Showing posts with label PAYE. Show all posts
Showing posts with label PAYE. Show all posts

Thursday, November 9, 2017

Millions of Older Americans Are Delinquent On Their Loans: Long-Term Repayment Plans Will Make the Problem Worse

Several decades after obtaining their college degrees, millions of older Americans are still paying on their student loans. According to the Consumer Financial Protection Bureau, the percentage of student borrowers over 60 years of age who carry student-loan debt increased by 20 percent from 2012 to 2017.

Even more alarming is the rising number of older student borrowers who are delinquent on their student loans. In all but five states, delinquency rates among older student debtors went up over the last five years.

In California, for example, more than 300,000 people age 60 or older hold $11 billion in student-loan debt, and 15 percent of these borrowers are delinquent.

Delinquency rates for older borrowers vary substantially from state to state. In Georgia, Mississippi, Oklahoma, South Carolina, and West Virginia, one out of five student-borrowers age 60 or older are delinquent on their loan payments.

As the CFPB noted, these data show that an increasing number of older Americans are still shouldering student-loan debt at an age when most of them are living on fixed incomes.  And these data do not reflect the Department of Education’s recent campaign to recruit more and more college borrowers into income-based repayment plans that can stretch out for as long as 20 and even 25 years.

During Obama’s second term in office, the Department of Education rolled out two relatively generous income-driven repayment plans (IDRs): PAYE and REPAYE.  Both plans call for participants to pay 10 percent of their adjusted gross income on their student loans for a period of 20 years.

Most commentators have viewed these initiatives as a humane way to lower struggling borrowers’ monthly payments. But for many of the people in IDRS, probably most of them, the monthly payments don’t cover accruing interest. For these people, their IDRs cause their loan balances to go up even if they make regular monthly payments.  Thus, IDR participants will enter their retirement years with thousands of dollars in unpaid student-loan debt.

The CFPB report should be alarming to everyone. Already, we are seeing student borrowers enter their sixties with increasing levels of debt; and delinquency rates are climbing.

This is a crisis right now, but as the IDR participants reach retirement age, the crisis will grow worse. Indeed, it will be a calamity as millions of people try to service their student loans while surviving on Social Security checks and small pensions.

References

Older consumers and student loan debt vary by state. Consumer Financial Protection Bureau, August 2017.


Thursday, September 28, 2017

The Department of Education's Official 3-Year Student-Loan Default Rate is Baloney

During the First World War, it is said, the British military kept three sets of casualty figures: one set to deceive the public, a second set to deceive the War Ministry, and a third set to deceive itself.

Over the years, the Department of Education has released its annual 3-year student-loan default rate in the autumn, about the time the pumpkins ripen. And every year the default rate that DOE issues is nothing but bullshit. I can't think of another word that adequately conveys DOE's mendacity and fraud.

This year, DOE reported that 11.5 percent of the the 2014 cohort of debtors defaulted on their loans within three years and that only ten institutions had default rates so high that they can be kicked out of the federal student-loan program. That's right: among the thousands of schools and colleges that suck up student-aid money, only ten fell below DOE's minimum student-loan default standard.

Why do I say DOE's three-year default rate is fraudulent?

Economic hardship deferments disguise the fact that millions of people aren't making loan payments. First of all, DOE has given millions of student-loan borrowers economic-hardship deferments or forbearances that allow borrowers to skip their monthly loan payments.  These deferments can last for several years. 

But people who are given permission to skip payments get no relief from accruing interest. Almost all these people will see their loan balances grow during the time they aren't making payments. By the time their deferment status ends, their loan balances will be too large to ever pay back.

The colleges actively encourage their former students to apply for loan deferments in order to keep their institutional default rates down. And that strategy has worked brilliantly for them. Virtually all of the colleges and schools are in good standing with DOE in spite of the fact that more than half the former students at a thousand institutions have paid nothing down on their loans seven years after beginning repayment.

