Showing posts with label student loan crisis. Show all posts
Showing posts with label student loan crisis. Show all posts

Wednesday, July 12, 2017

Half a millon bucks in student loans to become a pharmacist: Does that make any sense?

Earlier this week, I read a letter posted on Steve Rhode's web site: Get Out of Debt Guy and distributed on the Personal Finance Syndication Network.  An anonymous writer asked Mr. Rhode how to handle $500,000 in student loans that he or she borrowed to become a pharmacist.  Rhodes' advice was spot on, and I won't comment further about how this individual should manage all that debt.

My purpose here is to ask the simple and obvious question: How could anyone be permitted to accumulate a half million dollars in student loans to obtain a pharmacy degree?

As I said, the writer posted anonymously, so I have no way of knowing whether the person is male or female.  I'll just refer to this debtor as Pete.

As Pete mentioned in his query to Steve Rhode, he obtained a GED when he was 35 years old, about ten years ago. He obtained a BS in Neuroscience, another BS in biochemistry, and a doctor of pharmacy degree, which he recently completed. So I'm guessing Pete is about 45 years old, and he's embarking on a new career as a pharmacist.

Will Pete earn enough money as a pharmacist to pay off $500,000 in student loans? No, he won't.  We don't know the interest rate on his loans, which are both federal and private; but let's assume all his loans are accruing interest at 6 percent a year. That's $30,000 a year just to pay accruing interest on the debt.

What are Pete's options? Perhaps he can enroll in a 20-year income-base repayment plant, whereby his loan payments are based on his income. If he obtains a job paying $60,000 a year, which seems reasonable, his payments will be less than $400 a month. But of course, a payment that low won't begin to cover accruing interest on Pete's loans.

Pete might get a public service job that will allow him to make income-based payments for 10 years with the balance forgiven if he makes 120 consecutive payments.  Again, his monthly payments probably won't even cover accruing interest.

Bottom line is this: Pete, who is in his mid-40s, doesn't have a snowball's chance in hell of ever paying back $500,000 in student loans.

We can blame Pete for borrowing so much money or for obtaining two bachelor's degrees instead of one. Perhaps we can criticize him for making poor choices when choosing where to study. Maybe he could have borrowed less money had he attended less expensive colleges.

But that would be pointless. The parties who bear the blame for Pete's unmanageable debt load are the U.S. government and the banks, which loaned Pete way too much money.

Pete's situation is atypical, I'll grant you, but it is far more common than many people believe. Not long ago I blogged on a Hofstra law graduate who owes $900,000 in student loans--pretty damn near a million bucks!

The student loan crisis is not small beer. Less than half of the nation's student borrowers in repayment are paying down the principle of their loans. The problem is as obvious as a tsunami barreling down on a beach full of sunning vacationers.

Why can't we put some limit on the amount of money students can borrow? The amount of interest that can accrue? The amount of penalties and fees that can get added to borrowers' debt when they default?

In fact there are lots of things we could do to limit the harm caused by the student loan crisis. But nobody is talking about fixes. The college presidents, whether they are Ivy League college leaders or the CEO of Bobby Joe's College of Auto Mechanics, are saying nothing about the student loan mess. Every school, college, and university participating in the federal student loan program--more than 4,000 institutions--is dependent on regular infusions of student-loan dollars to keep the doors open.

Someday, it will become apparent that a high percentage of the nation's accumulated student-loan debt--30 percent, 40 percent, perhaps 50 percent--is not going to be paid back; and this house of cards will collapse.

But until that day comes, our politicians, academics and the national media will continue focusing on what they think is the most important topic of the day--President Trump's alleged communications with the Russians. And like summer vacationers lolling on the beach, a lot of pundits, intellectuals and journalists are going to be caught unawares as the student-loan tsunami flows over America's colleges and universities and destroys a good many of them--beginning with the small liberal arts colleges.

References

Steve Rhode, How Do I Handle My $500K of Student Loans to Become a Pharmacist? Personal Finance Syndication Network. 


Tuesday, May 9, 2017

The Opioid Epidemic and The Student Loan Crisis: Is there a link?

James Howard Kunstler wrote one of his best essays recently about America's opioid epidemic, and he began with this observation:
 While the news waves groan with stories about "America's Opioid Epidemic," you may discern that there is little effort to actually understand what's behind it, namely the fact that life in the United States has become unspeakably depressing, empty, and purposeless for a large class of citizens.
Kunstler went on to describe life in small towns and rural America: the empty store fronts, abandoned houses, neglected fields, and "the parasitical national chain stores like tumors at the edge of every town."

