Showing posts with label REPAYE. Show all posts
Showing posts with label REPAYE. Show all posts

Tuesday, February 6, 2018

Loan-Forgiveness and Income-Driven Repayment Plans Are Costing Taxpayers a Bundle of Money

The Department of Education's Office of Inspector General (OIG)issued another one of those mealy-mouth reports we've come to expect from the Department. In essence, the OIG told us something we already knew: DOE's income-driven repayment plans (IDRs) and debt forgiveness plans are costing taxpayers billions of dollars.

For several years now, the higher education community has touted income-driven repayment plans as the panacea for the rising  cost of going to college.  Back during the 2016 presidential campaign, Catharine Hill, president of Vassar College, wrote an op ed essay for the New York Times attacking Senator Bernie Sander's proposal to allow people to go to college for free.  Free college is not the answer, Hill argued. Rather we need to expand income-driven repayment programs.

Indeed, DOE has expanded income-driven repayment options. President Obama's administration rolled out the PAYE and REPAYE, programs that allow student borrowers to pay 10 percent of their adjusted income for 20 years in lieu of the standard 10-year repayment plan. Borrowers who make regular payments for 20 years will have their loan balances forgiven.

As outlined by OIG, the Department of Education offers six income-driven repayment plans and two loan forgiveness plans. Of course, all the student loans under these plans accrue interest. Even an idiot knows that borrowers who makes loan payments that aren't large enough to pay accruing interest will never pay off their loans.

So it shouldn't surprise anyone that DOE's flexible spending plans and loan forgiveness plans are costing the taxpayers billions of dollars because the government is loaning people more money than they will ever repay.

As the OIG reported, DOE's loan balance for income-driven repayment plans increased from $7.1 billion to $51.5 billion between 2011 and 2015. That's an increase of 625 percent in just four years.

Meanwhile, government subsidies for income-driven repayment plans ballooned from $1.4 billion to $11.5 billion over the same four years--an increase of more than 800 percent.

Why did our government create these insane flexible repayment plans?  I can think of one primary reason.

IDRs allow DOE to maintain the fiction that the vast majority of college borrowers are paying back their loans. For most of the people in these plans, an IDR is the only alternative to default. In fact, DOE has encouraged college-loan defaulters and people in danger of default to sign up for IDRs.

But most people in income-driven repayment plans are not paying off their loans because their payments aren't large enough to cover accrued interest. Thus, while IDR participants are not officially in default, they are only making token payments on loans they will never pay off.

What is the OIG's advice to DOE about how to handle the enormous cost of its income-driven repayment plans and its loan forgiveness programs? Here is OIG's gobbledygook recommendation:
We recommend that the Department enhance its communications regarding cost information related to the Federal student loan program's IDR plans and loan forgiveness plans to make it more informative to decision makers and the public.
That's right: All OIG can think of to recommend is more transparency!

As the Wall Street Journal reported about 20 months ago, 43 percent of college borrowers--approximately 9.6 million people--weren't making loan payments as of January 1, 2016. Some of these borrowers were in default, some had delinquent loans and some had loans in forbearance or deferment.

And thanks to DOE's income-driven repayment plans, an additional six million people are making payments too small to pay off their loans.

It is time for DOE to be more than transparent. It needs to admit that about half the people who took out student loans will never pay them back. Thus, of the $1.4 trillion in outstanding student loans, more than half of it will never be collected.



References

Paul Fain. Costs Mount for Federal Loan Programs. Inside Higher Ed, February 5, 2018.

Catharine Hill. Free Tuition Is Not the AnswerNew York Times, November 30, 2015, p. A23.

Josh Mitchell. More Than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016.

U.S. Department of Education Office of Inspector General (2018, January 31). The Department's Communication Regarding the Costs of Income-Driven Repayment Plans and Loan Forgiveness Programs. ED-OIG/A09Q0003. Washington DC: Author

U.S. Government Accountability Office (2016 December). Federal Student Loans: Education Needs to Improve Its Income Driven Repayment Plan Budget Estimates. Washington DC: Author.


