Student Loans, Bankruptcy, and Creditors' Lawyers: If Auschwitz Comes to the United States, Will Attorneys Handle the Paperwork?

I was a child when I learned about the Nazi concentration camps. I was a voracious reader when I was young, and I often wandered around our town library, browsing through the books. One day, I pulled a book off a shelf because I was intrigued by the title, and the pages fell open to a photo of one of the German concentration camps. It might have been Auschwitz, but I don't remember.

The photo showed dozens of naked and emaciated corpses piled in a heap, and that was all. I remember being viscerally shocked and frightened by what I saw, and I immediately realized that the dead people who appeared in the photo were the victims of human monsters.

I thought about that photo for weeks, and I finally comforted myself with the childish conviction that the death camps would never come to America--that Americans could never commit such savage acts.

I hope I get off work in time to see my kid's soccer game

I was naive of course.  As I grew older, I realized there are plenty of Americans who will do anything they are directed to do--no matter how much pain they inflict on other human beings.

The people who operated the Nazi death camps were, after all, ordinary people.  They probably read their morning newspapers over breakfast and played with their children after work in the evenings. They labored for the Nazi death machine for a variety of mundane reasons--maybe they just needed a paycheck.

And this brings me to the lawyers who work for Educational Credit Management Corporation, perhaps the federal government's most aggressive debt collector against student-loan borrowers. ECMC's attorneys have gone into bankruptcy court time after time to oppose debt relief for distressed student-loan debtors.  In the Roth case, for example, ECMC's legal counsel opposed bankruptcy relief for Janet Roth, an elderly debtor with chronic health problems who was living on less than $800 a month. ECMC harried Ms. Roth all the way to the Ninth Circuit's Bankruptcy Appellate Panel.

In a letter dated July 7, 2015, Lynn Mahaffie, a Department of Education bureaucrat, issued a letter advising creditors like ECMC not to oppose bankruptcy relief for student debtors if the cost of fighting a bankruptcy discharge did not make the effort worthwhile.

But that letter was just bullshit. The Department of Education and its loan collectors almost always oppose bankruptcy relief for student-loan debtors--whether or not it is cost effective to do so.  For example, in Acosta-Conniff v. Educational Credit Management Corporation, an Alabama bankruptcy judge discharged Alexandra Acosta-Conniff's student loan debt. Conniff was a single mother of two children working as a school teacher, and the court reasoned quite sensibly that Conniff would not be able to pay off her student loans.

ECMC dispatched six attorneys to appeal the bankruptcy court's decision: David Edwin Rains, Kristofer David Sodergren, Rachel Lavender Webber, Robert Allen Morgan, Margaret Hammond Manuel, and David Chip Schwartz. Six attorneys--and Conniff didn't even have a lawyer!

Not surprisingly, ECMC won its appeal.  Six lawyers against a single mother of two who can't afford an attorney--it was hardly a fair fight.

Conniff has a lawyer now, and she is appealing the district court's unfavorable decision to the Eleventh Circuit Court of Appeals. ECMC has a platoon of lawyers to represent it before the Eleventh Circuit, and who knows how much that costs?

But ECMC apparently doesn't care how much the appeal will cost, and the Department of Education obviously doesn't care either. Otherwise it would direct its loan collectors not to harass insolvent student-loan debtors in the bankruptcy courts.

Now I am not comparing ECMC's lawyers to Nazi death-camp workers. Being a debt collector's attorney is not intrinsically evil; and any misery inflicted on a student-loan debtor in a bankruptcy court is trivial compared to the horrors of Auschwitz. I feel sure ECMC's lawyers are all decent people.

Nevertheless, I personally could not sleep at night if I were representing ECMC in the bankruptcy courts against people like Janet Roth or Alexandra Acosta-Conniff.  I would ask myself whether I am serving the interests of justice by helping ECMC deprive honest but unfortunate college-loan borrowers a fresh start in life.

But I don't imagine ECMC's attorneys ask themselves that question. And I doubt whether they have trouble sleeping at night. After all, the lawyers have their own student loans to pay off; and everyone has to make a living.


