Education Secretary Betsy Devos Hires Private Accounting Firm to Audit the Student Loan program: Asking For Bad News

Secretary of Education Betsy Devos hired McKinsey & Company, a global consulting firm, to audit the federal student loan program. Why did she do that?

After all, the Congressional Budget Office, the Government Accountability Office or the Inspector General could have done the job. Why hire a private firm?

I'm thinking Secretary DeVos and the Trump administration realize the federal student-loan program is under water. They know the news is bad, but they want to know just how bad it is. After all, Secretary DeVos compared the program to a looming thunderstorm in a speech she made last November.

It took 42 years, DeVos pointed out, for the federal student-loan portfolio to reach half a trillion dollars (1965 until 2007). It took only 6 years--2007 to 2013--for the portfolio to reach $1 trillion. And in 2018--just five years later--the federal government held $1.5 trillion in outstanding student loans. In fact, uncollateralized student loans now make up 30 percent of all federal assets.

This wouldn't be a problem if student borrowers were paying off their loans. But they're not. As DeVos candidly admitted last November, "only 24 percent of FSA borrowers—one in four—are currently paying down both principal and interest." One in five borrowers are in delinquency or default, and 43 percent of all loans are "in distress" (whatever that means).

Although DeVos did not say so explicitly, she basically acknowledged that we've arrived where we are because the government is cooking the books. Student loans now constitute one third of the federal balance sheet. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk" DeVos said. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

We can hope that McKinsey and Company will give us an accurate accounting. But we already know the news will be catastrophic.  More than 7.4 million people are in income-based repayment plans (IBRPs) that stretch out for 20 and even 25 years. IBRP participants make loan payments based on their income, not the amount they borrowed. Virtually no one in these plans will ever pay off their loans. 

Millions more have their loans in deferment or are prolonging their education to postpone the day they will be obligated to start making loan payments. Thus--as DeVos disclosed--only a quarter of student-loan borrowers are paying back both principal and interest on their loans.

Over the past 15 years or so, presidential administrations have juggled the numbers to postpone the day of reckoning. "After us, the deluge," has been the watchword.  Meanwhile, university presidents are saying nothing about this looming thunderstorm. They hope the deluge won't come until they are drawing their pensions.

The McKinsey report, when it comes, will be a shock to the public consciousness. And there is only one solution. We must admit that the federal student-loan program is totally out of control and allow its victims to discharge their loans in bankruptcy.

Before the deluge: Photo Credit Yale Center for British Art

References

Michelle Hackman, Josh Mitchell, & Lalita Clozel. Trump Administration Hires McKinsey to Evaluate Student-Loan Portfolio. Wall Street Journal, May 1, 2019.

Augustin v. U.S. Department of Education: Adventures in Fantasy Land

In  April 2016, Pierre Augustin filed an adversary complaint in a Maryland bankruptcy court, seeking to discharge $210,000 in student loan debt. He told the court he had been burdened by this debt for 24 years, and that his financial circumstances did not permit him to pay it back. Augustin's wife also had student-loan debt: $120,000. Together the couple had accumulated a third of a million dollars in student debt.

Augustin had three postsecondary degrees: a bachelor's degree in political science from Salem State University in Massachusetts, a master's degree in public administration from Suffolk University in Boston, and an MBA from University of Massachusetts Lowell. Seventeen years after receiving his MBA degree, he was working  as a security guard.

Augustin claimed he was unable to find a job in the field of his degrees, but together he and his wife earned a net income of more than $6,000 a month. The Department of Education (DOE) offered Augustin a 25-year income-based repayment plan that would allow him to pay $331 a month toward his student loans or a 15-year plan with payments of $1,138 a month.

Augustin did not accept DOE's offers. Under the 25-year plan, he argued, he would face a lifetime of indebtedness. Moreover, when the payment term ended, he would face massive tax liability for the amount of forgiven debt. The 15-year plan was also unacceptable, he maintained, because it would not allow him to save money for his retirement.