Saturday, December 9, 2017

It's official: The Republicans hate student-loan debtors

A few days ago, Republicans introduced their bill for revising the Higher Education Act. Some provisions in the GOP proposal are astonishing in their cruelty and contempt for student debtors.
  • Abolishing income-drive repayment plans. For starters, the Republicans want to end all student-loan forgiveness. Goodbye PAYE. Goodbye REPAY. Students who can't pay off their loans under the standard 10-year repayment plan will be forced into income-driven repayment plans that continue until their loans are paid off--which for many of them will be never.
  • Abolishing the Public Service Loan Forgiveness Program. The GOP wants to abolish the Public Service Loan Forgiveness Program, which Congress created in 2007. Hundreds of thousands of students have entered into public-service jobs expecting to have their college loans forgiven after 10 years. If the Republican proposal becomes law, some of these people may be grandfathered into the PSLF program, but the program will be shut down.
  • Forbidding states from enforcing consumer protection laws against student loan servicers. Buried on page 464 of the GOP's bill is a provision that forbids states from regulating the student-loan serving companies.  Some state AGs have vigorously pursued wrongdoers in the loan servicing business, and Republicans apparently want to shield the debt collectors from state consumer protection laws.
Where are these pernicious Republican ideas coming from? Representative Virginia Foxx (R-NC) is Chair of the House Education Committee, and she supports all these nasty proposals. But Foxx is not pulling the strings. These toxic proposals are coming from the heart of the Trump administration--and undoubtedly from Secretary of Education Betsy DeVos.

I don't know if these punitive GOP proposals will make it into federal law. But if they do, Republicans will push millions of college borrowers into a lifetime of indebtedness.  It's almost as if the GOP wants to create an underclass of sharecroppers.

President Trump and his fiendish Secretary of Education (who has financial ties to the debt collection business) may think their scheme to punish student borrowers will play to the Republican base. But if these proposals get through Congress, there will be hell to pay in coming elections.  

The Democrats are missing a golden opportunity if they don't take up the banner of student-debt relief.  In my view, they should forget Russia and turn their venom toward Betsy DeVos, who may be Trump's Achillese heel. The Dems need to educate college borrowers about the nation's venal Secretary of Education and rouse them to righteous fury.

Betsy DeVos summer home: Maybe you could get a job there as pool boy


References

Douglas Belkin, Josh Mitchell, & Melissa Korn. House GOP to Propose Sweeping Changes to Higher EducationWall Street Journal, November 29, 2017.

Jillian Berman. House Republicans seek to roll back state laws protecting student loan borrowers. Marketwatch.com, December 7, 2017.

Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment program, overhaul federal financial aidWashington Post, December 1, 2017.

Danielle Douglas-Gabriel. Dems raise concern about possible links betwen DeVos and student debt collection agencyWashington Post, January 17, 2017.













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).

Wednesday, January 25, 2017

A Kansas bankruptcy court discharged all the accrued interest on a married couple's student loans: Murray v. ECMC

Do you remember political consultant James Carville's famous line during the 1992 presidential campaign? "It's the economy, stupid," Carville supposedly observed. That eloquently simple remark became Bill Clinton's distilled campaign message and helped propel him into the presidency.

Something similar might be said about the student-loan crisis: "It's the interest, stupid." In fact, for many Americans, it is the interest and penalties on their student loans--not the amount they borrowed--which is causing them so much financial distress.

The Remarkable case of Murray v. Educational Credit Management Corporation

This truth is starkly illustrated in the case of Murray v. Educational Credit Management Corporation, which was decided last December by a Kansas bankruptcy judge.  At the time they filed for bankruptcy, Alan and Catherine Murray owed $311,000 in student-loan debt, even though they had only borrowed about $77,000. Thus 75 percent of their total debt represented interest on their loans, which had accrued over almost 20 years at an annual rate of 9 percent.

As Judge Dale Somers explained in his ruling on the case, the Murrays had taken out 31 student loans back in the 1990s to obtain bachelor's degrees and master's degrees. In 1996, when they consolidated their loans, they only owed a total of $77,524.

Over the years, the Murrays made loan payments when they could, which totaled $54,000--more than half the amount they borrowed. Nevertheless, they entered into several forbearance agreements that allowed them to skip payments; and they also signed up for income-driven repayment plans that reduced the amount of their monthly payments. Meanwhile, interest on their debt continued to accrue. By the the time the Murrays filed for bankruptcy in 2014, their $77,000 debt had grown to almost a third of a million dollars.

The Murrays' combined income was substantial--about $95,000. Educational Credit Management Corporation (ECMC), the creditor in the case, argued that the Murrays had enough discretionary income to make significant loan payments in an income-driven repayment plan.  In fact, under such a plan, their monthly loan payments would be less than $1,000 a month,

But Judge Somers disagreed. Interest on the Murrays' debt was accruing at the rate of $65 a day, Judge Somers pointed out--about $2,000 a month. Clearly, the couple would never pay off their loan under ECMC's proposed repayment plan. Instead,  their debt would grow larger with each passing month.

On the other hand, in Judge Somers' view, the Murrays had sufficient income to pay off the principle of their loan and still maintain a minimal standard of living. Thus, he crafted a remarkably sensible ruling whereby the interest on the Murrays' debt was discharged but not the principle. The Murrays are still obligated to pay the $77,000 they borrowed back in the 1990s plus future interest on this amount, which would begin accruing at the rate of 9 percent commencing on the date of the court's judgment.