Kunstler also commented on people's physical appearance in backwater America: "prematurely old, fattened and sickened by bad food made to look and taste irresistible to con those sick in despair." And he described how many people living in the forgotten America spend their time: "trash television, addictive computer games, and their own family melodramas concocted to give some narrative meaning to lives otherwise bereft of event or effort."

There are no jobs in flyover America. No wonder opioid addiction has become epidemic in the old American heartland. No wonder death rates are going up for working-class white Americans--spiked by suicide, alcohol and drug addiction.

I myself come from the desperate heartland Kunstler described. Anadarko, Oklahoma, county seat of Caddo County, made the news awhile back due to four youth suicides in quick succession--all accomplished with guns. Caddo County, shaped liked the state of Utah, can easily be spotted on the New York Times map showing where drug deaths are highest in the United States. Appalachia, eastern Oklahoma, the upper Rio Grande Valley, and yes--Caddo County have the nation's highest death rates caused by drugs.

Why? Kunstler puts his finger on it: "These are the people who have suffered their economic and social roles in life to be stolen from them. They do not work at things that matter.They have no prospect for a better life . . . ."

Now here is the point I wish to make. These Americans, who now live in despair, once hoped for a better life. There was a spark of buoyancy and optimism in these people when they were young. They believed then--and were incessantly encouraged to believe--that education would improve their economic situation. If they just obtained a degree from an overpriced, dodgy for-profit college or a technical certificate from a mediocre trade school, or maybe a bachelor's degree from the obscure liberal arts college down the road--they would spring into the middle class.

Postsecondary education, these pathetic fools believed, would deliver them into ranch-style homes, perhaps with a swimming pool in the backyard; into better automobiles, into intact and healthy families that would put their children into good schools.

And so these suckers took out student loans to pay for bogus educational experiences, often not knowing the interest rate on the money they borrowed or the payment terms. Without realizing it, they signed covenants not to sue--covenants written in type so small and expressed in language so obscure they did not realize they were signing away their right to sue for fraud even as they were being defrauded.

And a great many people who embarked on these quixotic educational adventures did not finish the educational programs they started, or they finished them and found the degrees or certificates they acquired did not lead to good jobs. So they stopped paying on their loans and were put into default.

And then the loan collectors arrived--reptilian agencies like Educational Credit Management Corporation or Navient Solutions.  The debt collectors add interest and penalties to the amount the poor saps borrowed, and all of a sudden, they owe twice what they borrowed, or maybe three times what they borrowed. Or maybe even four times what they borrowed.

Does this scenario--repeated millions of time across America over the last 25 years--drive people to despair? Does it drive them to drug addiction, to alcoholism, to suicide?

Of course not.

And even if it does, who the hell cares?


Drug Deaths in 2014


References


James Howard Kunstler. The National Blues. Clusterfuck Nation, April 28, 2017.

Sarah Kaplan.'It has brought us to our knees': Small Okla. town reeling from suicide epidemicWashington Post, January 25, 2016.

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014

Gina Kolata and Sarah Cohen. Drug Overdoses Propel Rise in Mortality Rates of Young Whites. New York Times, January 16, 2016.

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. 

Haeyoun Park and Matthew Bloch. How the Epidemic of Drug Overdose Deaths Ripples Across AmericaNew York Times, January 19, 2017.






Thursday, November 10, 2016

The student loan crisis and the first 100 days: Please, President Trump, provide bankruptcy relief for distressed student-loan debtors

Hillary Clinton lost the presidential election, and we can throw her promise of a tuition-free college education in the ashcan. Meanwhile, the student loan crisis grows worse with each passing month.

Eleven million people have either defaulted on their loans or are delinquent in their payments. More than 5 million student-loan debtors are in long-term income based repayment plans that will never lead to loan payoffs.Several million student borrowers have loans in deferment or forbearance while interest continues to accrue on their loan balances.

Soon we will have a new president, and an exciting opportunity to look at the federal student loan program from a fresh perspective. What can President Trump do to bring relief to distressed college-loan debtors. Here are some ideas--respectfully submitted:

FIRST, TREAT THE WOUNDED.

President Trump can do several things quickly to alleviate the suffering.

