Showing posts with label private student loans. Show all posts
Showing posts with label private student loans. Show all posts

Friday, June 9, 2017

If Trump Will Let CFPB Survive Their Work Will Protect Small Business Loans and Student Loans--essay by Steve Rhode

I can’t imagine a measure of the the amount of effort that has been invested into making sure the Consumer Financial Protection Bureau is wiped off the face of the earth.

Big business and companies wanting consumers to have less power in the financial world are not excited about the CFPB that has been fighting hard to protect consumers from scams and schemes to rip them off.

In the coming years, if the CFPB survives, they are planning on targeting mortgage loan servicing, student loan servicing, and small business lending to make sure consumers are not getting to get screwed by these entities.

Some people want government out of our lives at nearly all costs. But for all those who politically want the CFPB to go away there is one simple issue that should change your mind. Let’s be honest. big business has more money to fight back against consumers and people just do have the resources to make much of a difference when they get screwed over by their financial company.

Sure, there have been some hit and miss victories by the lone consumer but for the most part, the deep pockets win.

Take private student loans for example. Consumers could discharge a lot of private student loan debt in bankruptcy or invalidate it. But people don’t have the resources to wage these battles and fight back against the lenders. So guess what, lives are ruined.

The CFPB represents at least one entity that works hard to fight for consumers. It creates leverage against deceptive and abusive financial practices that take advantage of consumers. But in this atmosphere of America First – Consumers Last, the Trump Administration wants the CFPB to go away. According to USA Today, “the Department of Justice argued in an amicus brief that the structure of the Consumer Financial Protection Bureau (CFPB), the watchdog created after the financial crisis during the Obama administration, is unconstitutional.” Even the federal government wants consumer protections to vanish.

Wanting to make the CFPB go away from defending consumers does not make the underlying problems go away or increase the defense of people just like you when you get scammed and ripped off.

The CFPB has been fighting back to protect consumers by filing suit against Navient for not providing advice to help consumers. Navients response is they don’t have to provide good advice, just collect on loans. And Navient even knew they were peddling loans that were not affordable when they pushed them on students.

So let’s let the CFPB fight back to protect people with student loan issues and small business loans. The only thing you have to lose is a better financial future and more protections for those you love.
Steve Rhode

Get Out of Debt GuyTwitter, G+, Facebook

If you have a credit or debt question you’d like to ask, just click here and ask away.
This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.


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I am in total agreement with Mr. Rhode regarding the value of the Consumer Financial Protection Bureau. The the Trump administration should  support the CFPB its mission, including the protection of student borrowers from unscrupulous for-profit college and ruthless student-loan debt collectors.

Richard Fossey

Saturday, June 3, 2017

Hofstra Law School Graduate incurs nearly one million dollars in debt: Dufrane v. Navient Solutions

Who holds the record for accumulating the most debt while going to college and law school? I don't know, but it might be Scott Dufrane.

Mr. Dufrane attended Thomas Jefferson Law School and graduated from the Maurice A. Deane School of Law at Hofstra University in 2009. He financed his undergraduate and legal education with student loans, and by the time he received his law degree, he had incurred debt of nearly a million dollars--or more specifically, $900,000.

Dufrane filed for bankruptcy in 2015. At that time  he owed the U.S. Department of Education approximately $400,000; and he owed various private creditors about $500,000. 

A short time after filing his bankruptcy petition, Dufrane filed an adversary complaint in an effort to discharge his private loans. In his complaint, he argued that the private loans fell outside the protection of the "undue hardship" rule and were dischargeable.

Dufrane owed SunTrust Bank about $90,000, and SunTrust moved to dismiss Dufrane's adversary complaint on the grounds that the SunTrust loans were protected by 11 U.S.C. sec. 523(a)(8) and could not be discharged unless Dufrane met the "undue hardship" standard.

But Dufrane had an answer to SunTrust's argument.

He argued that the private loans were not "qualified student loans" under 11 U.S.C. sec. 528(a) (8) and could be discharged like any other nonsecured debt.  Dufrane said that the private lenders had solicited him to borrow money while he was in school without any inquiry "regarding need, cost of tuition, or cost of any other education-related expense." In addition, the private lenders' solicitations "generally stated that the money could be used for anything, and that it would be disbursed directly to [Dufrane]" and not through any school.

Moreover, Dufrane alleged, all the private loan money was disbursed directly to him "without any input, knowledge or approval of the Financial Aid Office . . ."

Judge Peter Carroll, a California bankruptcy judge, agreed with Dufrane and ruled that the private loans were not the type of loan that Congress intended to exclude from bankruptcy relief.   Judge Carroll acknowledged that federal courts were divided on this issue, but he agreed with courts that interpreted the law in harmony with Dufrane's position. Therefore, the judge denied SunTrust's motion to dismiss. Under the rationale of Judge Carroll's ruling, it seems possible that all $500,000 of Carroll's private loan debt will ultimately discharged.

What is the significance of the Dufrane decision?

First, as Judge Carroll pointed out, the federal courts are in disagreement about whether some private student loans are subject to the "undue hardship" rule, and this controversy may ultimately go to the Supreme Court. For now, however, student borrowers who responded to bank solicitations by taking out private loans and who received the money directly have an argument that those loans are dischargeable in bankruptcy like any other consumer loan.

Second, the Dufrane case illustrates the recklessness of student-loan creditors--both the federal government and private banks.  It was insane for the Department of Education to loan Dufrane $400,000 for college and lawschool studies.  And of course it was insane for private lenders to loan Dufrane $500,000 while he was in law school.

Almost no one who accumulates nearly a million dollars in debt to get a college degree and a law degree will ever be able to pay back that amount of money.  Hofstra's law school is ranked 118 on the list of best law schools published by U.S. News & World Report. But even if Hofstra had graduated from Yale Law School at the top of his class, it is unlikely he would have obtained a job that would allow him to pay back $900,000.

Millions of Americans are struggling with  student-loan debt. Last year, student borrowers were defaulting at an average rate of 3,000 a day

The Department of Education is urging borrowers to enroll in income driven repayment plans (IDRs), but the Government Accountability Office reported last December that about half of a sample of people who signed up for IDRs failed to recertify their income as the program requires (p. 36). It seems obvious that IDRs are no magic bullet for the student-loan crisis.

Bankruptcy relief is the only viable option for people whose student loans are out of control. Last month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill to make student-loan debt dischargeable in bankruptcy like any other nonsecured loan.  This bill is unlikely to become law in this Congressional session; but someday, Congress will be forced by reality to pass some form of the Delaney-Katko bill.

References

Dufrane v. Navient Solutions, Inc. (In re Dufrane), 566 B.R. 28 (Bankr. C.D. Cal. 2017).

Representative John Delaney press releaseDelaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.

Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.


The Wrong Move on Student LoansNew York Times, April 6, 2017.

