"Stepped in Blood": The Student Loan Program is So Screwed Up That There Is No Solution Without Pain

I read Shakespeare's Macbeth as a high school student, and I still remember one line from that play:

I am in blood stepped in so far, that, should I wade no more, returning were as tedious as go o'er.

I understood the line to mean that Macbeth had involved himself in so many murders that he might as well continue on the same bloody path as turn back.

That's America's situation with the disastrous federal student loan program. Forty-five million student debtors owe a total of $1.7 trillion in federal loans, and there is no way to undo the monstrous damage that has been done. 

Thousands of articles, books, news stories, and scholarly reports have been written about the student-loan catastrophe, but Eleni Schirmer summarized it very well in a recent New Yorker article.

Shirmer focused on elderly student-loan debtors, beginning her article by telling the tale of Mary Ann, who borrowed $29,000 to attend law school in the early 1980s. Today, she is 91 years old, and her debt has grown to $329,000.

As Schirmer explained, oppressive student debt is not only a problem for the young. One in five student borrowers is 50 years or older--about nine million Americans.

Hundreds of thousands of student debtors reach retirement age without paying off their debt. The federal government garnishes their social security checks if they default on their loans.

Millions of overburdened college borrowers have rolled their loans into income-driven repayment plans (IDRs) to lower their monthly payments. Theoretically, their debt is canceled if they successfully complete the terms of their IDR.

Unfortunately, only a handful of debtors have had their loans forgiven through IDRs. As Schirmer explained:

[O]wing to negligent bookkeeping, I.D.R's promise of cancelation has proved to be a mere mirage: as of 2021, more than four million borrowers could have accessed I.D.R. loan cancellation, but only a hundred and fifty-seven had ever received it.

As Shirmer relates, the federal student loan program is so screwed up, so burdened by bureaucracy, and so complicated that the government can't even tell us how much of the $1.7 trillion that is owed is principal on the debt and how much is accrued interest.

For years, the Department of Education has claimed that the federal government makes a profit on federal student loans. Over the last quarter of a century, DOE maintained, the feds created a tidy $114 billion on the program.

But the Government Accountability Office reported this week that DOE grossly miscalculated. In fact, the government lost about $197 billion--a $311 billion math error!

In fairness to the Biden administration, his Department of Education has brought significant relief to millions of distressed student borrowers--mainly by forgiving debt owed by students who claimed to have been defrauded by their colleges. And DOE has initiated several other minor reforms.

Unfortunately, the federal government can't tinker its way out of the student-loan mess. Real reform will be painful.

What, then, needs to be done?

• The feds have got to stop sending student-loan money to the for-profit colleges and shut down this sleazy industry.

• DOE urgently needs to terminate the Parent PLUS program, which has devastated hundreds of thousands of low-income and minority families.

• Congress must reform the Bankruptcy Code to allow distressed student debtors to discharge their loans in bankruptcy. 

Finally, the federal government must put some reasonable cap on the amount of money students can borrow for their college education and force the colleges to get their costs under control.

Sadly, none of these reforms will ever take place. Why? Because reining in the student-loan program would be too painful for various higher-education constituencies, who are happy with the status quo.

Much like Macbeth, the federal student loan program is so mired in corruption, incompetence, and venality that it can't be fixed.  Tragically, this program, designed to help Americans go to college and improve their lives, has destroyed the lives of millions.

Steeped in blood and no painless options

Betsy DeVos and the Republicans wants to dump the Public Service Loan Forgiveness Program: Big Mistake

Betsy DeVos and the Republicans want to dump the Public Service Loan Forgiveness Program (PSLF)  because the program is too expensive. According to the Department of Education's Inspector General, costs of the government's various loan forgiveness programs shot up from $1.4 billion in 2011 to $11.5 billion in 2015--about a nine-fold jump.