Bankruptcy Judge Thomas Catliota was not sympathetic. The judge applied the three-pronged Brunner test to determine whether Augustin's student debt constituted an undue hardship.  Under Judge Catliota's analysis, Augustin failed all three prongs.

First, Judge Catliota noted, Augustin could make monthly loan payments of $331 under the 25-year repayment plan while maintaining a minimal standard of living. Second, Augustin could not show additional circumstances that would make it impossible to make monthly payments in that amount.

Finally, Judge Catliota ruled, Augustin had not demonstrated good faith. Augustin had not made a single payment on his student loans for more than a quarter of a century. "By his own  admission,"the judge pointed out, "Mr. Agustin deferred his loans for approximately 26 years."

Moreover, Mr. Augustin was not willing to accept DOE's offer of a  manageable repayment plan. In Judge Catliota's view, "This shows lack of good faith on [Augustin's] part."

Not surprisingly then, Judge Catliota refused to discharge Mr. Augustin's student debt. Applying the three-part Brunner test, Augustine was not entitled to relief.

Perhaps Judge Catliota reached a just outcome in the Augustin case. But let's look at the case in a larger context. Why does the Department of Education loan people money for multiple college degrees and then permit borrowers to make no payments on those loans for 25 years?

Why does the government push people into 25-year repayment plans that allow debtors to make monthly payments so low that they don't cover accruing interest? Even if Mr. Augustin agrees to make income-based payments of $331 a month for 25 years, he will never pay back the $210,000 he owes.

Finally, why apply the Brunner test to people like Mr. Augustin? Why not simply ask whether Mr. Augustin and his wife will ever pay back $330,000 in student-loan debt? The answer is clearly no.

In short, Augustin v. Department of Education is another adventure in Fantasy Land, which is what the federal student-loan program has become. Our government has rigged an insane student-loan program that is trapping millions of people to a lifetime of indebtedness from which there is no relief.

References

Augustin v. U.S. Department of Education, 588 B.R. 141 (Bankr. D. Md. 2018).

"Broken and at risk of collapsing": Sandy Baum's excellent recommendations for reforming DOE's income-based student-loan repayment system

Sandy Baum published a short essay yesterday in Chronicle of Higher Education titled "Don't Get Rid of the Income-Based Loan Repayment System. Fix It."  As she said in her essay, the federal student-loan repayment system as it now stands is "broken and at risk of collapsing."

I have a few reservations about Ms. Baum's recommendations (which I will address later), but on the whole her suggestions for reform make sense.

"Create one income-driven repayment plan with clear requirements and provisions." 

As Ms. Baum attests, the Department of Education currently administers a "hodgepodge of repayment programs": PAYE, REPAYE, Public Service Loan Forgiveness (PSLF), etc.  She recommends one plan for everyone with borrowers paying a higher percentage of their income than the 10 percent rate that currently applies to borrowers in PAYE and REPAYE plans.

Baum also recommends that student borrowers be automatically enrolled in an income-based repayment plan just as soon as their repayment obligations begin. In addition, she endorses having student-loan payments added as a payroll deduction to student borrowers' paychecks.

This is a good idea. As Baum pointed out, "[p]ayroll deductions for student-loan payments would make it easier for required payments to adjust quickly when financial circumstances change, and also make it easier for students to meet their payment responsibilities."

More than that, automatic payroll deductions would make it impossible to default on student loans and eliminate the need for student borrowers to obtain economic hardship deferments. If the payroll deduction reform were implemented, it would be put the student-loan servicers out of business. No more 25 percent penalties slapped on loan defaulters; no more interest accruing on loans that are in deferment, no more robocalls from the debt collectors.

"As the total amount borrowed increases, extend the number of payments required to reach loan forgiveness."

Baum argues for longer repayment periods for people who acquired a lot of student debt. And this too makes sense. People who borrowed $20,000 or $30,000 to attend college should have a repayment plan that allows them to be debt free after 10 or 15 years.  But a person who borrows $100,000 or more should expect to make payments for a longer period of time.