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





Saturday, July 30, 2016

Consumer Reports' article on student loan debt: A missed opportunity to give students some clear warnings

Consumer Reports' August issue ran a cover story on student loans, which led with this arresting quote: "I Kind of Ruined My Life By Going to College." An inside article profiled several students who were struggling to pay back enormous student loan debt.
  • For example, Jackie Krowen borrowed $128,000 to attend three colleges. She now owes $152,000 and is making loan payments of $1200 a month.  She told Consumer Reports she didn't understand how much interest could accrue when she took out her loans.
  • Jessie Suren borrowed $72,000 to attend a private Catholic school. She now owes $90,000 and makes payments of $900 a month. She works at a sales job that pays $39,000 a year. Here entire income comes from commissions.
  • Saul Newton borrowed $10,000 to attend University of Wisconsin at Stevens Point. He dropped out to join the Army and now owes $23,000. He works as a veterans' activist making $28,800 a year.
 The Consumer Reports article pointed out hat 45 percent of people surveyed said that their college experience was not worth the cost, and 47 percent said if they had it to do over again they would have attended a cheaper school and incurred less student-loan debt.

Anyone making college plans should read the Consumers Reports story. Nevertheless, the article missed an opportunity to give potential students several dire warnings:

1) First, do not attend a for-profit college. The research shows that for-profit colleges charge more for their programs than public institutions, that their student-loan default rates are shockingly high, and that a high percentage of their students don't complete their programs. Students should find a public-college alternative to a for-profit college education. I don't think there are any exceptions to this rule.

2) Never allow a parent or loved one to co-sign a loan. Parents who co-sign student loans for their children are on the hook to pay those loans back, and it is as difficult for a co-signer to discharge a student loan in bankruptcy as it is for the primary borrower. If your college plans depends on getting a loved one to co-sign your student loans, then you need a different plan.

3) Don't take out a student loan from a private lender. Private loans generally have higher interest rates than federal loans, and private loans don't have alternative payment plans if a borrower gets in financial trouble and can't make monthly loan payments. Again, if your college plan requires you to take out a private loan, you need to make another plan.

4) Don't borrow a lot of money to obtain a liberal arts degree from a high-priced elite college. People foolishly think a degree from a prestigious university will pay off, no matter what major they choose. That is not true. A person who borrows $100,000 to get a religious studies degree from NYU will regret it.

5) Don't borrow money to get an MBA or law degree from a mediocre school, particularly if you know you are not going to graduate in the top of your class. Anyone contemplating law school should read Paul Campos' book titled Don't Go to Law School(Unless). Campos strongly warns against borrowing money to attend a second- or third-tier law school. It just doesn't make economic sense given the dismal job market for lawyers, particularly if you don't graduate in the top of your class. In my opinion, the same advice holds for MBA programs. Borrowing a lot of money to get an MBA from a nondescript university is unlikely to pay off financially.

In his book, Paul Campos also warned against the "Special Snowflake Syndrome"--the irrational belief that you can beat the odds. For example, you may think you will study especially hard and graduate in the top 10 percent of your class. But Campos points out that 90 percent of law students don't graduate in the top 10 percent of their class.

Alternatively, you may think you are a special person with great interpersonal skills and that you will do well in a law career even if you graduate at the bottom of your class from a mediocre law school. But statistics don't lie; most  people who borrow $150,000 to attend Nowhereville School of Law aren't going to earn a salary that will make that investment pay off.

Campos' advice for prospective law students applies to everyone going to college. Do your research and make an informed decision about where to go to school and what to study. Don't assume the world will be your oyster simply because you have a bachelor's degree in multiculturalism from a hot-shot Eastern college.

In summary, you should read the recent Consumer Reports story if you are making plans to go to college. But you should also heed the warnings in this blog. Millions of people made bad decisions about financing their college educations. Five million are now in long-term income-based repayment plans that stretch their monthly loan payments out for 20 and even 25 years.

You want to improve your life by going to college; you don't want to wind up as a sharecropper--paying a percentage of your income to the government for the majority of your working life just because you made some bad financial decisions when you were a college freshman.

References

Paul Campos. (2012). Don't Go to College (Unless). Lexington, KY). 

Lives on Hold. Consumer Reports, August 2016, 29-39. Accessible at http://www.consumerreports.org/student-loan-debt-crisis/lives-on-hold/




Sunday, July 24, 2016

Amazon partners with Wells Fargo to peddle private student loans: Say it ain't so, Jeff Bezos

Amazon announced recently that it is partnering with Wells Fargo in the private student-loan business. The plan is for Wells Fargo to offer a slightly discounted interest rate to Amazon Prime Student members on Wells Fargo's private student loans.

 I was sorry to get this news. More than 50 years ago, American businesses discovered that they could rake in more cash from loaning money to their customers than from selling products. Prior to filing bankruptcy, for example, General Motors generated more profits from GMAC, its lending arm, than it did from selling cars.

In fact, the common joke at the time was that GM was not a car manufacturing company; it was a bank that happened to sell cars. And of course that slight change in focus from building quality automobiles to lending money at interest partly explains why GM went bankrupt.

Amazon already sells just about everything in the world. I recently purchased a couple of bags of wood chips for my electric smoker from Amazon; and I bought them cheaper than I could have gotten them at my local grocery store. Amazon's success has made Jeff Bezos, its founder, the third richest man in the world. He's worth about $65 billion.

Do Jeff and Amazon really need to get into the student loan business? Doesn't Jeff have enough money already?

But what is wrong with Amazon getting into the private student loan business, you might ask? What makes peddling student loans different from selling books, CDs, and appliances?

At least three things. First, most banks and lenders require student-loan borrowers to obtain a co-signer who will guarantee repayment of the loan. Thus, when Johnny and Sallie take out private student loans, Mom and Pop are also on the hook. In my opinion, it is reprehensible for banks to force students to get parents or relatives to cosign student loans.

Second, private loans generally carry higher interest rates than federal student loans, and they don't provide alternative payment options if a borrower runs into financial trouble and can't make monthly loan payments.  Without exception, people would be better off borrowing in the federal program than the private program.

Private lenders argue that they provide loans to people who need more money than they can borrow through the federal program.  But in my view, people who can't finance their educational program solely through federal loans are in the wrong program.

Finally, the banks managed to get Congress to revise the Bankruptcy Code in 2005 to make private loans as difficult to discharge in bankruptcy as federal loans. Senator Joe Biden was the chief architect of that sweetheart deal for the banks.

So if you take out a student loan from Wells Fargo and suffer a financial catastrophe, you will find it virtually impossible to discharge your Wells Fargo loan in bankruptcy. This is another good reason not to take out a private student loan.

In sum, the private student loan business is a sleazy industry. And so I ask again: Jeff Bezos, don't you have enough money already? Does Amazon really need to associate itself with the unsavory commerce in private student loans?

Jeff Bezos' iconic laugh.jpg
Jeff Bezos: Say it ain't so, Jeff

References

Ann Carne. Student Loan Co-Signers Face Tangled Path to a Release. New York Times, July 10, 2015. http://www.nytimes.com/2015/07/11/your-money/student-loan-co-signers-face-a-tangled-path-to-a-release.html

Karen Silke Carty. 7 Reasons GM is Headed to Bankruptcy. ABC News. Accessible at http://abcnews.go.com/Business/story?id=7721675&page=1

Annamaria Andriotis. Amazon tiptoes into the banking business through student loans. Wall Street Journal, July 21, 2016. Accessible at http://www.wsj.com/articles/amazon-tip-toes-into-banking-business-1469093403

Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15 , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664

Tuesday, November 17, 2015

The Department of Education's so-called plan to "strengthen" the student loan system is pathetic. Do President Obama and Secretary of Education Arne Duncan really care about distressed student-loan debtors?

