Over the years, the Department of Education has released its annual 3-year student-loan default rate in the autumn, about the time the pumpkins ripen. And every year the default rate that DOE issues is nothing but bullshit. I can't think of another word that adequately conveys DOE's mendacity and fraud.
This year, DOE reported that 11.5 percent of the the 2014 cohort of debtors defaulted on their loans within three years and that only ten institutions had default rates so high that they can be kicked out of the federal student-loan program. That's right: among the thousands of schools and colleges that suck up student-aid money, only ten fell below DOE's minimum student-loan default standard.
Why do I say DOE's three-year default rate is fraudulent?
Economic hardship deferments disguise the fact that millions of people aren't making loan payments. First of all, DOE has given millions of student-loan borrowers economic-hardship deferments or forbearances that allow borrowers to skip their monthly loan payments. These deferments can last for several years.
But people who are given permission to skip payments get no relief from accruing interest. Almost all these people will see their loan balances grow during the time they aren't making payments. By the time their deferment status ends, their loan balances will be too large to ever pay back.
The colleges actively encourage their former students to apply for loan deferments in order to keep their institutional default rates down. And that strategy has worked brilliantly for them. Virtually all of the colleges and schools are in good standing with DOE in spite of the fact that more than half the former students at a thousand institutions have paid nothing down on their loans seven years after beginning repayment.
Second, DOE's three-year default rate does not include people who default after three years. Only around 11 percent of student borrowers default within three years, but 28 percent from a recent cohort defaulted within five years. In the for-profit sector, the five-year default rate for a recent cohort of borrowers was 47 percent--damn near half.
DOE's income-driven repayment plans are a shell game. As DOE candidly admits, the Department has been able to keep its three-year default rates low partly through encouraging floundering student borrowers to sign up for income-driven repayment plans (IDRs) that lower monthly loan payments but stretch out the repayment period to as long as a quarter of a century.
President Obama expanded the IDR options by introducing PAYE and REPAYE, repayment plans which allow borrowers to make payments equal to 10 percent of their discretionary income (income above the poverty level) for 20 years.
But most people who sign up for IDRs are making monthly payments so low that their loan balances are growing year by year even if they faithfully make their monthly loan payments. By the time their repayment obligations cease, their loan balances may be double, triple, or even quadruple the amount the originally borrowed.
Alan and Catherine Murray, who obtained a partial discharge of their student-loan debt in bankruptcy in 2016, are a case in point. The Murrays borrowed $77,000 to obtain postsecondary education and paid back about 70 percent of that amount. But they ran into financial difficulties that forced them to obtain an economic hardship deferment on their loans. And at some point they entered into an IDR.
Twenty years after finishing their studies, the Murrays' student-loan balance had quadrupled to $311,000! Yet a bankruptcy court ruled that the Murrays had handled their student loans in good faith, and they had never defaulted.
DOE is engaged in accounting fraud. If the Department of Education were a private bank, its executives would go to jail for accounting fraud. (Or maybe not. Wells Fargo and Bank of America's CEOs aren't in prison yet.) The best that can be said about DOE's annual announcement on three-year default rates is that the number DOE releases is absolutely meaningless.
This is what is really going on. More than half of the people in a recent cohort of borrowers have not paid down one penny of their student-loan debt five years into the repayment phase of their loans. And the loan balances for these people are not stable. People who are not paying down the interest on their student loans are seeing their loan balances grow.
In short, DOE is operating a fraudulent student-loan program. More than 44 million Americans are encumbered by student-loan debt that totals $1.4 trillion. At least half that amount--well over half a trillion dollars--will never be paid back.
Betsy DeVos' job is to keep the shell game going a little longer, which she is well qualified to do. After all, she is a beneficiary of Amway, "a multi-level marketing company," which some critics have described as a pyramid scheme.
|Betsy DeVos: The perfect person to oversee DOE's student-loan shell game|
Paul Fain. Federal Loan Default Rates Rise. Insider Higher ED, September 28, 2017.
Paul Fain. Feds' data error inflated loan repayment rates on the College Scoreboard. Inside Higher Ed, January 16, 2017.
Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.
Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015).
Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016), aff'd, Case No. 16-2838 (D. Kan. September 22, 2017).
Joe Nocera. The Pyramid Scheme Problem, New York Times, September 15, 2015.