"Place reasonable limits on graduate students' federal borrowing."

Student-loan debt is spinning out of control, partly fueled by the GRAD PLUS program that allows people to borrow the entire cost of going to graduate school regardless of the amount. In response to that incentive, universities raised the cost of their graduate programs exponentially--and I mean exponentially. As I have said before, I paid $1,000 a year to attend University of Texas School of Law. The current cost is $35,000 a year--35 times as much as I paid.

Not long ago, I wrote about Mike Meru, who borrowed $600,000 to go to dentistry school. With accrued interest, he now owes $1 million! A cap on the amount a student can borrow to go to graduate school would stop the insane escalation in professional-school tuition.

"Eliminate taxes on all forgiven loan balances.

The IRS considers a forgiven loan to be taxable income. Thus, with the exception of borrowers in PSLF plans, borrowers whose loan balances are forgiven under income-based repayment plans receive a tax bill for the amount of forgiven debt .

This is crazy. I doubt anyone in Congress supports the status quo on this issue. After all, what is the point of people enrolling in income-based repayment plans if they get hit with a big tax bill after faithfully making monthly loan payments for 20 or 25 years?

Baum's other good ideas

In addition to the recommendations she made this week in Chronicle of Higher Education, Baum wrote a book on the student loan program in which she endorsed easier accessibility to the bankruptcy courts for distressed student borrowers. She also supports an end to garnishing Social Security checks of elderly student loan defaulters.

I once opposed all income-based repayment plans on the grounds that they basically turn student debtors into indentured servants--forced to pay a portion of their wages to the federal government for the majority of their working lives simply for the privilege of going to college. I still believe that.

Nevertheless, Baum's proposals address reality--which is that 45 million student debtors now carry $1.5 trillion in student-loan debt.  The proposals Baum put forward this week in Chronicle of Higher Education won't fix this train wreck of the federal student-loan program, but they will make the system more humane.

References

Sandy Baum. Don't Get Rid of the Income-Based Loan Repayment System. Fix It. Chronicle of Higher Education, July 30, 2018.

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016.

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

Mike Meru racked up $1 million in student loans to go to dental school. Will he ever pay it back?

Perhaps you read Josh Mitchell's story in the Wall Street Journal about Mike Meru, who took out $600,000 in student loans to go to dental school at University of Southern California. Due to fees and accrued interest, Meru now owes $1 million.

How did that work out for Dr. Meru? Not too bad actually. He's now working as a dentist making $225,000 a year. He entered an income-based repayment plan (IBR), which set his monthly payments at only $1,590 a month. If he makes regular payments for 25 years, the unpaid balance on his loans will be forgiven.

But as WSJ's  Josh Mitchell pointed out, Dr. Meru's payments don't cover accruing interest, which means his student-loan debt continues to grow at the rate of almost $4,000 a month. By the time, Dr. Meru completes his 25-year payment obligations, he will owe $2 million. Although this huge sum will be forgiven, the IRS considers forgiven debt as taxable income. Dr. Meru can expect a tax bill for about $700,000.

The student-loan program's many apologists will say Dr. Meru's case is an anomaly because most people borrow far less to get their postsecondary education. In fact, only about 100 people owe $1 million dollars or more. But 2.5 million college borrowers owe at least $100,000; and even people who borrow far less are in deep trouble if they drop out of school before graduating or don't land a good job that allows them to service their loans.

Here are the lessons I draw from Dr. Meru's case:

First, income-based repayment programs are insane because student debtors make payments based on their income, not the amount they owe. Dr. Meru's payments are set at $1,590 a month regardless of whether he borrowed $100,000, $200,000 or $600,000.  Thus, IBRs operate as a perverse incentive for students to borrow as much as they can, because borrowing more money doesn't raise the amount of their monthly payments.