Note: A quick search in the Westlaw data base turned up 557 cases in which Educational Credit Management Corporation appeared as a named party.


References

Fossey, R. & Cloud, R. C. (2015). Tidings of comfort and joy: In an astonishingly compassionate decision, a bankruptcy judge discharged the student loans of an Alabama school teacher who acted as her own attorney. Teachers College Record Online, tcrecord.org. ID Number 18040. 

ECMC v. Acosta-Conniff, 550 BR 557 (M.D. Ala. 2016).

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

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

Federal Reserve Bank Report: Households with "negative wealth" tend to have high levels of student loan debt. Should we be surprised?

Households with more debt than assets are said to have "negative wealth." In other words, they owe more than they own. Or to put it more baldly, they're broke.

Researchers for the Federal Reserve Bank of New York published a report this week on negative wealth households, and some of  their findings are not surprising.

Researchers found that negative-wealth households "are younger, predominantly female, more likely to be minority, own homes at lower rates and have lower average annual incomes than households with nonnegative wealth" (quoting from Inside Higher Education). This is what we would expect.

What I found most interesting were the report's findings about the kind of debt that negative wealth households tend to have. Among households that have $47,000 to $52,000 in negative wealth, almost half of their total debt is student loans. Among households with lower levels of negative wealth--between $12,500 and $46,300--college loans made up 40 percent of total debt.

And here is the report's money quote:

Given the importance of student debt in explaining negative household wealth . . ., it is likely that the steady growth in student debt and borrowing combined with the slow rate of student loan repayment . . ., has materially contributed and will continue to contribute to negative household wealth and wealth inequality. 

Should we be worried by this report?

At least a couple of experts suggest that we should not be overly concerned. In an interview with Inside Higher Education, Robert Kelchen of Seton Hall University said that student loans are driving income inequality with just one group of students--those who take out student loans but never complete their degree.

Kelchen pointed out that a lot of households with negative wealth include borrowers "who took out student loan debt to pay for graduate school and professional degrees." Although this group may carry a lot of student-loan debt, it will eventually do well financially.

But of course Kelchen's observation is not completely accurate. Law school graduates, on average, leave law schools with $140,000 in debt; and they are entering a terrible job market. Paul Campos, a law professor at the University of Denver, flatly stated that most people who graduate from second- and third-tier law schools at the bottom or their law school class will be financially hurt by their law school experience. They will likely never obtain an income that justifies the debt they incurred to get their J.D. degrees.

Mark Kantrowitz, another expert quoted in Inside Higher Education, suggested that people who borrow money to get a college degree will be better off than people who don't go to college at all. "Would these individuals have been able to obtain a college education had they not borrowed?" Kantrowitz asked. "And where would their net worth be if they hadn't taken on this debt because they hadn't gone to college?"

Basically, Kantrowitz is repeating the mantra of the higher education community's insiders. Sure, they say, people borrow heavily to go to college. But they're still better off than people who don't go to college at all.

But that is not necessarily true. We know that 35 percent of the college-educated workforce is made up of people holding jobs that do not require a college education.  If those people borrowed a significant amount of money to get their degrees, they might very well have been better off had they skipped the college experience altogether.

And we also know that some people pay more for their college degrees than they are worth. Brenda Butler, who filed for bankruptcy recently, borrowed $14,000 to get a bachelor's degree in English from Chapman University in California, which she obtained in 1995. According to the bankruptcy court's opinion in her case, Butler never made much more than $30,000 a year, and she experienced some periods of unemployment when she was unable to make her loan payments. Twenty years after she graduated from college, Butler owed more than twice what she borrowed and was in bankruptcy.  I think we can safely say that Butler does not fit Kantrowitz's model.

In short, we should not dismiss this recent report from the Federal Reserve Bank of New York. The report confirms what we already knew intuitively, which is this: Student-loan indebtedness contributes to rising income inequality in the U.S. and it cripples some families from acquiring wealth.  And as the government shifts millions of college borrowers into 20- year, 25-year, and even 30-year repayment plans, the trend documented by the Federal Reserve Bank researchers is only going to accelerate.