Second,  DOE's three-year default rate does not include people who default after three years.  Only around 11 percent of student borrowers default within three years, but 28 percent from a recent cohort defaulted within five years. In the for-profit sector, the five-year default rate for a recent cohort of borrowers was 47 percent--damn near half.

DOE's income-driven repayment plans are a shell game.  As DOE candidly admits, the Department has been able to keep its three-year default rates low partly through encouraging floundering student borrowers to sign up for income-driven repayment plans  (IDRs) that lower monthly loan payments but stretch out the repayment period to as long as a quarter of a century.

President Obama expanded the IDR options by introducing PAYE and REPAYE, repayment plans which allow borrowers to make payments equal to 10 percent of their discretionary income (income  above the poverty level) for 20 years.

But most people who sign up for IDRs are making monthly payments so low that their loan balances are growing year by year even if they faithfully make their monthly loan payments. By the time their repayment obligations cease, their loan balances may be double, triple, or even quadruple the amount the originally borrowed.

Alan and Catherine Murray, who obtained a partial discharge of their student-loan debt in bankruptcy in 2016, are a case in point. The Murrays borrowed $77,000 to obtain postsecondary education and paid back about 70 percent of that amount. But they ran into financial difficulties that forced them to obtain an economic hardship deferment on their loans.  And at some point they entered into an IDR.

Twenty years after finishing their studies, the Murrays' student-loan balance had quadrupled to $311,000!  Yet a bankruptcy court ruled that the Murrays had handled their student loans in good faith, and they had never defaulted.

DOE is engaged in accounting fraud. If the Department of Education were a private bank, its executives would go to jail for accounting fraud. (Or maybe not. Wells Fargo and Bank of America's CEOs aren't in prison yet.)  The best that can be said about DOE's annual announcement on three-year default rates is that the number DOE releases is absolutely meaningless.

This is what is really going on. More than half of the people in a recent cohort of borrowers have not paid down one penny of their student-loan debt five years into the repayment phase of their loans.  And the loan balances for these people are not stable. People who are not paying down the interest on their student loans are seeing their loan balances grow.

In short, DOE is operating a fraudulent student-loan program.  More than 44 million Americans are encumbered by student-loan  debt that totals $1.4 trillion.  At least half that amount--well over half a trillion dollars--will never be paid back.

Betsy DeVos' job is to keep the shell game going a little longer, which she is well qualified to do. After all, she is a beneficiary of Amway,  "a multi-level marketing company," which some critics have described as a pyramid scheme.

Betsy DeVos: The perfect person to oversee DOE's student-loan shell game

References

Paul Fain. Federal Loan Default Rates Rise. Insider Higher ED, September 28, 2017.

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

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall 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 ratesWashington, 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), aff'd, Case No. 16-2838 (D. Kan. September 22, 2017).

Joe Nocera. The Pyramid Scheme Problem, New York Times, September 15, 2015.







Friday, April 21, 2017

Income-Driven Repayment Plans for Managing Crushing Levels of Student-Loan Debt: Financial Suicide

By the end of his first term in office, President Obama knew the federal student loan program was out of control. Default rates were up and millions of student borrowers had put their loans into forbearance or deferment because they were unable to make their monthly payments. Then in 2013, early in Obama's second term, The Consumer Financial Protection Bureau issued a comprehensive report titled A Closer Look at the Trillion that sketched out the magnitude of the crisis.

What to do? President Obama chose to promote income-driven repayment plans (IDRs) to give borrowers short-term relief from oppressive monthly loan payments. Obama's Department of Education rolled out two generous income-driven repayment plans:  the PAYE program, which was announced in 2012;  and REPAYE, introduced in 2016.

PAYE and REPAYE both require borrowers to make monthly payments equal to 10 percent of their adjusted gross income for 20 years: 240 payments in all.  Borrowers who make regular payments but do not pay off their loans by the end of the repayment period will have their loans forgiven, but the cancelled debt is taxable to them as income.

The higher education industry loves PAYE and REPAYE, and what's not to like? Neither plan requires colleges and universities to keep their costs in line or operate more efficiently. Students will continue borrowing more and more money  to pay exorbitant tuition prices, but  monthly payments will be manageable because they will be spread out over 20 years rather than ten.