Second, IBRs allow professional schools to raise tuition year after year without restraint because students simply borrow more money to cover the increased cost. USC told Mr. Meru that dental school would cost him about $400,000, but USC increased its tuition at least twice while Meru was in school; and Meru wound up borrowing $600,000 to finish his degree--far more than he had planned for.

Does USC feel bad about putting its graduates into so much debt? Apparently not. Avishai Sadan, USC's dental school dean, said this: "These are choices. We're not coercing. . . You know exactly what you're getting into." By the way, Dr. Sadan got his dentistry degree in Israel: and I'll bet it cost him a lot less than $600,000.

And here's the third lesson I draw from Dr. Meru's story. The student loan program is destroying the integrity of professional education.  As I've explained in recent essays, the federal student loan program has allowed second- and third-tier law schools to jack up tuition rates, causing graduates to leave school with enormous debt and little prospect of landing good jobs.

A medical-school education now costs so much that graduates are forced to choose the most lucrative sectors of the medical field in order to pay off their student loans. That is why more and more general practitioners are foreign born and received their medical training overseas, where people don't have to borrow a bunch of money to get an education.

Dr. Avishai Sadan, Dean of USC's School of Dentistry
"You know exactly what you're getting into."

References

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

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

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

If you have to enroll in a 25-year income-based repayment plan to pay for your college education, you attended the wrong college

In his 2012 book entitled Don't Go To Law School Unless), Paul Campos made a statement that startled me by its intense clarity. "The truth is," Campos wrote, "that people who are likely to end up in [income-based repayment plans] if they go to law school should not go at all" (48). 

And of course Campos is right. But isn't the same observation true about undergraduate education as well? A person who must enter a 25 year income-based repayment plan to pay for a college degree either enrolled in the wrong college or chose the wrong academic major--and probably both.

For example, Ron Lieber of the New York Times wrote a story about five years ago that featured Cortney Munna, who borrowed almost $100,000 to get a degree in women's studies and religious studies at New York University, one of the most expensive universities in the world.. At the time of Lieber's story, Munna was working for a photographer for $22 an hour and enrolled in night school in order to defer her loan payments. 

As Lieber pointed out, going back to college simply to postpone student-loan payments on the degree one already has is not a good long-term option because interest continues to accrue on the debt.

I wonder how Ms. Munna is doing today. I think the chances are very good that she is in a 25-year income-based repayment plan

Campos said in his book that "there's a good argument to be made that law schools [that] promote IBR[income-based repayment plans] are participating in  a fraud on the public." (50) Again, I think Campos is right.

 Most people who enter into 25-year income-based repayment plans won't make payments large enough to cover accruing interest and also pay down the principal on their loans. In other words, most people in IBRs will see their loans negatively amortize. This means the taxpayer will be left holding the bag when the loan-repayment term ends and the unpaid portion of the loan is forgiven.

To return to Ms. Munna's story, shouldn't NYU bear some responsibility for allowing her to borrow so much money for a degree that is not likely to lead to a job that will allow her to pay back the debt?

Of course, universities are not in the habit of admitting that some of their degree programs are overpriced. But maybe it is a habit they should acquire.  How many private universities could look their students in the eye and say their degrees in women's studies, religious studies, sociology, urban studies etc. etc. etc. are worth going $100,00 into debt? Not many.

References

Paul Campos. Don't Go To Law School (Unless). Self-published, 2012.

Ron Lieber. Placing the Blame as Students Are Buried in Debt. New York Times, May28, 2010. Accessible at http://www.nytimes.com/2010/05/29/your-money/student-loans/29money.html

The General Accounting Office's Report on Student Loan Indebtedness Among Elderly Americans: Scary Reading

The General Accounting Office released a report this week on elderly Americans with student loan debt. The report is 30 pages long but can be summarized in a few paragraphs.

First, the percentage of people aged 65 through 74 who have outstanding student loans is small but growing. In 2004, only 1 percent of people in this age category still owed on student loans. By 2010, that percentage had grown to 4 percent.