On October 1, 2015, the U.S. Department of Education issued a report entitled Strengthening the Student Loan System to Better Protect All Borrowers. It's about time. More than 20 million people are struggling with unmanageable student loans, including 10 million who are delinquent on their loans or in default.

But what a pathetic document! Clearly President Obama and Secretary of Education Arne Duncan don't have the moral courage to seriously address the student-loan crisis. They are just tinkering with this problem, hoping they can keep the student-loan crisis off the public's radar screen until after Obama leaves office.

Here are my specific critiques:

Garnishing Social Security checks of elderly student-loan defaulters. The federal government garnished the Social Security checks of a 155,000 student-loan defaulters in a recent year, which is shameful. It is true that the U.S. Supreme Court approved this practice in its heartless Lockhart decision; but President Obama, using his discretionary enforcement powers that he so often invokes, could stop garnishing Social Security checks immediately. But he hasn't done that because he really doesn't give a damn about the suffering of elderly people.

Instead, the Department of Education recently proposed to insert an inflationary index into the garnishing system that would allow Social Security recipients to protect more of their Social Security check from garnishment when inflation occurs. (Currently, only $750 a month is protected from garnishment.)

This is an incredibly callous proposal. In the Roth case, the 9th Circuit BAP court's 2013 decision, Jane Roth sought to discharge more than $90,000 in student-loan debt. At the time she filed for bankruptcy, she was 68 years old, had chronic health problems, and was entirely dependent on her Social Security check of less than $800 a month.

How could any humane and reasonable person argue that  any of Ms. Roth's Social Security check should be garnished? But that is what the Department of Education's recent report basically proposes.

Arbitration clauses imposed on unsophisticated student-loan borrowers by for-profit colleges. The New York Times reported recently that many private businesses (particularly those in the finance industry) require individuals to agree to arbitration clauses and to waive their right to sue. As the Times pointed out, the arbitration system favors the business community over private individuals.

Many for-profit colleges also require students to arbitrate their grievances and to give up their right to sue, even if they believe their college defrauded them or breached contractual obligations. Arbitration can be more costly for individuals than litigation because arbitration fees can be quite expensive. And a business party is more likely to win than an individual.  For-profit arbitration clauses have been upheld by the courts.

Why don't Arne Duncan and Barack Obama stop the for-profit college industry from inserting litigation waivers and arbitration clauses into their admission documents, which they could do simply by enacting a regulation prohibiting the for-profits from engaging in this pernicious practice?

I'll tell you why. Because for all their public hand-wring and their tongue-clucking over the student-loan crisis, Obama and Duncan are firmly committed to the status quo.  Obama and Duncan's failure to address unconscionable arbitration clauses is shameful.

Making private loans dischargeable in bankruptcy. The DOE report recommends "potential changes" to the treatment of private loans in the bankruptcy courts.  DOE is referring to a provision in the Bankruptcy Code that Congress legislated in 2005 that makes private student loans nondischargeable in bankruptcy unless the debtor can show "undue hardship."  Senator Joe Biden, acting at the behest of the banking industry, helped get that legislation passed.  Thanks,Joe!

Several prominent bankruptcy scholars have recommended that the 2005 legislation be repealed and that private student loans be dischargeable in bankruptcy like any other nonsecured debt. But the DOE doesn't go that far. Here's what the DOE report says:
[T]he report recommends allowing private loans that do not offer [pay-as-you-earn or PAYE]-like borrower protections to be dischargeable in bankruptcy similar to other forms of consumer debt. Allowing private lenders the protection of non-dischargeability if they offer PAYE-like features will provide an incentive for private lenders to create meaningful ex ante payment modification options available for when borrowers cannot make standard payments. (p. 17)
In other words, Obama and Duncan propose that banks will still have the protection of having their student loans virtually impossible to discharge in bankruptcy if they will allow distressed student-loan borrowers to switch from standard loan payments to long-term income-based repayment plans. Of course, the banks might be willing to add an income-based repayment feature to their student loans, but that would mean that most private student loans would negatively amortize due to the fact that the income-based payments would almost certainly not be large enough to pay accumulating interest.

What an idiotic notion! What the DOE report should have said is simply this: private student loans should be dischargeable in bankruptcy like any other unsecured loan--period.

The fact the the Department of Education advocates any restrictions on bankruptcy relief for distressed debtors who took out private student loans is outrageous and shows that the Obama administration--for all its posturing--is little more than a lackey of the banks.

A few timid but good recommendations. The DOE report does contain a few timid but good recommendations  Eliminating tax liability for people whose student loans are forgiven under long-term income-based repayment plans is a good idea and one that President Obama had earlier proposed.

But student-loan borrowers were never under much of a threat of being assessed a huge tax bill if their loans were discharged. Present IRS regulations do not consider a forgiven loan to be taxable income if the debtor is insolvent at the time the loan is forgiven.  And in any event, this relief is small consolation for people who wind up in 25-year income-based repayment plans.

Streamlining the disability discharge process, which DOE recommends, is also a good idea.  But if it is such a good idea, why did DOE oppose bankruptcy discharge for Bradley Myhre, a quadriplegic student-loan debtor whose expenses exceeded his income due to the fact that he needed  a personal full-time caregiver in order to remain employed? (Myhre v. U.S. Department of Education, 2013).

Finally, DOE promises to streamline the process whereby individuals can have their student loans forgiven if they were defrauded by the institution they attended.   The DOE report states that the Department of Education "will conduct negotiated rulemaking on borrower defense and plans to develop new regulations to clarify and streamline loan forgiveness under the defense repayment  provision . . . ."

What DOE probably means is that it will negotiate with the for-profit college industry regarding the process for forgiving loans owed by students who were enticed to enroll at for-profit collegea through fraud or misrepresentation. Of course it is a good idea to streamline the loan-forgiveness process for people who attended institutions that have been found guilty of misrepresenting their education programs.

But I doubt if DOE is willing to streamline the loan-forgiveness process enough to provide meaningful relief. After all there are 350,000 former students of the Corinthian Colleges system, which filed for bankruptcy last spring amid allegations of wrongdoing.  As of a few months ago, only about 3,000 students had had their student loans forgiven by DOE.

Conclusion

In my opinion, President Obama's Department of Education issued a report that purports to "strengthen" the student loan system for the protection of borrowers but does not attack the underlying problems.  Until the private loan industry and the for-profit college industry are shut down and distressed student-loan debtors have meaningful access to the bankruptcy courts, the student-loan catastrophe will just grow bigger. And the number of people who can't make their student-loan payments--now more than 20 million--will only grow larger with each passing day.

https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pictures/2008/12/16/obamaeducation476.jpg?w=620&q=85&auto=format&sharp=10&s=26d17b6c928a0f80f7662a66a2d328a8
Frankly, my dear, we don't give a damn.
References


Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15  , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers.  Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf

Thursday, October 8, 2015

Go to Hell, Joe Biden, Go to Hell! Obama Administration recommends repeal of Biden-backed law making it difficult for private student-loan borrowers to discharge loans in bankruptcy

Image result for "joe biden"
Joe Biden: No friend of student-loan debtors
Louisiana State University and the University of Mississippi have a deep football rivalry going back more than half a century. When LSU plays Ol' Miss, LSU students by the thousands chant this cheer over and over again in the football stadium: "Go to Hell, Ol' Miss, Go to Hell!"