Stop garnishing Social Security checks of loan defaulters. More than 150,000 elderly student-loan defaulters are seeing their Social Security checks garnished. President Trump could stop that practice on a dime. Admittedly, this would be a very small gesture; the number of garnishees is minuscule compared to the 43 million people who have outstanding student loans. But this symbolic act would signal that our government is not heartless.

Streamline the loan-forgiveness process for people who were defrauded by the for-profit colleges. DOE already has a procedure in place for forgiving student loans taken out by people who were defrauded by a for-profit college, but the administrative process is slow and cumbersome. For example, Corinthian Colleges and ITT both filed for bankruptcy, and many of their former students have valid fraud claims. So far, few of these victims have obtained relief from the Department of Education.

Why not simply forgive the student loans of everyone who took out a federal loan to attend these two institutions and others that closed while under investigation for fraudulent practices?

Force for-profit colleges to delete mandatory arbitration clauses from student enrollment documents. The Obama administration criticized mandatory arbitration clauses, but it didn't eliminate them. President Trump could sign an Executive Order banning all for-profit colleges from putting mandatory arbitration clauses in their student-enrollment documents.

Banning mandatory arbitration clauses would allow fraud victims to sue for-profit colleges and to bring class action suits. And by taking this step, President Trump would only be implementing a policy that President Obama endorsed but didn't get around to implementing.

Abolish unfair penalties and fees. Student borrowers who default on their loans are assessed enormous penalties by the debt collectors--18 percent and even more. President Trump's Department of Education could ban that practice or at least reduce the penalties to a more reasonable amount.

PLEASE PROVIDE REASONABLE BANKRUPTCY RELIEF FOR DISTRESSED STUDENT-LOAN DEBTORS.

The reforms I outlined are minor, although they could be implemented quickly through executive orders or the regulatory process. But the most important reform--reasonable access to the bankruptcy courts--will require a change in the Bankruptcy Code.

Please, President Trump, prevail on Congress to abolish 11 U.S.C. 523(a)(8) from the Bankruptcy Code--the provision that requires student-loan debtors to show undue hardship as a condition for discharging student loans in bankruptcy.

Millions of people borrowed too much money to get a college education, and they can't pay it back. Some were defrauded by for-profit colleges, some chose the wrong academic major, some did not complete their studies, and some paid far too much to get a liberal arts degree from an elite private college. More than a few fell off the economic ladder due to divorce or illness, including mental illness.

Regardless of the reason, most people took out student loans in good faith and millions of people can't pay them back. Surely a fair and humane justice system should allow these distressed debtors  reasonable access to the bankruptcy courts.

President Trump can address this problem in two ways:

  • First, the President could direct the Department of Education and the loan guaranty agencies (the debt collectors) not to oppose bankruptcy relief for honest but unfortunate debtors--and that's most of the people who took out student loans and can't repay them.
  • Second, the President could encourage Congress to repeal the "undue hardship" provision from the Bankruptcy Code.
Critics will say that bankruptcy relief gives deadbeat debtors a free ride, but in fact, most people who defaulted on their loans have suffered enough.from the penalties that have rained down on their heads.

More importantly, our nation's heartless attitude about student-loan default has discouraged millions of Americans and helped drive them out of the economy. President Trump has promised middle-class and working-class Americans an opportunity for a fresh start. Let's make sure that overburdened student-loan debtors get a fresh start too.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1. 2014. Accessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Stephen Burd. Signing Away Rights. Inside Higher Ed, December 17, 2013. Available at https://www.insidehighered.com/views/2013/12/17/essay-questions-mandatory-arbitration-clauses-students-profit-higher-education

Andrew Kreighbaum, Warren: Education Dept. Failing Corinthian StudentsInside Higher Ed, September 30, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/09/30/warren-education-dept-failing-corinthian-students

Senator Elizabeth Warren to Secretary of Education John B. King, Jr., letter dated September 29, 2016. Accessible at https://www.warren.senate.gov/files/documents/2016-9-29_Letter_to_ED_re_Corinthian_data.pdf

Ashley A. Smith. U.S. Urged to Deny Aid to For-Profits That Force Arbitration. Inside Higher Ed, February 24, 2016. Available at: https://www.insidehighered.com/quicktakes/2016/02/24/us-urged-deny-aid-profits-force-arbitration?utm_source=Inside+Higher+Ed&utm_campaign=183bc9e3a3-DNU20160224&utm_medium=email&utm_term=0_1fcbc04421-183bc9e3a3-198565653