Second, the amount of student-loan debt held by elderly Americans is also growing. It grew six fold between 2005 and 2013--from $2.8 billion in 2005 to $18.2 billion last year.

Third, the number of elderly Americans who are having their Social Security Checks garnished because they defaulted on student loans has increased dramatically in recent years. In 2002, only 31,000 people had Social Security benefits garnished because they had defaulted on their student loans. That number has ballooned five fold in just 11 years; 155,000 Americans saw their Social Security checks reduced in 2013 because they had defaulted on student loans.

On one level, the GAO's report is no big deal. Currently, there are 39 million people with outstanding student loans. The number of elderly student-loan defaulters who are having their Social Security checks garnished---155,000--is only a drop in the bucket.

But that number will undoubtedly grow larger in the coming years. GAO reported that 6.9 million people who are 50 years old or older are carrying student-loan debt. That number has gone up 130 percent since 2005.

Moreover, the GAO pointed out that the amount of student loan debt held by elderly Americans grew much faster in recent years than it did for the general population. Between 2005 and 2013, the total amount of student loan indebtedness more than doubled, from $400 million to $1 trillion. But for people in the 65 to 74 age group, the amount of student loan debt grew six fold during those years.

And here's the scary part. Elderly student-loan debtors have higher default rates than younger people. Only 12 percent of federal student loans held by people in the 25 to 49 age bracket are din default. Among people 75 or older, more than half are in default!

I will make just a couple of points about this useful report.

First, in my view, a humane society should not garnish people's Social Security checks because they defaulted on their student loans. As I have said many times, Congress needs to amend the law to stop the garnishment of Social Security checks of elderly student-loan defaulters.

Let's face it, taking a small portion of people's Social Security checks (a maximum of 15 percent) probably won't even put a dent in individual debtors' total loan balances. Undoubtedly, most of them owe far more than they borrowed due to accruing interest and penalties.

Second, the Obama administration's proposal to encourage student-loan debtors to sign up for 20- and 25-year Income Based Repayment Programs (IBRPs) will only make this problem worse. A lot of people will be in their late 20s, early 30s, or even older when they begin paying off their student loans under 25-year repayment plans. Without a doubt, the percentage of people who enter retirement with outstanding student loan debt is going to increase as more and more people elect IBRPs to service their student loans.

The Department of Education, the Brookings Institution and several other education policy groups have endorsed IBRPs as a good way to help people manage their burgeoning student-loan obligations; and the New York Times also seems to like IBRPS.

But IBRPs are a terrible idea. Our nation cannot prosper economically if we have a high percentage of Americans paying on their student loans over the majority of their working lives.

It will take political courage to solve the student-loan crisis, and we won't solve it until we begin reducing the amount of money people borrow to attend college.

But we are going in the wrong direction. Every year, Americans borrow more and more money to attend college, and every year the average amount of individual indebtedness goes up. Encouraging people to pay off their loans over 25 years instead of 10 years just postpones the day when Americans will finally admit that the federal student loan program is out of control.

The federal student loan program is slowly destroying our economy and the integrity of higher education in the United States. And--with the advent of IBRPs--the number of elderly Americans who will see their retirement years blighted by student-loan debt is going to go no direction but up.

References

General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

Educational Credit Management Corporation makes good money chasing destitute student-loan debtors: The Obama Administration should take action

Richard Boyle, CEO of ECMC
He made $1.1 million in 2010

Educational Credit Management Corporation is a nonprofit company that collects on defaulted student loans for the federal government. Just because it is nonprofit, however, doesn't mean its employees don't make a lot of money. According to a news story posted on Bloomberg.com, Richard Boyle, ECMC's chief executive officer, made $1.1 million in 2010.

Other ECMC employees are also making good money.  Dave Hawn, ECMC's chief operating officer, made about half a million dollars in 2010. Joshua Mandelman, an ECMC debt collector, made $454,000. And ECMC directors also do pretty well. According to the Bloomberg story, they make as much as $90,000 a year.