But most people enrolling in PAYE or REPAYE are signing their own financial death warrants. By shifting to long-term, income-driven repayment plans, they become indentured servants to the government, paying a percentage of their income for the majority of their working lives.

And, as illustrated in an ongoing bankruptcy action, a lot of people who sign up for IDRs will be stone broke on the date they make their final payment.

In Murray v. Educational Credit Management Corporation, a Kansas bankruptcy judge granted a partial discharge of student-loan debt to Alan and Catherine Murray.  The Murrays borrowed $77,000 to get bachelor's and master's degrees, and paid back 70 percent of what they borrowed.

Unfortunately, the Murrays were unable to make their monthly payments for a time, and they put their loans into deferment.  Interest accrued over the years, and by the time they filed for bankruptcy, their student-loan indebtedness had grown to $311,000--four times what they borrowed.

A bankruptcy judge concluded that the Murrays had handled their loans in good faith but would never pay back their enormous debt--debt which was growing at the rate of $2,000 a month due to accruing interest.  Thus, the judge discharged the interest on their debt, requiring them only to pay back the original amount they borrowed.

Educational Credit Management Corporation, the Murrays' student-loan creditor, argued unsuccessfully that the Murrays should be place in a 20- or 25-year income-driven repayment plan. The bankruptcy judge rejected ECMC's demand, pointing out that the Murrays would never pay back the amount they owed and would be faced with a huge tax bill 20 years from now when their loan balance would be forgiven.

ECMC appealed, arguing that the bankruptcy judge erred when he took tax consequences into account when he granted the Murrays a partial discharge of their student loans. Tax consequences are speculative, ECMC insisted; and in event, the Murrays would almost certainly be insolvent at the end of the 20-year repayment term, and therefore they would not have to pay taxes on the forgiven loan balance.

What an astonishing admission! ECMC basically conceded that the Murrays would be broke at the end of a 20-year repayment plan, when they would be in their late sixties.

So if you are a struggling student-loan borrower who is considering an IDR, the Murray case is a cautionary tale. If you elect this option, you almost certainly will never pay off your student loans because your monthly payments won't cover accumulating interest.

Thus at the end of your repayment period--20 or 25 years from now--one of two things will happen. Either you will be faced with a huge tax bill because the amount of your forgiven loan is considered income by the IRS; or--as ECMC disarmingly admitted in the Murray case--you will be broke.


References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.

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

Friday, September 16, 2016

Tax Consequences for Student-Loan Borrowers in Income-Based Repayment Plans: Insanity

The student loan crisis grows worse with each passing day. As the Wall Street Journal noted recently, total student-loan indebtedness is more than five times what it was just 20 years ago, and one out of four borrowers is behind on repayment or in default.

But American universities survive on federal student aid money; they are like addicts waiting on their next fix. Tuition rates continue to go up: Yale announced a tuition hike to nearly $50,000 a year!

The Obama administration knows the student loan program is out of control, but the only thing it can think of to do is roll out income-based repayment plans (IBRPs) that stretch borrowers' payments out for 20 or 25 years.  More than 5 million people are in these plans now, and the Department of Education wants 7 million in them by the end of next year. I think there will be 10 million people in these plans by the end of 2018.

IBRPs reduce borrowers' monthly payments because borrowers' payment terms are based on a percentage of their income--not the amount they borrowed. In Obama's latest two IBRP plans--PAYE and REPAYE--borrowers pay 10 percent of their adjusted gross income for 20 years.

But this is insanity. For most borrowers in PAYE and REPAYE, monthly payments are not large enough to cover accruing interest, and total indebtedness actually grows larger over the years as  accruing interest gets added to the amount that was originally borrowed.

It is true that borrowers who faithfully make loan payments for 20 years will have the remaining loan balance forgiven, but the amount of forgiven debt is considered taxable income by the IRS.  In fact, a Wall Street Journal article advised borrowers to start saving their money to pay the tax bill they will receive when they finish paying off their loans.