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

U.S. 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

Tuesday, October 13, 2015

When You Reach the Broken Promised Land: Student-Loan Debtors Have Much in Common with Undocumented Immigrants

                             When you reach the broken promised land
                             And every dream slips through your hands
                             Then you'll know that it's too late to change your mind
                             'Cause you've paid the price to come so far
                             Just to wind up where you are
                             And you're still just across the borderline 
Across the Borderline                              
Ry Cooder, John Hiatt & Jim Dickinson
Across the Borderline is perhaps the most powerful of the musical border laments, even more stirring than Woodie Guthrie's immortal song, Deportees (Plane Wreck at Los Gatos). No one with an ounce of human empathy can listen to Willie Nelson's rendition of Across the Borderline and not be moved by the suffering and hardship that so many of our Mexican immigrants have experienced.

Recently, as I reflected on the lyrics of this song, it occurred to me that it could serve just as well as a lament for our nation's distressed student-loan debtors. Indeed, much like our Mexican immigrants, millions of young Americans from disadvantaged backgrounds have tried to "cross the borderline" to economic prosperity by borrowing money to enroll in our nation's colleges. And like our Mexican immigrants, many college students have paid a high price only to see their dreams slip away and to wind up "just across the borderline" with thousands of dollars of student-loan debt that they are unable to repay.

Ten million Americans have defaulted on their student loans or are delinquent in their loan payments. Another 4 million have signed up for long-term repayment plans that can last up to 25 years.  And about 9 million have gotten deferments or forbearances that give them only temporary relief from making loan payments while the interest on their indebtedness piles up month by month.

Why haven't our politicians addressed this calamity? 

I'll tell you why. We've become a nation run by oligarchs who are making money on the federal student loan program. The private equity groups who own most of the for-profit colleges are getting rich. Our public universities are feasting off of Pell grant money and student loans, and they get their federal dollars whether or not students benefit from their college experiences. Our politicians are getting campaign contributions from the people who who want to preserve the status quo, and so-called non-profit corporations are collecting big fees to manage loan portfolios stuffed with promissory notes signed by 41 million student-loan debtors.

In fact, our nation's distressed student-loan debtors are treated exactly like undocumented immigrants. Both are derided as scofflaws and deadbeats, even though most of these people want nothing more than to be productive and to make a decent living for their families. And both groups are exploited. Undocumented immigrants are working in the construction trades and the hospitality industry for substandard wages, and college students are borrowing millions in order to pay exorbitant tuition fees to get education and training that doesn't lead to good jobs. 

Both groups cry out for justice. But they won't get justice because too many powerful people like things just they way they are. 



Image result for undocumented immigrants

Friday, June 12, 2015

Lee Siegel is not the poster child for the student loan crisis: Single mothers are more typical of defaulting student-loan borrowers than self-proclaimed cultural critics

It is unfortunate--truly unfortunate--that the New York Times chose to publishe Lee Siegel's op ed essay in which he defended his decision to default on his student loans. Siegel has received a lot of negative feedback on his essay, including several letters that were published in the New York Times, and some people may have gotten the impression that Siegel is a typical student-loan debtor.

But he is not typical, and it would be tragic if Siegel becomes the poster child for the student-loan crisdis.

Americans need to understand that most student-loan defaulters are not successful, self-employed professionals like Siegel. Rather, they are typically people in desperate circumstances due a a host of negative life events (job loss, divorce, illness) that left them unable to manage their student-loan debts.  

If Americans are looking for a poster child for the student loan crisis, I nominate Alethea Lamento. 


Arethea Lamento, Not Lee Siegel, is the Poster Child for the Student Loan Crisis

As explained by a sympathetic bankruptcy court, Alethea Lamento was a 35-year-old single mother of two when she filed for bankruptcy. She was working for a grocery store chain for $10.15 an hour, and she only made ends meet for herself and her two children by living rent-free with her mother and her step-father.

Lamento had accumulated $70,000 in student loan debt while trying to obtain an education that she hoped would open the door to a better life. Unfortuantely, she married a man who, according to the bankruptcy court, was "abusive in multiple ways," and her husband did not want her to go to college. She made several attempts to get training to increase her income but she was unsuccessful due in part to the fact that she was a mother of two and married to a man who discouraged her from obtaining an education. 