I admit that "Go to hell, Ol' Miss" is not a very gracious salutation. Still, it is strangely satisfying to hear this lusty phrase chanted repeatedly, like a mantra, by a frenzied throng of LSU fans.

Distressed student-loan debtors might craft a similar salute for Joe Biden. Joe currently has a good gig pretending to be our Vice President, but he may run for the Oval Office. Student-loan borrowers need to know that Joe committed a foul deed against them in 2005, when he was a U.S. Senator from Delaware.

Ten years ago, Congress passed so-called bankruptcy reform legislation at the behest of the banking industry. One provision--inserted solely for the benefit of the banks--made private student loans nondischargeable in bankruptcy unless the debtor could show "undue hardship."  
The banks justified this heartless legislation as a way to reduce interest rates on private student loans. They argued that the additional protection for creditors would make it possible for banks to loan students money at a lower interest rate because defaulting borrowers would find it virtually impossible to discharge their private college loans in the bankruptcy courts.
This legislation benefited Sallie Mae, Wells Fargo, and other major players in the private student-loan business, but the U.S. Department of Education  issued a report earlier this month arguing that the provision should be repealed.

This is what the DOE report had to say: 
There has been no evidence that the 2005 changes to bankruptcyy caused interest rates on student loans to decline or access to credit to increase significantly. As private student loans generally do not include the consumer protections, such as income-driven repayment plans, included in federal loans, the undue-hardship standard for bankruptcy discharge leaves private student loan borrowers in financial distresswith few options 
According to a recent article in the International Business Times (IBT), Senator Joe Biden was an enthusiastic supporter of this Fat Cat Relief Act, which made it harder for insolvent student-loan debtors to obtain bankruptcy relief. As IBT's David Sirota observed:
Though the vice president has long portrayed himself as a champion of the struggling middle class--a man who famously commutes on Amtrack and mixes enthusiastically with blue-collar workers--the Delaware lawmaker has played a consistent and pivotal role in the financial industry's four-decade campaign to make it harder for students to shield themselves and their families from creditors, according to an IBT review of bankruptcy legislation going back to the 1970s.
And--surprise, surprise!--the financial industry has donated $1.9 million to Biden over the course of his career. Now Joe may launch a campaign to become our president.

So if you get an opportunity to cast a vote for Joe Biden, keep this in mind: he is a lackey of the banks. And if you are a student-loan debtor, you should say to Joe Biden, what LSU fans say to Ol' Miss: "Go to hell, Joe Biden, Go to hell!"

References



Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15  , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers.  Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf

Saturday, April 4, 2015

President Obama's "Student Bill of Rights" would be laughable if the student-loan crisis weren't so tragic

President Obama recently released what he laughably called his "Student Bill of Rights." The Bill of Rights has just four parts:

I. Every student deserves access to a quality, affordable education at a college that is cutting costs and increasing learning.
II. Every student should be able to access the resources needed to pay for college.
III.Every borrower has the right to an affordable repayment plan.
IV. And every borrower has the right to quality customer service, reliable information, and fair treatment, even if they struggle to repay their loans.
You want this ludicrous, so-called "Bill of Rights" boiled down into a single sentence?President Obama is basically saying everyone has the right to borrow money at a reasonable interest rate to attend college and to be treated courteously by the debt collectors.

This ridiculous document does nothing to rein in college costs or to effectively regulate the for-profit college industry. It does nothing to ease the suffering and hardship of millions of people who have defaulted on their student loans.

What would a real Student Bill of Rights look like?  Something like this:

I. Insolvent people who took out student loans in good faith have the right to have their student loans discharged in bankruptcy.

II. Elderly people who are living entirely off their Social Security income should not have their Social Security checks garnished because they defaulted on a student loan.

III. People should not be required to sign covenants not to sue as a condition for enrolling at a for-profit college.

IV. All colleges and universities that benefit from the federal student-loan program should be subject to an open-records law that would require them to disclose their financial affairs and their decision-making process for admitting students.

V. Student-loan defaulters should not have excessive fees and penalties added to their student-loan debt.

VI. A statute of limitations should apply to all efforts to collect on unpaid student loans. The statute of limitations should be six years, just as it is in most jurisdictions for lawsuits for breach of contract or nonpayment on a debt.

VII. The government and its collection agents should stop trying to force bankrupt debtors into 25-year repayment plans as they did in the Roth case, the Myhre case, and the Lamento case.

VIII. Students who take out loans from private banks and private financial institutions should be able to discharge their student loans in bankruptcy under the same terms that apply for discharging other debts.

But the Obama administration, Congress,  and the higher-education industry don't really want to effectively curb the excesses of the student-loan industry.  They want to tinker around the edges of this huge problem, while the colleges and the debt collectors gorge themselves on student-loan money.

There's good money in student loans.



Tuesday, November 4, 2014

Occasionally, The New York Times Says Something Sensible About the Student Loan Crisis: Bankruptcy Relief for Private Student Loan Borrowers

Last month, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB)issued a report highlighting the hardships experienced by students who took out private loans to attend college. Unlike the federal student loan program, which offers income-based repayment plans and economic hardship deferments to student-loan borrowers who run into financial trouble, private lenders generally do not offer any type of relief for distressed student-loan borrowers.

What the CFPB did not say in its report is that private student-loan borrowers, like borrowers in the federal student loan program, cannot discharge their student loans in bankruptcy unless they can show "undue hardship," a very difficult standard to meet.
All the CFPB report offered as a remedy to this problem was a form letter that student-loan borrowers could modify and send to their private lenders to beg for relief.  That is really not much of a solution.

Yesterday, however, the New York Times commented on the CFPB report and made a sensible suggestion. The Times proposed that Congress repeal the 2005 "undue hardship" provision that makes it almost impossible for private student-loan borrowers to discharge their loans in bankruptcy. In the alternative, the Times added, legislation should be passed that requires private lenders to modify loan terms for distressed student-loan borrowers. "Now it's time for Congress to fix [the error it made when it passed the 2005 law]," the Times editorialized, "by rescinding the bankruptcy provision or requiring lenders to create clearly advertised flexible payment plans in exchange for retaining it."