Judge Somers Points the Way to Sensible Student-Debt Relief


In my view, Judge Somers' decision in the Murray case is a sensible way to address the student debt crisis.  Eight million people have defaulted on their loans, and 5.6 million more are making token payments under income-driven repayment plans that are often not large enough to cover accruing interest. Millions of Americans have obtained loan deferments that allow them to skip their loan payments; but these people--like the Murrays--are seeing their loan balances grow each month as interest accrues.

Judge Somers' decision doesn't solve the student-loan crisis in its entirety, but it is a good solution for millions of people whose loan balances have doubled, tripled and even quadrupled due to accrued interest, penalties, and fees.

Obviously, Judge Somers' solution should only be offered to people who dealt with their loans in good faith.  Judge Somers specifically ruled that the Murrays  had acted in good faith regarding their loans. In fact, they paid back about 70 percent of the amount they borrowed.

Unfortunately, but not surprisingly, ECMC appealed the Murray decision, hoping to overturn it. Nevertheless, let us take heart from the fact that a Kansas bankruptcy judge reviewed a married couple's financial disaster and crafted a fair and humane solution.


References

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








Tuesday, November 8, 2016

Black students and the student loan crisis: African Americans suffer most

Judith Scott-Clayton and Jing Li published a report for the Brookings Institution last month on the disparity in student-debt loads between blacks and whites. Essentially, Scott-Clayton and Li told us us what we should already know, which is this: African Americans are suffering more from student-loan debt than whites.

Scott-Clayton and Li's findings

Here are the report's key findings:
  • On average, blacks graduate from college with $23,400 in college loans compared to whites, who graduate with an average debt load of $16,000.
  • The disparity in debt loads between blacks and whites nearly triples four years after graduation. By that time, the average debt load for African Americans  is $52,726, compared to $28,006 for white graduates.
  • Four years after graduation, black graduates are three times more likely to default on their student loans than whites. For African Americans the rate is 7.6 percent; among whites, only 2.4 percent are in default.
  • Four years after graduation, almost half of African American graduate (48 percent) owe more on their undergraduate student loans than they did when they graduated.
  • Although African Americans are going to graduate school at higher rates than whites, blacks are three times more likely to be in a for-profit graduate program than whites. Among whites, 9 percent enroll in for-profit graduate programs; for blacks, the rate is 28 percent.

Growing debt loads for black graduates and high numbers of blacks attending for-profit graduate programs: Disturbing

In my mind, Scott-Clayton and Li's most disturbing findings are set forth in the last two bullet points. First, almost half of African American college graduates owe more on their undergraduate loans four years after graduation than they did on graduation day,  What's going on? 

Clearly, people who are seeing their total indebtedness grow four years after beginning the repayment phase on their loan are not making loan payments large enough to cover accruing interest.  Those people either defaulted on their loans, have loans in deferment/forbearance, or are making token payments under income-based repayment plans that are not large enough to pay down the principle on their loans.

Surely it is evident that people with growing student-loan balances four years after graduation are more likely to eventually default on their loans than people who are shrinking their loan balances.

Scott-Clayton and Li's finding that a quarter of African American graduates students are enrolled in for-profit colleges is also alarming. We know for-profit colleges charge more than  public institutions and have higher default rates and dropout rates. It should disturb us to learn that blacks are three times more likely than whites to be lured into for-profit graduate programs.

Income-Based Repayment Plans do not alleviate the high level of student indebtedness among African Americans

The Obama administration and the higher education community tout long-term income-based repayment plans (IBRPs) as the way to alleviate the suffering caused by crushing levels of student debt. But as Scott-Clayton and Li correctly point out, new repayment options such as  REPAYE "may alleviate the worst consequences of racial debt disparities," but they fail "to address the underlying causes."

Lowering monthly payments and extending the repayment period from 10 years to 20 or 25 years does not relieve African Americans from crushing levels of student debt. We've got to shut down the for-profit college sector to eliminate the risk that people will enroll in overpriced for-profit graduate programs that are often of low quality..And we've got to fundamentally reform the federal student-loan program so that African Americans and indeed all Americans can graduate from college without being burdened by unreasonably high levels of debt.

References

Judith Scott-Clayton and Jing Li. Black-white disparity in student loan debt more than triples after graduation. Evidence Speaks Reports, Vol. 2, #3, Brookings Institution, October 20, 2016. Available at https://www.brookings.edu/research/black-white-disparity-in-student-loan-debt-more-than-triples-after-graduation/





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.

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