As the court explained, Lamento was never able to make a voluntary payment on her student loans, and the federal government eventually began garnishing her paychecks to collect on the accumulated debt. Lamento then filed for bankruptcy.

In the bankruptcy proceedings, the U.S. Department of Education and Educational Credit Management Corporation appeared as creditors and opposed Lamento's request to have her student-loan debt discharged. They argued she should be put in a 25-year income-based repayment plan.

But a sympathetic and compassionate bankruptcy court rejected these arguments and discharged Lamento's student loans. First of all, the court pointed out, it was obvous that Arethea would not be able to maintain a minimal standard of living if she were forced to pay off her student loans.


 “At the age of 35, she has no money to pay rent or utilities for housing for herself and her two children,” the court wrote. “Without the generosity of her mother and stepfather, her family would have nowhere to live” (p. 676). Alethea’s salary did not allow her to pay rent or utilities, which the bankruptcy court considered to be basic needs. Nor did she have health insurance, which the court also considered to be a basic need. 

Alethea's creditors argued that her financial circumstances would improve, but the court did not agree.  “The evidence showed conclusively that Alethea’s financial situation is not temporary and that it is likely to persist for a significant part of the repayment period,” the court ruled.  

In the bankruptcy court's view, Alethea had filed for bankruptcy in good faith. It was true, the court acknowledged, that Alethea had made no voluntary payments on her student loans. Nevertheless, it was undisputed that with her limited income and tight budget, Alethea had never made enough money to make student-loan payments.

ECMC and the Department of Education tried to make much of the fact that Alethea had refused their offer to enter into a 25-year income-based repayment plan. In their view, her refusal to agree to a long-term repayment plan showed her lack of good faith.

But the court rejected this line of reasoning. As the court pointed out, the creditors’ position basically amounted to the argument that the only way a student-loan debtor can show good faith in a bankruptcy proceeding is to sign up for a long-term repayment plan.

The court ruled that Alethea’s reasons for rejecting a 25-year income-based repayment plan “to be credible, convincing, and offered in good faith” (p. 679). In the court’s opinion, it was clear that Alethea was not able to pay anything on her student loans and would be unable to do so in the foreseeable future. Thus her participation in an income-based repayment plan would be futile.

In addition, the court pointed out, there were burdens associated with such agreements. First, if Alethea agreed to a 25-year repayment plan, she would essentially be trading one nondischargeable debt for another. Second, signing up for such a repayment plan would require Alethea to report her income to her student-loan creditors for the next 25 years.

Finally, and perhaps most importantly, the court noted that the creditors’ insistence on a long-term repayment plan overlooked “the psychological effect” of having a significant debt obligation stretch out over a quarter of a century. “Given Alethea’s desperate circumstances, and her status as the proverbial honest but unfortunate debtor, she is entitled to sleep at night without these unpayable debts continuing to hang over her head for the next 25 years” (p. 679, emphasis supplied).

Conclusion: Millions of Student-Loan Defaulters are Entitled to Bankruptcy Relief

Perhaps Lee Siegel should have paid off his student loans, but millions of people who took our student loans in good faith don't make enough money from their jobs to pay back their loans. All these people are entitled to bankruptcy relief.

As Americans contemplate the growing student-loan disaster, they need to realize that Rober Siegel is not the typical student-loan debtor. More typical by far is Alethea Lamento, a single mother of two and an "an honest but unfortuante debtor," who deserves relief from oppressive student loans.

Note: Parts of this blog essay are taken from an article I co-authored with Robert C. Cloud and which appeared in Teachers College Record Online earlier this year. The opinions expressed in this blog are soley my own.

References

Delisle, J. & McCann, C. (2014, September 26). Who's Not Repaying Student Loans? More People Than You Think. Forbes.com. Retrieved from http://www.forbes.com/sites/jasondelisle/2014/09/26/whos-not-repaying-student-loans-more-people-than-you-think/

Fossey, R. & R. C. Cloud. (2013, November 22). "The Law Does Not Require a Party to Engage in Futile Acts”: Student Loans, Bankruptcy and a Compassionate Federal Court. Teachers College Record, http://www.tcrecord.org,  ID Number: 1733.

Fossey, R. & R. C. Cloud (2015, February 23). In Re Lamento: An Honest But Unfortunate Debtor Is Entitled To Sleep At Night Without Worrying About Unpayable Student-Loan Debt. Teachers College Record Online, http://www.tcrecord.org ID Number: 17871

In re Lamento, 520 B.R. 667 (Bkrtcy. N.D. Ohio 2014).