Alan Moore, a financial planner who was quoted n the WSJ, made this chilling observation: "If you don't save enough money for the tax bill, all you are accomplishing is swapping your student-loan debt for a debt to the IRS." Moore advised student-loan borrowers to open a segregated account to save for their eventual tax bill and not to invest that money too aggressively due to the risk of a bear market.

Higher Education insiders chant the mantra that people who get college degrees make more money than people who don't go to college. But that is not true for everyone. And that trite observation does not justify forcing millions of people into 20- and 25-year repayment plans that terminate with big tax bills that come due just about the time most Americans hope to retire.

References  

Anne Tergesen. Six Common Mistakes People Make With Their Student Loans. Wall Street Journal, September 12, 2016. Accessible at http://www.wsj.com/articles/six-common-mistakes-people-make-with-their-student-loans-1473645782

Yale Financial Aid Budget Will Meet Term Bill Increase. Yale News, March 9, 2016. Accessible at http://news.yale.edu/2016/03/09/yale-financial-aid-budget-will-meet-term-bill-increase

Thursday, August 11, 2016

The White House Council of Economic Advisers issues a feel good report on federal student loans: Ignoring reality

President Obama's Council of Economic Advisers reminds me of the French Army during the spring of 1940 as German panzer columns were streaming toward Paris. Although  the Germans had crossed the Meuse River and French troops were fleeing everywhere, General Alphonse Georges sent a message to General Maurice Gamelin that his soldiers were holding firm and fighting in the Marfée Woods. "We are calm here," Georges assured Gamelin.

In fact, French troops were not fighting in the Marfée Woods. They were south of the Woods in full retreat.

The Council of Economic Advisers report: Don't worry about debt--college is a good investment

Let's now take a look at a report issued last month by President Obama's Council of Economic Advisers. Titled Investing in Higher Education: Benefits, Challenges, and the State of Student Debt, the report basically repeats the old bromide that college is a good investment and that long-term income-based repayment plans are the smart way to deal with rising levels of student indebtedness.

Of course it is true that college graduates earn more over their lifetimes than people who only have a high school degree. But that does not mean that college is always a good investment. People who graduate from college may simply have more initiative and resources than people who do not graduate. As the CEA report admitted, "students who attend college may have been more skilled or more connected and thus would have earned more [than non-college completers] regardless."

At the very least, college graduates have the self-discipline necessary to sit through four years of boring college classes and listen to a lot of postmodernist bullshit. And that's the kind of self-discipline that can help a person obtain a relatively well paying job--whether or not that person has a college degree.

In my view, the CEA report's breezy reassurances about the value of a college degree glosses over a bleak reality, which is this:  Millions of Americans are suffering because they took out student loans to go to college and can't pay them back.

CEA report:  Cheerleader for long-term income-based repayment plans

Part of the CEA's 78-page report was devoted to singing the praises of long-term income-based repayment plans (IBRPs). About 5 million people are in these programs now, and CEA Chairman Jason Furman wants to shove more people into "these smarter repayment plans."

In my opinion, the CEA's discussion of IBRPs was utterly deceptive. First of all, the report described these plans based on the unstated assumption that most people who enter IBRPs will pay back the principal on their loans. But I don't think they will.

The report provided this unrealistic example of how the IBRP program works:  A 2008 college graduate who leaves college with $31,000 in debt and earns an income of $31,000 a year (the median income for a 2008 college graduate) will pay off the debt in 17 years, assuming typical income growth and a 2 percent inflation rate. (The COA's illustration appears in Figure 41 on page 63 of its report.)

But of course, a great many people signing up for IBRPs are not college completers who go into jobs that pay the median income for new college graduates. A lot of people in these plans are people who didn't complete college, weren't able to find well-paying jobs, or who entered IBRPs after struggling for many years to pay off their loans under standard 10-year plans. Brenda Butler, for example, whose bankruptcy case was decided this year, entered into an IBRP after trying unsuccessfully to pay off her loans for 20 years. As the court noted, she won't finish paying off her student loans until 2037--42 years after she graduated from college!