In fact, all the Department of Education's loan-forgiveness programs are bleeding red ink. As the Government Accounting Office reported in November 2016, the Department underestimated the cost of these programs. For one thing, DOE assumed that student-loan debtors would sign up for a repayment plan and not switch.

But that's not what happened. Many college borrowers tried to repay their loans under DOE's standard 10-year plan but couldn't find jobs that paid enough to service their monthly loan payments. Millions then switched to income-driven repayment plans (IDRs), which lowered their monthly payments, but those payments were not large enough to cover accruing interest. In my estimation, most of the people in IDRs will never pay back their loans because interest is accruing on loan balances with every passing month.

PSLFs have specific problems, which make them particularly expensive for taxpayers.  First, the PSLF program, which was approved by Congress in 2007, defined eligibility far too broadly.  Anyone working for the federal, state or local government and anyone working for a nonprofit charitable corporation is eligible. As Jason Delisle observed in a Brookings Institution report, about a quarter of America's entire workforce is eligible for a PSLF plan.

PSLF advocates sometimes say the program was designed to encourage people to enter hard-to-fill public service jobs: police officers, fire fighters, ambulance drivers, and inner-city school teachers. But that description is misleading. Accountants, lawyers, public relations people--anyone working for the government or a non-profit--is eligible. 

And there's a second problem with PSLFs: Congress put no cap on the amount a PSLF participant can borrow. DOE apparently calculated costs based on the assumption that most PSLF beneficiaries had relatively low loan balances. But a lot of people applying for the program are people who accumulated massive debt from attending graduate school. A typical lawyer, for example, graduates law school with an average of $140,000 in accumulated student loans.

PSLF participants--including lawyers, accountants and MBA graduates--will make monthly payments based on a percentage of their adjusted income for 10 years, with the unpaid balance being forgiven when their 10-year repayment plans expire.  But most PSLF participants won't come close to paying off their loan balances after 10 years, and American taxpayers will be picking up the bill.

Thus, Trump and the Republicans have valid concerns about IDRs and PSLF programs.Nevertheless, I do not think these programs should be eliminated.

Why? Because 44 million Americans have student-loan debt and about half of them will never pay it back.  Congress has blocked bankruptcy relief for most of these people, which means they have two choices: default or sign up for an income-based repayment plan.

In my view, then, DOE's income-based repayment plans and the PSLF program should be continued  because the only other option for millions of distressed college borrowers is default.

But ultimately, there is only one way out of the student-loan morass. First. we must either allow insolvent student borrowers to discharge their college loans in bankruptcy or we must forgive the debt en masse. Second, we must shut down the venal and corrupt federal student-loan program and allow all Americans to get a free undergraduate education at a public college or university.

I realize this is a hard reality, which our government is refusing to face. But face reality it must; and the longer it waits to do so, the more people will be harmed by a student-loan program that is totally out of control.

Representatives Virginia Foxx: Republican Chair of the House Education Committee

References

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

Ryan Cooper. The case for erasing every last penny of student debt. The Week, February 8, 2018.

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be Invalid. New York Times, March 30, 2017. 

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

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, & Marshall Steinbaum. The Macroeconomic Effects of Student Loan Cancellation. Levy Economics Institute. Bard College, February 2018.

Jason Delisle. The Coming Public Service Loan Forgiveness Bonanza. Brookings Institution Report, Vol 2(2), September 22, 2016.

Andrew Kreigbaum. GAO Report finds costs of loan programs outpace estimates and department methodology flawed. Inside Higher Ed, December 1, 2016.

Eric Levitz. We Must Cancel Everyone's Student Debt, for the Economy's Sake. New York, February 9, 2018.

Amanda Palleschi. Student Loans Are Too Expensive To Forgive. fivethirtyeight.com, March 27, 2018.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016. 

Jordan Weissmann. Betsy DeVos Wants to Kill a Major Student Loan Forgiveness Program, Slate, May 17, 2017.

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 Answer. New 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.