  According to  NCLC,  Sallie Mae often encourages students who are delinquent on their loans to apply for forbearances instead of steering them into income-based repayment plans, which might be in the students' best interest.  Students who receive forbearnces on their loans are excused from making payments but interest accrues on the loan balance, making them more difficult to pay off.

NCC's Recommendations for Reform

NCLC recommends better oversight of Sallie Mae's activities and urges the government to hold Sallie Mae and other private loan servicers accountable for poor performance and legal violations.  Who can disagree?

NCLC also recommends the creation of a "safety net" for distressed student borrowers who took out private student loans, "including bankruptcy discharge rights and cancellation rights for fraud victims." Again, who could disagree?

My Own Belief: The Private Student-Loan Business Should Be Shut Down

NCLC's recommendations are reasonable, but they don't go far enough. In my view, the federal student loan program should be the exclusive provider of college loans.  In other words, the feds should shut down the private student-loan business completely.

Certainly, Sallie Mae and the major corporate banks should not be offering college loans to students at high interest rates and with inadequate consumer protections--loans which are almost impossible to discharge in bankruptcy. It is outrageous that Congress amended the Bankruptcy Code in 2005 to make private student loans nondischargeable in bankruptcy absent a showing of "undue hardship."

Even the banks themselves have come to realize that the their private student-loan activity is dirty business.  The banks have reduced their student-loan business from $22 billion in loans in 2008 to only $6.4 billion n 2012.  And JP Morgan Chase recently announced recently that it is getting out of the private student-loan business altogether.

All Congress needs to do to shut down the private student-loan industry is to repeal its 2005 Bankruptcy Code amendment and allow distressed student-loan borrowers to discharge their private student loans in bankruptcy just like any other unsecured loan.  That one reform would cause the banks to voluntarily stop offering private student loans.

Why won't Congress enact this one simple reform? Perhaps it is because Sallie Mae, the banks and the for-profit college industry pay powerful lobbyists to discourage Congress from cleaning up the giant mess that the student-loan business has become--both the federal student loan program and the private student-loan industry.  As NCLC pointed out, Sallie Mae paid lobbyists more than $22 million between 2007 and 2013 to protect its interests.

The Feds Should Not Be Paying Private Firms to Manage the Federal Student Loan Program

In addition, the Feds should stop paying private companies to service federal student loans and act as loan collection agencies.  The government now has $1 trillion in outstanding student loans and 39 million borrowers in repayment status.  It is time the government itself takes over the management of this huge portfolio of debt instead of outsourcing loan management to Sallie Mae and other private entities who act in their own private interest and not the interest of student borrowers.

References

Albert L. Lord executive compensation. Salary.com. Accessible at: http://www1.salary.com/Albert-L-Lord-Salary-Bonus-Stock-Options-for-SLM-CORP.html

JP Morgan Chase to stop making student loans. USA Today, September 5, 2013. Accessible at:
http://www.usatoday.com/story/money/personalfinance/2013/09/05/jpmorgan-chase-student-loans/2772509/

Deanne Loonin. The Sallie Mae Saga: A Governmet-Created, Student Debt Fueled Profit Machine. National Consumer Law Center, January 2014.