Respected commentators have recommended rescinding the 2005 Bankruptcy Code provision for years. In 2009, Rafael Pardo, a law professor and noted researcher on the student-loan crisis, testified before a Congressional committee on the special hardships suffered by individuals who took out private student loans to finance their college studies.  Here is what Professor Pardo said:
Because the costs of private student loans can quickly spiral out of control, and because there exist limited nonbankruptcy options for mitigating the financial distress imposed by such costs, borrowers of private student loans are particularly vulnerable to the negative effects of undue-hardship discharge litigation.  If they end up seeking relief through the bankruptcy system and subsequently fail to prevail in their claim of undue hardship, they will find themselves struggling interminably under an oppressive amount of educational debt with little to no other options for relief.
In short, Professor Pardo told the Congressional committee:
By stripping away the one social safety net that existed for borrowers of private student loans--that is, the automatic discharge of such loans in bankruptcy--Congress has likely condemned certain student-loan debtors to the Sisyphean task of repaying obligations that will never be extinguished. [Emphasis supplied.]
In his testimony, Professor Pardo stated unequivocally that Congress should repeal the 2005 "undue hardship" provision that has made it almost impossible for individuals to discharge their private student-loan debts in bankruptcy.  Pardo testified as follows:
I respectfully urge Congress to restrike the balance between student-loan debtors and lenders of private student loans by restoring the automatically dischargeable status of private student loans in bankruptcy.
Without a doubt, repeal of the 2005 Bankruptcy Code provision is essential to providing relief to distressed college borrowers who took out private student loans.  It is refreshing to see that the New York Times essentially agrees with Professor Pardo on this issue, although the Times equivocated a bit by saying that Congress might pass a law requiring private student-loan lenders to offer flexible payment terms as an alternative to repealing the 2005 Bankruptcy Code provision.

Everyone in higher education should be clamoring for repeal of the Bankruptcy Code's "undue hardship provision for all student-loan borrowers, whether they borrowed from the federal student loan program or borrowed from private lenders.  Literally millions of distressed student-loan borrowers are suffering  because they cannot repay their loans and have no real means of relief in the bankruptcy courts.

But if across-the-board reform cannot be achieved politically, at least Congress should repeal the "undue hardship" provision as it applies to people who took out student loans from the private banks. Even the New York Times, which at times seems almost clueless about the student-loan crisis, has figured that out.

References

Editorial. Driving Student Borrowers Into Default. New York Times, November 3, 2014.

Rafael Pardo. ABI Members Testify on Discharging Student Loan Debt in Bankruptcy. ABI Journal, November 2009, p. 10. Accessible at: http://www.abiworld.org/AM/Template.cfm?Section=Home&CONTENTID=59097&TEMPLATE=/CM/ContentDisplay.cfm


Friday, October 31, 2014

Rohit Chopra and Rich Cordray Should Be Ashamed of Themselves: The Consumer Financial Protection Bureau's Timid Report on Distressed Private Student-Loan Borrowers

Rohit Chopra should be ashamed of himself.
Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB), issued a report earlier this month on the status of distressed private student-loan borrowers.  The report is so timid, so tepid, so lacking in real recommendations for reform that Chopra and Chopra's boss, CFPB Director Richard Cordray, should be ashamed of themselves.

Basically, Ombudsman Chopra's  report analyzed more than 5,000 student loan complaints directed at private lenders.  The report documents that many students who borrowed money from banks to attend college have been driven into default.  Chopra's reported identified these problems:
  • Borrowers who have trouble paying back their private loans receive little information from the banks about their options for modifying their loan terms.
  • People who borrow from the banks often find that there are no loan-modification options available.  
  • Private lenders are sometimes willing to offer borrowers a temporary forbearance from making their loan payments, but these forbearances often only delay default. Moreover, borrowers sometimes have to pay enrollment fees or experience processing delays in order to get nothing more than temporary relief. 
Chopra's report ends on a pathetic note. Although it professes to offer "new tools to help borrowers take action when they run into trouble [with private student loans]," the report offers nothing more than a sample letter "that consumers can edit and send to their student loan servicer to request lower monthly payments and information on available repayment plans."  That's all the CFPB has to offer--a crummy form letter!

Chopra and the CFPB Understate the Harm Caused by the Private Student Loan Industry

Chopra and the CFPB vastly understate the harm done to student borrowers who take out loans from private lenders to finance their college educations.

First of all, many students are ignorant of the difference between private loans and loans obtained through the federal student-loan program. Federal loans give distressed borrowers access to economic hardship deferments, income-based repayment plans, and loan consolidation options.  For the most part, these options are not available to people who borrow money from private lenders to finance their college studies. Moreover, federal student loans generally offer lower interest rates than private student loans.

Many students are so unsophisticated that they do not realize that they are taking out loans from private lenders rather than participating in the federal student loan program. Thus, students often pass up the opportunity to participate in the federal student loan program and fall into the clutches of private banks.

Second, unlike most federal student loan programs, private lenders generally require students to obtain co-signers for their student loans.  In most cases, the co-signer is a student's parent or other relative. Parents who co-sign their children's private student loans become personally liable for the debt--all of it.

Third, students and their parents may not realize that private student loans,like federal student loans, cannot be discharged in bankruptcy absent a showing of undue hardship, which is very hard to establish in a bankruptcy court. Students who take out private loans and are unable to pay them back may see their parents dragged down into financial ruin if their parents are not able pay back the debt. In most cases, the parents will have no recourse to the bankruptcy courts. 

The Federal Government Should Shut Down the Private Student-Loan Industry

The CFPB report is pathetic in terms of its advice to students and their families who find themselves unable to pay back their private student loans.  All Cordray and Chopra could think to do about the rapacious private student-loan industry was draft a form letter that students can use to beg for mercy when they find themselves unable to make their loan payments.

Students don't need sample letters to deal with the private student-loan industry; they need effective relief from private student-loans that many students did not fully understand when they signed the loan documents.

What needs to be done?

Congress needs to repeal the 2005 amendment to the Bankruptcy Code that has made it almost impossible for student borrowers and their co-signers (usually parents) to discharge their private loans in bankruptcy.  

If Congress would take this simple step, the private student-loan industry would almost immediately shut down, which would be a good thing.  The banks are happy to loan students money so long as students' parents co-sign the loans and bankruptcy relief is unavailable.  But if private student loans could be discharged in bankruptcy like any other unsecured debt, the banks would get out of the student-loan business in a hurry.

In the meantime, Rohit Chopra, Rich Cordray and the CFPB need to issue dire warnings to college students and their families not to take out private loans to attend college.  Such loans may make sense for people who are enrolling in expensive but high-quality professional programs in law or medicine. But low-income students have no business taking out student loans from banks and other private lenders.  Too often, taking out a private student loan leads to financial disaster not only for the student but for the student's parents as well.

Mr. Chopra and Mr. Cordray are fully aware of the harm being caused by private student-loan financiers.  “Struggling private student loan borrowers are finding themselves out of luck and out of options," Mr. Cordray acknowledged.  Unfortunately, Mr. Chopra, Mr. Cordray, and the CFPB do not have the courage to propose effective reforms.

Mr. Cordray should be ashamed of himself too.
References

CFPB Report Finds Distressed Private Student Loan Borrowers Driven Into Default. Consumer Financial Protection Bureau, October 16, 2014.




Thursday, May 1, 2014

The Private Student Loan Industry Doesn't Need Better Regulation: It Needs to Be Exterminated

Businesses that protect homeowners from termites and roaches call themselves pest control companies. But speaking as a homeowner, I don't want the roaches in my house to be controlled. I want them dead.