And although the CEA report touts the fact that people in IBRPS who are unemployed won't have to make any payments on their student loans during their period of unemployment, the report failed to mention that interest accrues during the time borrowers are not making payments.

In fact, the report made no mention of accruing interest for IBRP participants and no mention of the fact that many people who enter IBRPs after defaulting on their loans have loan balances far larger than the amount they borrowed due to accruing interest, penalties, and collection fees.

And the report made no mention of the tax consequences for people who complete IBRPs but fail to pay off their loan balances. The government forgives the unpaid debt for these people, but the amount of the forgiven debt is considered taxable income by the IRS.

Conclusion: The CEA says "We are calm here" while millions of student-loan debtors are suffering

It is now clear that the Obama administration's central strategy for dealing with the student-loan crisis is to push millions of people into PAYE, REPAYE and other long-term income-based repayment plans that stretch out people's loan payments over 20, 25 and even 30 years. The CEA's example for how such plans work does not portray a typical IBRP participant. Most people do not enter these plans immediately after graduating from college, they do not earn the median income for new college graduates, and their income trajectories are not typical.

Many IBRP participants are people who did not graduate from college, or who graduated from college but did not find a job that paid well enough to service their student loans. Many have defaulted and have seen their loan balances go up due to accruing interest and the fees and penalties that creditors stuck on to their loan balances.

In fact, I believe most people in IBRPs will never pay off their loan balances because their income-based payments are not large enough to cover accruing interest. Thus most people in these plans will be faced with big tax bills when they finish their payment terms because the amount of their forgiven debt is considered taxable income by the IRS.

Now I fully expect that tax regulations will eventually be amended so that forgiven loans will not be considered taxable income, but that doesn't change the fact that most people in IBRPs will never pay off their loans.

In short, the CEA, like General Georges during the Battle of France, is saying "We are calm here" while in fact the student loan program is collapsing.

French troops retreeating during the Battle of France:
"We are calm here."


References

Jason Furman. The Truth About Higher Education And Student LoansHuffingon Post, Jul 19, 2016. Accessible at: http://www.huffingtonpost.com/jason-furman/the-truth-about-higher-ed_b_11060192.html

Council on Economic Advisors. Investing in Higher Education: Benefits, Challenges, and The State of Student Debt. July 2016. accessible at https://www.whitehouse.gov/sites/default/files/page/files/20160718_cea_student_debt.pdf

Note: References to the Battle of France come from The Collaps of the Third Republic by William L. Shirer. The quotation from the message by General Alphonse Georges can be found on page 650.

Saturday, June 18, 2016

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.

Image result for tender mercies movie
"It hurts so much to face reality."

References

Abney v. U.S. Department of Education540 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 ratesWashington, 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

Wednesday, June 15, 2016

PAYE and REPAYE: Long-term student loan repayment plans are a bad option for older student-loan debtors

You can be young without money, but you can't be old without it.

Tennessee Williams

President Obama's Department of Education is pushing distressed student-loan debtors into long-term income-based repayment plans. Five million people are in them now, and DOE hopes to enroll two million more by the end of next year.  Without a doubt, DOE will reach this goal. In fact, I predict at least 10 million people will be enrolled in long-term repayment plans within four years.

To advance this goal, the Obama administration launched two new income-based repayment programs: PAYE and REPAYE. These are the most generous of the government's eight income-based repayment plans. PAYE and REPAYE allow debtors to make payments equal to ten percent of their adjusted gross income for 20 years. At the end of that time, any unpaid debt is forgiven, although debtors may be forced to pay federal income tax on the forgiven portion of their loans.

As I have argued repeatedly, long-term income-based repayment plans are nothing more than a cynical scheme to hide the magnitude of the student-loan crisis.  By lowering monthly payments, the Feds hope to keep the student-loan default rate down even though most people in these programs are making payments so low that they will never pay off their student loans.

