Interest, fees and penalties are burying millions of student-loan debtors--not the amount these poor people borrowed to go to college

Sometimes, huge problems can be analyzed best by simply boiling down the complexity of a situation into a simple phrase.  For example, "It's the economy, stupid," crafted by Democratic political strategist James Carville, summarized a central theme of Bill Clinton's 1992 presidential campaign.

Likewise, we can summarize at least one huge element of the student-loan crisis by focusing on one core fact: accrued interest, penalties and fees are burying millions of student-loan debtors, not the amount of money these poor people borrowed to attend college.

For example, I have a friend on the East Coast who borrowed a total of about $55,000 to obtain a bachelor's degree and a graduate degree; and he paid nearly $14,000 on those loans.  Unfortunately, my friend suffered a series of unfortunate life events--health issues, divorce, and job loss.  Now at age 67, he is living entirely on Social Security and a small pension. The Department of Education is garnishing his meager retirement income, and he is living on only $1200 a month.

A few weeks ago, my friend filed an adversary complaint in bankruptcy court, seeking to discharge his student-loan debt based on the Bankruptcy Code's "undue hardship" provision. Guess how much the government says he owes? $120,000--including accrued interest and $23,000 in collection costs. That's more than twice the amount my friend borrowed.

And this case is not atypical. In Halverson v. U.S. Department of Education, Stephen Halverson borrowed about $132,000 to obtain two master's degrees. Just as with my East Coast friend, life happened for Mr. Halverson: a job loss, serious health issues, a divorce, medical expenses for a child, and expenses incurred to care for an aging parent.

At times, Mr. Halverson was unable to make payments on his student loans, but he obtained a series of economic hardship deferment, and he was never in default.  Nevertheless, when Halverson was in his 60s, it was clear he could never pay back his student loan debt. By the time he filed for bankruptcy, his total deb had ballooned to almost $300,000--more than twice the amount he had borrowed. And Mr. Halverson's job at that time only paid $13.50 an hour.

Various public-policy analysts have argued that there is no student-loan crisis because most people borrow relatively modest amounts of money--typically about the amount of a car loan. But these analysts ignore two key facts:

1) Even a small student loan is a huge burden for someone who doesn't have a job or who has a low-income job.

2) People who are unable to make their monthly loan payments must obtain an economic hardship deferments or enter a long-term repayment plan in order to avoid default. And both options mean that the debtor's loan balance goes up due to accruing interest.

Thus we see people like Liz Kelly, featured in a recent New York Times article, who owes $410,000 on her student loans, far more than she borrowed to attend college and graduate school. Today, at age 48, the annual interest cost on her indebtedness is more than the entire amount she borrowed to obtain her bachelor's degree!

And I know a man in California who borrowed around $70,000 to finance his education, and paid back about $40,000. Now the Department of Education claims he owes more than $300,000, including a one-time penalty assessed in the amount of $59,000! That one penalty is more than 80 percent of the entire amount he borrowed!

Surely it should be apparent to everyone--even Secretary of Education Arne Duncan, President Obama and Congress--that adding interest, fees and penalties to people's student-loan debt only increases the likelihood of default.

The higher education industry and the Department of Education have embraced economic-hardship deferments and long-term repayment plans because both programs hide the fact that millions of people can't pay off their student loans.

Does anyone think, for example, that Liz Kelly, who was unable to pay back the $25,000 she borrowed to get an undergraduate degree, will ever pay back the $410,000 she currently owes.? Does anyone think my East Coast friend, who is living on about $1,200 a month, will ever pay back $120,000?

Like a seething volcano about to erupt, pressure is building on the federal student loan program. Currently, about 41 million Americans owe a total of $1.3 trillion in outstanding student loans. Let's face it: at least half that amount will never be paid back.

References

Kevin Carey. (2015, November 29). Lend With a Smile, Collect With a Fist. New York Times, Sunday Business Section, 1. Accessible at: http://www.nytimes.com/2015/11/29/upshot/student-debt-in-america-lend-with-a-smile-collect-with-a-fist.html?_r=0


Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Occupy Wall Street Needs a Clear Objective: How About Bankruptcy Relief for Overburdened Student-Loan Debtors?

You can fool all of the people some of the time, Lincoln observed, and some of the people all of the time. “[B]ut you can’t fool all of the people all of the time.” The Occupy Wall Street protestors--huddled in tents and shanties in cities across America--are some of the folks who are not fooled about economic conditions in the United States. Conservative pundits revile the Occupy Wall Street protestors as communists, anarchists, and criminals; and counter-protestors hold up der isive signs that read, “Get a Job!”

But of course that is the point. Many of the protestors are unemployed or severely underemployed. If these people had good jobs they wouldn’t be camping in urban parks or subjecting themselves to police beatings and arrest. No--the Occupy Wall Street protestors are not wild-eyed radicals. Most are simply angry Americans demanding economic justice. (Lacey, 2011).

Unfortunately, the Occupy Wall Street movement cannot achieve its goals for economic justice without defining some clear objectives--which so far it has not done. It is not enough to say Congress should tax the rich or regulate the financial sector better. Occupy Wall Street needs to boil down its broad demand for economic justice to articulate some clear and realistic political goals.

Student Loan Default Rates Are Catastrophic

Let me suggest one plank for OWS’s economic justice platform--bankruptcy relief for overburdened student-loan debtors. Although the U.S. Department of Education won’t admit it, default rates on student loans are catastrophic--especially for students who borrowed money to attend for-profit colleges and vocational programs.

Even by DOE’s own anemic standard for measuring default rates, those rates have doubled over the past few years (Blumenstyk, 2011). And DOE’s rating system only measures defaults in the first two years of the student-loan repayment period. When the measurement period is expanded to three years--which DOE will soon do--the default rate will spikes dramatically--particularly for students who borrowed to attend for-profit institutions.

 And even these numbers don’t tell the full story. Students who qualify for economic hardship deferments are not making their loan payments, but they are not counted as defaulters. Some for-profit institutions have encouraged their students to apply for economic hardship deferments in order to keep their institutions’ official student-loan default rates down. Unfortunately, for most of the people who have economic hardship deferments, the interest on their loans continues to accrue (In re Halverson, 2009). If student-loan debtors defer their payments for just two or three years, they will see the outstanding balance on their loans grow significantly--perhaps to an amount so high that they will never be able to pay back their loans.

Some experts estimate that the student-loan default rate for students who attended two-year for-profit institutions is 40 percent (Field, 2010); and another analysis concluded that a majority of students who borrowed money to attend for-profit institutions are in default (Lewin, 2010). And of course a student-loan default subjects the defaulter to a torrent of bad consequences. Their credit is ruined; they become subject to all the wiles and torments of debt collectors; they can have their income-tax refunds garnished; they can even have their Social Security checks dunned (Fossey & Cloud, 2011; Cloud, 2006). In short, as a recent New York Times editorial put it, defaulting student-loan debtors wind up in “financial purgatory” (Editorial, 2011, p. A34).  

Conclusion?  OWS Should Demand Bankruptcy Relief for Student-Loan Debtors

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