Image credit: pestcontrolman.cm
The Consumer Financial Protection Bureau (CFPB) is much like a pest control company that looks out for the interests of the pests.  It wants to regulate the the nation's rapacious financial services sector in a way that doesn't cause the banks too much discomfort. When it comes to the private student loan industry, this attitude is a mistake.

As the New York Times pointed out in a recent editorial, private student loans are very different from federal student loans.  Students who take out federal student loans get a fixed interest rate, and they can apply for an economic hardship deferment if they run into financial difficulties.  Private lenders often offer variable interest rates that allow monthly loan payments to adjust upward,  and they usually don't have any process in place to assist financially distressed borrowers.

The CFPB collects hundreds of complaints each year from people who took out private student loans. In a recent analysis,  the  Bureau reported that some private student-loan borrowers were forced into default without warning even though they were current on their loan payments In particular, the CFPB documented that some student-loan borrowers who were making regular payments on their loans were forced to pay back the entire amount of their loans if a person who co-signed their loan died.  Some student borrowers received notice from their lender that their loans were being called due at the same time they were mourning the loss of the parent or grandparent who had cosigned the student's college loan. Now that's crumby behavior.

And guess which private lender received the most complaints? Sallie Mae.  The CFPB received 995 complaints about Sallie Mae between October 2013 and March 2014.  That's a 50 percent jump over the previous measuring period.

And coming in second place for most number of complaints was JP Morgan Chase.

Issuing private loans is a particularly lucrative business for the banking industry. Why? First of all, in 2005, the banks got Congress to amend the bankruptcy laws to make private student loans almost impossible to discharge in bankruptcy.

Second, about 90 percent of these loans are co-signed--often by a parent or a grandparent. Co-signers stand jointly liable with the student borrower when it comes to paying off a private student loan. And co-signers--like the student borrowers themselves--cannot discharge a private student loan in bankruptcy except under very rare circumstances.

In its recent report, the CFPB practically begged the banks to be more compassionate to their student-loan debtors.  Rohit Chopra, CFPB's Student Loan Ombudsman, pointed out that a student-loan borrower who had a bad experience with a bank would be less likely to use that bank for other banking matters. And, Chopra added, treating student-loan borrowers  badly might hurt the banks' reputation.  Yes--the CFPB's Student Loan Ombudsman actually expressed concern about the banks' reputation!

The New York Times, commenting on the CFPB's report, thinks more federal regulation is the way to deal with the rapacious private student-loan industry. "Federal regulators clearly have a lot to do to address what amounts to a student loan crisis," the Times editorialized. Regulators "can begin by preventing contracts that unfairly burden borrowers," the Times suggested and loan terms "should be clearly stated."  And--the Times concluded, student-loan borrowers should be notified when their loans are at risk and borrowers in good standing should not be "shoved into default."

Personally, I don't give a damn about Sallie Mae's reputation or the reputation of the banks that have been mistreating private student-loan debtors. And I don't think another layer of regulation will make the banks behave more compassionately or more responsibly.

The way to deal with problems in the private student-loan industry is to shut this sleazy business down. And that can be easily done. All Congress needs to do is to repeal the 2005 law that made it exceedingly difficult for private student-loan debtors and their guarantors to discharge student loans in the bankruptcy courts.

If Sallie Mae, JP Morgan Chase, Wells Fargo and the other major players in the private student loan industry knew that distressed student-loan debtors could discharge their student loans in bankruptcy in the same way they could discharge other non-secured debts, they would get out of the student loan business in a hurry.  And that is exactly what we should want them to do.

References

Rohit Chopra. Mid-year update on student loan complaints. Consumer Financial Protection Bureau, April 2014.

Editorial. Troubling Student Loans. New York Times, April 29, 2014, p. A20.





Wednesday, January 22, 2014

National Consumer Law Center Report on Sallie Mae: Good Recommendations But They Don't Go Far Enough

The National Consumer Law Center (NCLC) published a report this week on Sallie Mae, the nation's largest lender of private student loans and a major servicer of federal student loans.  The report documents a long history of poor performance and allegations of wrong-doing. As documented by NCLC, Sallie  Mae was under investigation by both the Consumer Financial Protection Bureau and the Justice Department during 2013.

NCLC has produced a very useful and interesting report--but like most reports on the student-loan industry, it does not go far enough with its reform recommendations. In this blog, I will briefly summarize the NCLC  report and give my own recommendations for reform.

Sallie Mae: A Summary of the NCLC Report

The Student Loan Marketing Association--commonly called "Sallie Mae"--began as a government-sponsored enterprise during the Nixon administration. Today it is a publicly traded corporation involved in nearly every aspect of the student loan business.

Sallie Mae is incredibly profitable.  According to NCLC, it enjoyed a return of 30 percent on equity in 2006, and its income nearly tripled between 2010 and 2013. As of September 30, 2011, it has received almost $100 million from the federal government for servicing federal loans.

Sallie Mae's CEO, Albert Lord, received more than $200 million in compensation between 1999 and 2004 (NCLC Report, p.2).  According to Salary.com, Mr. Lord made more than $7 million in total compensation in fiscal year 2012.

Albert Lord, CEO of Sallie Mae
photo credit: Sallie Mae
How does Sallie Mae make its money? Besides servicing federal student loans, it lends money to student borrowers at high interest rates--often much higher than the rates charged under the federal student loan program.

In NCLC's view, Sallie Mae's activities are often not in the interest of student-loan borrowers.  Its private student-loan business offers loans at higher interest rates than loans offered through the federal student loan program and these loans do not provide options for forbearance and long-term repayment that are available to students who borrow from the federal program. Default rates are high for Sallie Mae's "nontraditional" loan, including loans made to students with poor credit ratings who attend for-profit schools.

NCLC also criticizes Sallie Mae's work as a servicer of federal student loans.  According to  NCLC,  Sallie Mae often encourages students who are delinquent on their loans to apply for forbearances instead of steering them into income-based repayment plans, which might be in the students' best interest.  Students who receive forbearnces on their loans are excused from making payments but interest accrues on the loan balance, making them more difficult to pay off.

NCC's Recommendations for Reform

NCLC recommends better oversight of Sallie Mae's activities and urges the government to hold Sallie Mae and other private loan servicers accountable for poor performance and legal violations.  Who can disagree?

NCLC also recommends the creation of a "safety net" for distressed student borrowers who took out private student loans, "including bankruptcy discharge rights and cancellation rights for fraud victims." Again, who could disagree?

My Own Belief: The Private Student-Loan Business Should Be Shut Down

NCLC's recommendations are reasonable, but they don't go far enough. In my view, the federal student loan program should be the exclusive provider of college loans.  In other words, the feds should shut down the private student-loan business completely.

Certainly, Sallie Mae and the major corporate banks should not be offering college loans to students at high interest rates and with inadequate consumer protections--loans which are almost impossible to discharge in bankruptcy. It is outrageous that Congress amended the Bankruptcy Code in 2005 to make private student loans nondischargeable in bankruptcy absent a showing of "undue hardship."

Even the banks themselves have come to realize that the their private student-loan activity is dirty business.  The banks have reduced their student-loan business from $22 billion in loans in 2008 to only $6.4 billion n 2012.  And JP Morgan Chase recently announced recently that it is getting out of the private student-loan business altogether.