In re Roth, 490 B.R. 908 (9th Cir. BAP 2013).

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (6th Cir. 2013).

David Marans, This Author Called for A Student Loan Boycott, And CNBC Was Not Having It. Huffington Post, June 8, 2015. Accessible at: http://www.huffingtonpost.com/2015/06/08/cnbc-student-loan-boycott_n_7537432.html

Lee Siegel. Why I Defaulted on My Student Loans. New York Times, June 7, 2015, Sunday ReviewSection, p. 4.

Student borrowers and the economy (2014, June 10). New York Times. Retrieved from http://www.nytimes.com/2014/06/11/opinion/student-borrowers-and-the-economy.html?_r=0




Wednesday, June 18, 2014

If You Have a Student Loan, You Should Read Susan Dynarski's Proposal for Having Student Loan Payments Automatically Deducted From Debtors' Pay Checks

Susan Dynarski
If you took out a federal student loan to attend college, you should read Susan Dynarski's op ed essay in last Sunday's New York Times entitled "Finding Shock Absorbers for Student Debt."  Ms. Dynarski explains why two proposals for assisting overburdened student-loan debtors will not be very effective.  And she makes her own proposal for deducting borrowers' monthly student-loan payments directly from borrowers' pay checks.

Reducing Interest Rates on College Loans Won't Give Borrowers Much Relief

Recently, Senator Elizabeth Warren introduced legislation to significantly lower  interest rates on student loans, legislation that President Obama supported. Warren's bill would have covered the cost of lower interest rates by raising taxes on the wealthy. Not surprisingly, Republicans opposed the bill, and it did not get enough votes to move forward.

Ms. Dynarski points out that even a large cut to student-loan interest rates won't have much impact on individual students' monthly loan payments.  Borrowers with $30,000 in student loans (which is the average amount that college graduates owe when they finish their studies) would only see a $44 reduction in their monthly loan payments  if the interest rate on their loans was reduced from 6.5 percent to 3.5 percent--which  is a big reduction.

Thus the recent hype about Senator Elizabeth's failed attempt to pass legislation to reduce interest rate on student loans is a tempest in a teapot.  Even if Senator Warren's bill had bee adopted into law, it would not have given the mass of student-loan debtors much relief.

President Obama's Pay As You Earn Plan Is Too Cumbersome to Give Borrowers Much Relief

Dynarski also pointed out that the President Obama's Pay As You Earn program, whereby students make student-loan payments based on a percentage of their income, is so cumbersome that a high percentage of borrowers haven't applied for it even though they are behind on their loans or in default. One problem with Pay As You Earn is that the program does not respond quickly enough to borrowers who lose their jobs. A student-loan borrower's monthly loan payments are based on the borrower's previous year's income, so a borrower who is thrown out of work in mid-year would have to wait many months before seeing a reduction in the size of  monthly loan payments.

Dynarksi and the Brookings Institution Propose Automatic Student-Loan Payroll Deductions

Dynarksi proposes an automatic income-based loan repayment program, whereby employers would simply deduct the appropriate college-loan payment from borrowers' paychecks just like they make deductions for federal income tax, Social Security contributions and health insurance.  The borrower's monthly payment would fluctuate as income goes or up or down; and a borrower who is unemployed would pay nothing during the period of unemployment.

Dynarski's plan is a little more complicated than I've explained but not much.  The proposal is set out in detail in a paper released recently by the Brookings Institution, which recommended that an automatic income-based repayment program be the default option for students who take out federal student loans.

Dynarksi's automatic income-based loan repayment plan has many attractive features. First of all, if fully implemented, it would completely eliminate all student-loan defaults.  Any student-loan borrower who is employed would see a payroll deduction for student loans on every paycheck.

Second, an automatic paycheck deduction plan would virtually eliminate the need for loan collection agencies.  The IRS (or perhaps the Department of Education) would in essence by a giant federal student-loan collection agency.

Long-Term Automatic Payroll Deductions for College-Loan Borrowers Is a Sharecropper Plan

What's the downside?

As I've said before, income-based student-loan repayment plans  do nothing to stop the spiraling cost of higher education. Putting millions of students on income-based repayment plans might actually reduce the incentive for colleges an universities to get their costs under control.