References

Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Andrew Kreighbaum. Federal Reserve analysis finds high student loan debt in housholds with most negative wealth. Inside Higher Education, August 3, 2016. Accessible at https://www.insidehighered.com/news/2016/08/03/federal-reserve-analysis-finds-high-student-loan-debt-households-most-negative?utm_source=Inside+Higher+Ed&utm_campaign=56be543194-DNU20160803&utm_medium=email&utm_term=0_1fcbc04421-56be543194-198564813

Olivier Armantier, Luis Armona, Giacomo De Giorgi, and Wilbert van der Klaauw. Which Households Have Negative Negative Wealth? Liberty Street Economics, August 1, 2016. Accessible at http://libertystreeteconomics.newyorkfed.org/2016/08/which-households-have-negative-wealth.html#.V6IRq3qxUwf

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/

Hillary Clinton proposes a three-month moratorium on student-loan payments and massive loan refinancing: A good idea, but difficult to implement

According to the Washington Post, Hillary Clinton has proposed a three-month moratorium on student-loan payments to allow borrowers time to restructure their student loans at lower interest rates.

Let me say flat out that this is a good idea. As the press has widely reported, about 40 percent of college-loan borrowers who are in the repayment phase of their loans aren't making payments. These people are seeing their loan balances go up as interest accrues on unpaid debt, and they desperately need repayment options they can afford.

In addition, millions of people who are making their loan payments would benefit from repayment plans that would lower monthly payments and take advantage of lower interest rates.

Hillary's proposal underscores this stark fact: The federal student-loan program is in chaos. There are currently eight income-based repayment plans, and even experts are confused about how the different options work and which students are eligible for the various repayment plans. Giving students a three-month hiatus to sort all this out is an excellent idea.

But why is Hillary making this proposal now? Was she prompted by pure politics--making a play for young people's votes? Is her proposal an attempt to win over Bernie Sanders' supporters?

Obviously, Hillary's proposal was driven by political consideration. But I think there is something more going on--namely panic. I think Hillary and the Democratic establishment finally realize that millions of Americans are overwhelmed by unmanageable student-loan debt. These distressed debtors are frustrated, demoralized and angry; and they won't vote for Hillary unless they think she will provide them with tangible relief if she is elected President.

In short, the Democrats see blood in the water; they know they must do something substantive to keep young voters in the Democratic column in the November election.   And even Hillary's fiercest critics must admit that her massive student-loan refinancing proposal is substantive and significant.

Nevertheless, I don't see how Hillary's plan can be effectively implemented. The federal student loan program is like a massive battleship plunging across a raging ocean at full speed--it can't be turned around quickly.  Here are some of the problems:

First, simply determining who is eligible for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have outstanding student loans, and most of them are in the repayment phase.  Just figuring out who is eligible to stop making loan payments and who is not will be an enormous headache.

For example, a lot of borrowers took out private student loans that aren't part of the federal student loan program.  Of course, private loans won't be covered by Hillary's moratorium. But research has shown that many borrowers don't know whether their loans are federal or private, and some have both kinds of loans. If Hillary implements a moratorium, a good many borrowers will stop making payments on their private loans, which will get them in trouble with their lenders.

And 5 million borrowers are already in income-based repayment plans under very favorable terms. Can these people stop making payments for three months? If not, who is going to notify them that they are not eligible to participate in the moratorium?

Second, the Department of Education may not have the capacity to meet the bureaucratic challenge of refinancing millions of loans over a three-month period. There are 43 million people with outstanding student loans, but many borrowers signed multiple promissory notes--perhaps a dozen or more. And some of these documents date back 20, 25, and even 30 years.  

Refinancing all these loans will be a gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I seriously doubt whether DOE or the various creditors have the resources to refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy. 

Third, once college borrowers are given license to stop making payments for a brief period, it will be very difficult to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's decision to accept refugees from the Middle East. Once the stream of migrants began moving, the Europeans found themselves unable to handle the volume of refugees that crossed into the EU. And there was no effective way to regulate the flow.