Nevertheless, I understand why debtors are signing up for these plans. If they've had their loans in deferment for any considerable length of time, their loan balances will have ballooned to double the amount they borrowed or more because of accrued interest. Once that happens, they will never be able to pay off their student loans over the conventional 10--year repayment term.  In short, people with large loan balances and low-paying jobs have no choice--they are forced to enter 20- or 25-year repayment plans in order to avoid default.  

But long-term repayment plans are a terrible option for older student-loan debtors. People in their forties, fifties and sixties need to maximize their retirement savings in order to be able to retire with dignity; and most of them of them can't do that if they are making student-loan payments equal to  10 or 15 percent of their annual income.

In fact, the evidence is mounting that the baby boomer generation is not ready for retirement; and millions are facing dire poverty if they lose their jobs. A recent article in the Star Tribune reported that two thirds of households in the 55-64 age group have savings that equal less than their annual income and one third have no savings at all.

According to the National Institute on Retirement Security, the median retirement account savings among households in the 55-64 age range is only $14,500! Due to the recent recession and stagnant wages, millions of Americans have been forced to cash out their retirement accounts just to meet daily living expenses. More than 40 percent of Americans have elected to take Social Security benefits early in recent years because they need the cash, even though early participation reduces annual benefits by 25 percent.

Obviously, the last thing financially strapped Americans need as they grow older is a 20-year obligation to contribute a percentage of their income to pay off student loans.  Although long-term repayment plans can be defended for people who enroll in them when they are young, they are a disaster for people who sign up for PAYE or REPAYE or the six other income-based repayment plans when they are in their forties or even older.

But the government  and the student-loan creditors insist on pushing student-loan debtors into these plans regardless of their age.  For example, in the Halverson case, decided in 2009, Educational Credit Management Corporation argued that Steven Halverson should enter a 25-year income-based retirement plan even though he was 65 years old, had chronic health problems, and had an income of only about $13 an hour.  (Fortunately, a Minnesota bankruptcy judge was sympathetic to Mr. Halverson's plight and discharged his student-loan debt.)

And in the Stevenson case, a Massachusetts bankruptcy judge insisted that a woman in her fifties sign up for a long-term income-based repayment plan even though she had a record of homelessness and was living on only $1,000 a month.

Perhaps most famously, ECMC hounded Janet Roth through the courts all the way to the Ninth Circuit Bankruptcy Appellate Panel, heartlessly arguing that Roth should be on an income-based repayment plan to pay off more than $90,000 in student-loan debt even though she was 68 years old, had  chronic health problems and was living entirely off her Social Security income of $780 a month.

As a matter of public policy, the federal government simply must stop pressuring student-loan debtors who are in their forties or older into long-term repayment plans because this practice is making it impossible for these people to prepare for retirement.

We should occasionally remind ourselves why the federal student-loan program was inaugerated in the first place. The program's sole purpose is to enable people to get postsecondary education that will improve their lives.  

But for millions of Americans, the federal student-loan program has driven them to the brink of indigence. And if they are forced to make loan payments until they are in their sixties, their seventies, or their eighties, we will have created a class of elderly debtors who will spend their final years in poverty and want.  

In short, no one who is 40 years old or older should be forced into a 20- or 25-year student-loan repayment plan,  No one.  Older student-loan debtors who are otherwise eligible for bankruptcy relief should be able to shed their student-loan debt in the bankruptcy courts rather than be saddled with monthly student loan payments that will extend into their retirement years.


References

Bob Brenzing. AP Poll: Many take Social Security before full retirement, May 26, 2016.Fox News 17. Accessible at http://fox17online.com/2016/05/26/ap-poll-many-take-social-security-before-full-retirement/

 Michael Greenstone and Adam Looney. The Uncomfortable Truth About American Wages. Brooking Institution, October 23, 2012. Accessible at http://www.brookings.edu/research/opinions/2012/10/22-wages-greenstone-looney

Katy Read. The real story about retirement: Millions of baby boomers face financial crisis.  Star Tribune, Ocrober 21, 2015.  Accessible at http://www.startribune.com/the-real-story-about-retirement-millions-of-baby-boomers-face-financial-crisis/334718191/

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP  2013). 