Second, and far more ominously, in my opinion, putting students on long-term income-based repayment plans, whereby college-loan payments are automatically deducted from borrowers' paychecks over a period of 20 or 25 years, essentially transforms all young people who borrow money to attend college into a class of sharecroppers who fork over a percentage of their income over the majority of their working lives simply for the privilege of getting a college education.

And this is why I don't like the Dynarski/Brookings Institution proposal.  But my best guess is that something like what Dynarksi and the Brookings Institution have proposed will eventually become the default option for most people who pursue postsecondary education.


References

Susan Dynarski. Finding Shock Absorbers for Student Debt. New York Times, June 15, 2014, Sunday Review Section, p. 8.


Monday, June 9, 2014

For what we have done to you, we are truly sorry: The Baby Boomers should apologize to the Millennial Generation for the student-loan mess

Frank Bruni wrote a long op ed essay in yesterday's Sunday Times about the wrongs the Baby Boomers have committed against the Millennial generation.   According to Bruni, the Baby Boomers are leaving today's youth with towering problems: climate change, a sick economy, and a mounting national debt. Bruni quotes former governor and U.S. Senator Bob Kerrey as saying the nation is spending too much on the last generation (Medicare, Social Security, and Veterans' benefits) and not enough on the next one.

Dear Millennnials: We're Sorry for the Student Loan Crisis (burp)!
Kerrey is right of course, and so is Bruni. The Baby Boomers have bequeathed the young people of our nation with a host of problems--problems that are only going to get worse because this generation doesn't have the courage or integrity to face them.

Bruni's op ed essay was in harmony with an editorial that appeared in the same issue of the Times entitled "Starting Out Behind." The Times points out that young people are graduating from college with massive indebtedness only to face a sickly job market.  Unemployment among people in their early 20s is higher than the national average, and underemployment (those people who are unemployed, employed part-time or who have given up looking for work) is very high--16.8 percent.

The Times editorial quoted statistics showing that 44 percent of today's college graduates hold jobs that do not require a college education.  There was a time, the Times observed, when people working in jobs that did not require a college degree made decent money--tradespeople like plumbers and electricians, union workers, etc. Today, a lot of college-educated young people are working as waitresses, bar tenders and store clerks.

Perhaps the most disturbing bit of data the Times mentioned is the fact that more than half of young adults (55 percent) still live with their parents. Nobody wants to see that number go higher.

The Times editorial did not mention the burgeoning student-loan indebtedness that is crushing this nation's young adults. And this is odd, because  of all the problems this generation passed on to the Millennial generation, the federal student-loan mess is the most egregious and the easiest one to fix.

Addressing climate change,  the national debt, and our sickly national economy are complicated problems with no easy or certain solution. But we could easily do some things to ease the burden of student-loan indebtedness on our nation's young people; and we could do these things today.  Here are a few things we could do that would be helpful:

1) The federal government could remove any higher education institution from the federal student loan program that does not freeze tuition and fees at current levels.   In essence, our government would be telling the nation's porky colleges and universities that the party is over.

2) Congress could amend the Bankruptcy Code to allow insolvent student-loan debtors to discharge their loans in the bankruptcy courts so long as they file for bankruptcy in good faith.

3) The Obama Administration could instruct the Internal Revenue Service to stop garnishing the Social Security checks of elderly people who defaulted on their college loans.

4) Congress could easily shut down the private student-loan industry by making it easier for distressed debtors to discharge their private student loans in bankruptcy.

5) Congress could shut down the for-profit college industry, which has the highest student-loan default rates and which is riddled with fraud and abuse,  simply by making all for-profit colleges ineligible to participate in the federal student aid program.

Of course none of these things are going to happen.  So far, the Obama administration, which is fully aware of the magnitude of the student-loan crisis, can think of nothing better to do than extend students' loan repayment period from 10 years to 20 or 25 years.  Not very bold or creative in my opinion.

But Frank Bruni is right: the Baby Boomers generation owes the Millennial generation an apology.  But it should apologize for more than global warning and the national debt; it should say it is sorry for corrupting higher education with a corpulent and abusive federal student loan program that has put this nation's young people in debt to the tune of $1.2 trillion.

References

Frank Bruni. Dear Millennials, We're Sorry. New York Times, June 8, 2014, Sunday Review Section, p. 3.

Editorial. Starting Out Behind. New York Times, June 8, 2014, Sunday Review Section, p. 10.