All Congress needs to do to shut down the private student-loan industry is to repeal its 2005 Bankruptcy Code amendment and allow distressed student-loan borrowers to discharge their private student loans in bankruptcy just like any other unsecured loan.  That one reform would cause the banks to voluntarily stop offering private student loans.

Why won't Congress enact this one simple reform? Perhaps it is because Sallie Mae, the banks and the for-profit college industry pay powerful lobbyists to discourage Congress from cleaning up the giant mess that the student-loan business has become--both the federal student loan program and the private student-loan industry.  As NCLC pointed out, Sallie Mae paid lobbyists more than $22 million between 2007 and 2013 to protect its interests.

The Feds Should Not Be Paying Private Firms to Manage the Federal Student Loan Program

In addition, the Feds should stop paying private companies to service federal student loans and act as loan collection agencies.  The government now has $1 trillion in outstanding student loans and 39 million borrowers in repayment status.  It is time the government itself takes over the management of this huge portfolio of debt instead of outsourcing loan management to Sallie Mae and other private entities who act in their own private interest and not the interest of student borrowers.

References

Albert L. Lord executive compensation. Salary.com. Accessible at: http://www1.salary.com/Albert-L-Lord-Salary-Bonus-Stock-Options-for-SLM-CORP.html

JP Morgan Chase to stop making student loans. USA Today, September 5, 2013. Accessible at:
http://www.usatoday.com/story/money/personalfinance/2013/09/05/jpmorgan-chase-student-loans/2772509/

Deanne Loonin. The Sallie Mae Saga: A Governmet-Created, Student Debt Fueled Profit Machine. National Consumer Law Center, January 2014.


Friday, January 10, 2014

Such hypocrisy! The Obama administration urges private college-loan lenders to play nice with student borrowers

Obama administration officials summoned the leading private student-loan creditors to a meeting at the Treasury Department yesterday to urge them to do more to help student-loan borrowers who are in danger of default.

Who attended this meeting?  Arne Duncan, Secretary of Education, and Richard Cordray, chief of the Consumer Financial Protection Bureau, represented the government.

And these are some of the banks that attended: Sallie Mae, Wells Fargo, JP Morgan Chase, RBS Citizens Financial, PNC Financial Services, SunTrust Banks, and Discover Financial Services.

The Obamacrats delivered their usual blather about easing the plight of overburdened student-loan borrowers.  This is how a government  spokeswoman described the meeting.
Participants discussed strategies to assist borrowers in successfully managing their private student loans, including servicing best practices and approaches to private student loan modifications and refinancing.
Yak, yak, yak.  The only way to get the private banks to behave decently toward indebted college students is to force them out of the student-loan business altogether.  And this could be done so easily.

In 2005, Congress amended the Bankruptcy Code to make private student loans nondischargeable in bankruptcy absent "undue hardship"--the same standard that applies to federal student loans. Consequently, private student loans--like federal student loans--are almost impossible to discharge in a bankruptcy court.

All Congress needs to do to reform the private student-loan industry is repeal the 2005 law and allow insolvent debtors with private student loans to discharge those loans in bankruptcy. I guarantee you, this single legislative change would dry up the private student-loan industry overnight.

But Congress won't do the straightforward thing.  No--it will tinker with all kinds of cosmetic fixes and allow the private banks to continue exploiting colleges students.  

Hands down, Sallie Mae is the chief offender. According to a 2012 news story, Albert Lord, Sallie Mae's CEO, made $225 million between 1999 and 2004 and was building his own private golf course.  What do you think his total compensation is today?

Democrats seem to think they can establish their liberal credentials simply by expressing sympathetic platitudes. Arne Duncan talks about helping student borrowers but hasn't done a damn thing to alleviate the student loan crisis.  And Senator Elizabeth Warren, a self-proclaimed consumer's  advocate, is all bark and and no bite.

Thanks, Arne,ever so much!
Why doesn't Congress act more aggressively to give college students some relief? Maybe because the private lenders and private-college industry hire well-paid lobbyists to protect their interests and make strategic campaign contributions to powerful politicians.

Personally, I won't start believing the so-called liberal Democrats who express concern about the student-loan crisis until some of them throw their support behind some straightforward and simple reforms.  First and foremost, insolvent students who took out private loans to finance their education should have access to bankruptcy.  

References

U.S. Urges Private Lenders and services to Help Borrowers. Inside Higher Education, January 20, 2014. Accessible at: http://www.insidehighered.com/quicktakes/2014/01/10/us-urges-private-lenders-and-servicers-help-borrowers

Sophia Zamen. "Education is Worth It": Students Take on Sallie Mae CEO Albert Lord at Shareholder Meeting.  Alternet.org, May 21,2012. Accessible at: http://www.alternet.org/newsandviews/article/932971/%22education_is_worth_it%22%3A_students_take_on_sallie_mae_ceo_albert_lord_at_shareholder_meeting

Note: My description of the meeting at the Treasury Department comes from the Inside Higher Education story.  My references to Sallie Mae are taken from Sophia Zamen's essay for Alternet.org


Tuesday, October 22, 2013

The Brookings Institution Makes A Proposal for Student Loan Reform: Let's Turn College Graduates Into Sharecroppers

The Hamilton Project, a public policy initiative sponsored by the Brookings Institution, issued a report this month that offers some promising ideas for reforming the federal student loan program. At the same time, not all of the ideas are good.

The Hamilton Project Proposal in a Nutshell

In a nutshell, the Hamilton Project proposes a simple income-based repayment plan for student borrowers that will replace the hodgepodge of repayment options now in place. Students will make loan payments based on a percentage of their income for a maximum of 25 years. Any unpaid balance owing at the end of this 25 year period will be forgiven with no tax consequences for the debtor.

Loan payments would be paid through a payroll deduction similar to Social Security deductions and debtors would be free to make larger loan payments than the minimum if they want to pay off their loans early. The proposal calls for the government to manage the repayment program instead of contracting out this work to private loan servicers.

In addition, the Hamilton Project recommends the elimination of interest subsidies for low-income borrowers while they are in school. The authors point out that these subsidies do nothing to increase the number of low-income students who enroll for college since the subsidy doesn't really benefit them until they enter the loan-repayment phase.  In the authors' opinion, money spent on subsidizing interest rates should be directed toward grants.


Long-Term Student-Loan Repayment Plans Will Create a New Class of Sharecroppers
Sharecropper cabin, 1936
Photo by Carl Mydans


Finally, the Hamilton Project proposes important reforms for the private student-loan industry.  Most significantly, the Project recommends the repeal of a 2005 Bankruptcy Code provision that makes it almost impossible for borrowers to discharge private student loans in bankruptcy.  The Project recommends that private student loans be treated like any other unsecured debt in bankruptcy.

The Hamilton Project's Proposal Contains Some Good Ideas

I like some of the Hamilton Project's proposals.  First of all, I heartily endorse the Hamilton Project's proposal for providing better bankruptcy protection for people who took out private loans from the banks. Congress made a mistake when it amended the Bankruptcy Code in 2005 to make it almost impossible for debtors to discharge their private student loans in bankruptcy. As I have said before, repealing the 2005 provision would probably have the salutary effect of driving the banks out of the private student- loan business.