Stevenson v. Educational Credit Management Corporation, 463 B.R. 586 (Bankr. D. Mass. 2011).

John F. Wasik. Social Security At 62? Let's Run the Numbers. New York Times, May 14, 2014. http://www.nytimes.com/2014/05/15/business/retirementspecial/social-security-at-62-lets-run-the-numbers.html



Friday, December 18, 2015

Deeper into the abyss: Obama introduces REPAYE, yet another income-based student-loan repayment plan designed to turn students into sharecroppers

This week, the Obama administration introduced REPAYE, a new student-loan repayment plan.  Like PAYE ("Pay As You Earn"), REPAYE allows borrowers to pay back their student loans over a 20 year period and to make monthly payments no larger than 10 percent of their discretionary income.  REPAY, however, is available to borrowers who were not eligible for PAYE.

What is the significance of this new development?

It's complicated.  First of all, REPAYE is the federal government's fourth income-based repayment plan. We now have:

  • ICR Plan (Income-Contingent Repayment Plan)
  • IBR Plan (Income-Based Repayment Plan
  • PAYE (Pay  As You Earn Repayment Plan
  • REPAYE (Revised Pay As You Earn Repayment Plan)

Not all borrowers are eligible for all plans, and some plans are more favorable to debtors than others. DOE issued a 26-page set of guidelines called "Income-Driven Repayment Plans: Questions and Answers," but the guidelines are complicated.

Here is a sample passage:
The REPAYE, PAYE, and IBR plans offer an interest benefit if your monthly payment doesn't cover the full amount of interest that accrues on your loans each month. Under the three plans, the government will pay the difference between your monthly payment amount and the remaining interest that accrues on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under the plan. Under the REPAYE Plan, the government will pay half the difference on your subsidized loans after this three-year period, and will pay half the difference on your unsubsidized loans during all periods.
Millions of people are already confused by their student loans. Some don't know if they have private loans or federal loans, some don't know how many loans they have, some don't know how much they borrowed or what they now owe, and some people don't even know that they took out a student loan.

For the 20 million people who aren't able to make loan payments under a standard 10-year repayment plan, REPAYE is not going to offer much relief.  It's just another level of bureaucracy and administrative regulations.

REPAYE is a new sign of desperation. Second, REPAYE is just another sign of the federal government's desperation about the federal student loan program. As the New York Times noted a few weeks ago, 10 million people have either defaulted on their student loans or are delinquent in their payments.  About 4 million are making payments under the government's first three income-based repayment plans; and most are not making payments large enough to cover accruing interest.  And a bunch more have gotten some kind of deferment from making loan payments based on economic hardship.

The government's response to all this chaos and misery is to roll out ever more generous long-term repayment plans.  But this strategy hides the fact that millions of people on these plans will never pay back the principle on their loans and for all practical purposes are in default.

REPAYE is really just a program for turning college students into sharecroppers for the federal government.  But the real problem with REPAYE, with PAYE and with IBR and ICR are that these plans force millions of people to make payments to the federal government for a majority of their working lives in return for the privilege of attending college.  In effect, the government is turning our nation's young people into a generation of sharecroppers.

And remember, for most people, these 20- and 25-year repayment plans don't begin when students graduate from college. Often former students struggle for five years or more with their student loans before they finally sign up for a long-term repayment plan.  And that's when the long-term repayment plan starts.  Thus a person who graduated in 2010 and joins an income-based repayment plan this year, will not be free of student loan debt until 25 or 30 years after first enrolling in college.

President Obama, Arne Duncan, the Brookings Institution, and higher education leaders like Vassar's Catharine Hill hail long-term repayment plans as a solution to the growing student-loan crisis. But of course, these plans are not a solution at all. They're a strategy for turning Americans into indentured servants.

Image result for sharecroppers images
Go to college and become a sharcropper!


Image result for catharine hill vassar
Vassar's Catharine Hill: What the kiddies need is a nice long-term repayment plan!