How does ECMC make its money? It gets a small fee for helping distressed student-loan borrowers avoid default. But it makes much more money when it collects money from student borrowers who defaulted. By law, ECMC (and other similar companies) "can receive as much as 37 percent of a borrower's entire loan amount, half in collection costs and half in taxpayer-funded commissions" (Bloomberg.com).

What a sleazy business.  People are getting rich chasing down student-loan defaulters, many of whom are unemployed and destitute.

But perhaps the most disturbing aspect of ECMC's business is the position it takes when student-loan debtors file for bankruptcy. In several cases, ECMC has argued that bankrupt student-loan debtors should not have their loans discharged in bankruptcy. Instead, ECMC has argued, these debtors should be placed in income-based repayment plans that can last as long as 25 years.

Roth case: Elderly woman with health problems seeks bankruptcy relief from student loans

For example, in a recent case, Janet Roth, a 64-year old woman, filed for bankruptcy, seeking to discharge $95,000 in student loan debt.  Actually, she only borrowed $33,000, but her debt tripled due to fees and accrued interest.

At the time of the bankruptcy proceedings, Roth was unemployed and living entirely on her monthly Social Security check--only $774.  In addition, she suffered from several serious health conditions, including diabetes, macular degeneration, and depression.

Now most people would think that Ms. Roth was a good candidate for bankruptcy. But in court proceedings, ECMC challenged her request for bankruptcy relief from her student loans. ECMC argued she should have signed up for a 25-year income-based repayment plan, a plan that would have ended when she was almost 90 years old!

Fortunately, the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals was sympathetic to Ms. Roth's plight. The court said Ms. Roth had acted in good faith regarding her student-loan obligations, and it discharged her of the debt.

Can you imagine? A company run by a guy who makes more than a million dollars a year argued that an elderly woman with health issues and living on her Social Security check should make monthly payments on her student loans for 25 years! These ECMC guys make Ebenezer Scrooge look like Mother Teresa.

Want another example? In In re Stevenson (2011), an elderly woman with a history of homelessness  and who was living on less than $1,000 a month, was denied relief from her student-loan debt by a bankruptcy court in Massachusetts. ECMC opposed her effort to have her student loans discharged, and a court essentially forced Ms. Stevenson into a 25-year income-based repayment plan. Like Ms. Roth, Ms. Stevenson will be nearly 90 years old when her student-loan debt is discharged.

And take a look at the Krieger case. In Krieger v. Educational Credit Management Corporation (2013), ECMC opposed the discharge of a 53 year old woman's student-loan debt even though she was unemployed and had never made more than $12,000 a year during her entire working life.

President Obama Should Take Executive Action to Aid Elderly Student Loan Debtors

Ms. Roth, Ms. Stevenson and Ms. Krieger are not alone. According to a report prepared for the Federal Reserve Bank of New York, about five percent of people who are behind on their student-loan payments are 60 years old or older. Undoubtedly, many of these people are living almost solely on their Social Security checks or are destitute.

Surely, elderly student-loan defaulters are entitled to some relief. Unfortunately, their Social Security checks are subject to garnishment, and some of them are running into opposition when they file for bankruptcy.

President Obama likes to get things done through executive orders.  So how about this for a plan? President Obama should direct all student-loan collection agencies not to oppose elderly people's efforts to discharge their student loans in bankruptcy.  And he should stop the garnishment of elderly people's Social Security checks for the purpose of collecting on student loans.

President Obama can talk all he wants about how he wants to ease the burden on people who borrow money to attend college. But there are things he can do--simple things--that would ease the burden on elderly student-loan defaulters. So why doesn't he take action?

References

John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html

Brown, M., Haughwout, A., Lee, D., Mabutas, M., and van der Klaauw, W. (2012). Grading student loans. New York: Federal Reserve Bank of New York. Accessible at: http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (7th Cir. 2013).

Lockhart v. United States, 546 U.S. 142, 126 S. Ct. 699 (2005).

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).