I also like the Hamilton Project's proposal for simplifying the process for student debtors to participate in an income-based repayment plan and for having the government handle loan repayments through payroll deductions rather than having private student-loan servicers manage the repayment process.  Some of the private loan servicers are harassing delinquent student-loan debtors, and I would like to see their operations shut down.

Flaws in the Hamilton Project's Proposal

But  the Hamilton Project's proposal has some flaws.  First and most importantly, the plan calls for student-loan repayment obligations to stretch out for as long as a quarter of a century. In essence then, student-loan debtors will become sharecroppers for the government, paying a portion of their wages over most of their working lives in return for the privilege of going to college. I am opposed to lengthy income-based repayment plans as a matter of principle.

And, as I have said before, income-based repayment plans reduce students' incentives to borrow as little as possible and they reduce the colleges' incentives to keep their costs down.

The Hamilton Proposal is Based on a False Assumption

The Hamilton Proposal is based on the premise that most students don't borrow that much money, and thus they should have no trouble paying off their loans under an income-based repayment plan in just a few years. It points out that almost 70 percent of student-loan debtors borrow less than $10,000.

But as the Hamilton Project acknowledged in footnote 7 of its report, by the time people go into default, they owe considerably more than they borrowed due to penalties and accruing interest. If interest rates accrue for low-income borrowers while they are in school or if low-income borrowers' income-based payments are too low to cover accruing interest, then the amount of their debt will become larger--probably much larger--than they originally borrowed.

Conclusion: Some of the Hamilton Project's Proposals Have Promise, But We Should Avoid Putting Student Loan Debtors in Long-Term Repayment Plans

Some of he Hamilton Project's proposals have promise.  Restoring bankruptcy protection for private student-loan borrowers and eliminating the private student-loan repayment servicers are good ideas.

But the people who have been hurt the most by the federal student loan program are young people who attended for-profit colleges. As the Hamilton Project pointed out, people under 21 years of age have the highest loan default rates of any age group, and we know from many sources that people who attended for-profit colleges have the highest student-loan default rates.

The Hamilton Project's proposal is likely to put a lot of young, low-income people into long-term repayment plans they will never pay off.  And many of these long-term debtors--perhaps most of them-will be people who attended expensive for-profit colleges.

We simply must shut down the for-profit colleges.  Otherwise, the Hamilton Project's proposal for putting student-loan debtors in 25-year repayment plans will likely created a 21st century version of indentured servants--people who attended for-profit colleges that were too expensive and who will spend the majority of their working lives paying for college experiences that did not enable them to earn a salary large enough to quickly pay off their student loans.

References

Susan Dynarski and Daniel Kreisman. Loans for Equal Opportunity: Making Borrowing Work for Today's Students. Hamilton Project, Brookings Institution, October 2013. Accessible at: http://www.brookings.edu/~/media/research/files/papers/2013/10/21%20student%20loans%20dynarski/thp_dynarskidiscpaper_final.pdf

Thursday, October 17, 2013

Surprise, Surpise! Student Loan Ombudsman Reports Problems in Private Student Loan Industry

 I admit that I have been pleasantly surprised by the quality of the reports coming out of the Student Loan Ombudsman's office. Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau, is doing good work.  Mr. Chopra's reports on student loans are clear, concise, and helpful.

Mr. Chopra's latest report, released this week, focuses on complaints against the private student loan industry.  About 13.7 million people have outstanding balances on private student loans, which total well over $100 billion.  Students who attend for-profit colleges are most likely to take out private student loans. In 2008, almost half of all undergraduate students who attended a for-profit college (46 percent) had at least one private student loan.

Last year, the Consumer Financial Protection Bureau received 3,800 complaints against private student-loan lenders, which is a highly concentrated industry. Almost all the complaints were made against eight private lenders, including Wells Fargo, JP Morgan Chase, Citibank, and KeyBank.  Almost half of the complaints were made against one lender--Sallie Mae.

Here are some of the chief complaints that student-loan borrowers reported:

  • Borrowers had trouble paying off their loans early.  They had difficulty getting an accurate payoff number. And when they attempted to pay their loans off early by making additional payments, these additional payments were often not properly credited to them.

  • Late fees were charged even when borrowers paid their monthly payments on time.

  • When borrowers ran into financial trouble and only made partial payments, these payments were credited to maximize the penalties against them.
A few comments. First, some private student-loan lenders are getting out of the business, and that is a good thing.  For Example, JP Morgan Chase, which once loaned billions of dollars a year to student borrowers, announced last month that it shutting down its private student-loan operation.

Second, there is no valid reason why private student-loan borrowers should be having the problems that the CFPB reported. People with home mortgages have no difficulty paying off their loans early by making extra payments and they have no difficulty getting an early payoff amount.  So why are student-loan borrowers having a problem?  My guess is that the banking industry runs its student-loan operations to maximize profits and has no interest in helping their borrowers pay off their loans early.

Third--and most importantly, the banking industry got its toadies in Congress to amend the Bankruptcy Code in 2005 to make private student loans as difficult to discharge in bankruptcy as federal student loans.  Several respected commentators have recommended that this provision be repealed.

If Congress would repeal its 2005 Bankruptcy Code provision and allow distressed student-loan borrowers to discharge their private student loans in bankruptcy like any other unsecured debt, the private student-loan industry would disappear almost immediately.

The banks are in this business because it is very profitable, and their borrowers have almost no access to bankruptcy or to effective consumer protections.  Students who attend for-profit colleges are most vulnerable to these voracious institutions. I say it is time to shut this pernicious industry down.

References

Rohit Chopra. Annual Report on the CFPB Student Loan Ombudsman. Washington, DC: Consumer Financial Protection Bureau. October 16, 2013. Accessible at: http://www.consumerfinance.gov/reports/annual-report-of-the-cfpb-student-loan-ombudsman/

Alan Collinge. Commentary of the Day-May 2, 2012: What Congress Can do to Fix the Student Loan Crisis. Posted on Irascible Professor Website. accessible at: http://irascibleprofessor.com/comments-05-02-12.htm

Kimberly Hefling. Lender problems target student loan complaints. The Baton Rouge) Advocate, October 17, 2013, p. 8A.
JP Morgan Chase to stop making student loans. USA Today, September 5, 2013. Accessible at:
http://www.usatoday.com/story/money/personalfinance/2013/09/05/jpmorgan-chase-student-loans/2772509/

JP Morgan Chase to stop making student loans. USA Today, September 5, 2013. Accessible at:
http://www.usatoday.com/story/money/personalfinance/2013/09/05/jpmorgan-chase-student-loans/2772509/

Private Student Loans. Finaid web site. Accessible at:  http://www.finaid.org/loans/privatestudentloans.phtml

Private Student Loans. Report to Report to the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Health, Education, Labor, and Pensions, the House of Representatives Committee on Financial Services, and the House of Representatives Committee on
Education and the Workforce. August 29, 2012. Accessible at: http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf

Private Loans: Facts and Trends. Report updated in July 2011. Project on Student Debt. Accessible at: http://projectonstudentdebt.org/files/pub/private_loan_facts_trends.pdf