Likewise, Hillary's proposal to allow millions of college borrowers to stop making loan payments while they refinance their student loans will create a massive upheaval in the federal student loan program. If her plan goes forward, I think we will see millions of people stop making loan payments, whether or not they are eligible for Hillary's moratorium. 

Finally, Hillary's student-loan refinancing plan may be nothing more than a way to shove borrowers into 20- and 25-year repayment plans.  The Obama administration has been aggressively pushing college borrowers into long-term income-based repayment plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of 2017.

Hillary's pan will accelerate the movement of student borrowers into long-term repayment plans.  If it is implemented, we will surely see 10 million people or more in IBRPs, which will effectively make them indentured servants to Uncle Sam, paying a percentage of their income to the government for a majority of their working lives just for the privilege of going to college.

As I have said repeatedly, IBRPs are a bad idea and nothing more than a way to keep a lid on the student-loan crisis. It would be very disappointing if Hillary implemented a student-loan refinancing plan that has the primary effect of lengthening the loan repayment period for millions of Americans.

Conclusion: In spite of its drawbacks, Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to Hillary's refinancing idea, I hope she goes forward with it if she becomes President. Almost anything is better than the present state of affairs.  Lowering interest rates will give millions of borrowers some relief from their debt. And even if her plan forces more borrowers into IBRPs, that option is better than having them continue to shoulder monthly payments that are so large as to be unmanageable.

Besides, Hillary's scheme, if implemented, will expose the utter chaos of the federal student loan program, which the federal government has hidden from the American people. Once the public realizes how many millions of people are suffering from their participation in the federal student loan program, maybe we will see real reform--which is nothing more and nothing less than reasonable access to the bankruptcy courts. 

References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/

Nearly 95 million Americans aren't working: The government's unemployment rate is just a bullshit number

During the First World War, it is said. the British military kept three separate casualty lists: one list to deceive the public, a second list to deceive the War Office, and a third list to deceive itself.

We could say much the same thing about the government's official unemployment rate.  The Bureau of Labor Statistics (BLS) claims the nation's unemployment rate is only 4.7 percent, less than half the rate in Europe and about half what it was when Obama came into office.  "We cut unemployment in half, years before a lot of economists thought we could," President Obama boasted recently to a crowd in Indiana.

The BLS unemployment rate is just a bullshit number

But nobody believes that. Everyone knows the government's official unemployment rate is just a bullshit number.

Even the government admits the unemployment rate is higher if we include people who are working part-time involuntarily and the people who have given up looking for work. But including those people in the analysis still understates how bad the employment situation is.

In fact, when we ponder how many American adults are simply not working, we get a clearer understanding of the employment picture.  A few days ago, BLS reported that 94,708,000 American adults are not in the labor force--37 percent of the entire American adult population.

Of course, not all of these people are unemployed. Millions are retired, millions are pursuing post-secondary education, and millions are not working  because they are disabled and receiving disability benefits. Obviously, not all non-working Americans are suffering.

But a lot of non-working Americans are suffering. Millions of Americans are unemployed or underemployed, millions gave up looking for work and elected to take early retirement at reduced benefits. And there are millions who are still in the labor force but are working at substandard wages, including a lot of college graduates who hold jobs that don't require a college degree.

Signs of economic decline are everywhere

Although Obama takes credit for leading the nation out of the 2008 recession, the standard of living for millions of Americans continues to decline.  As the Brooking Institution paper noted in 2012, median wages for male workers have gone down precipitously in recent years.  In constant dollars, median wages for American men have slipped  by 19 percent since 1970.

Although the Obama administration insists that the economy is creating new jobs, that's probably bullshit as well. BLS reported last week that 38,000 new jobs came on line in May, a dramatic decline from an average of 178,000 a month over the first three months of 2016.  But a Brookings analysis, using a different form of measurement, claims the economy actually lost 4,000 jobs last month.

 And more and more people are on food stamps--1 out of 7 Americans are now receiving food-stamp assistance. That's 45 million people--up from around 28 million when Obama took office.  Do these numbers suggest that the economy is in recovery?

And then there's the student-loan crisis

And then there's the student loan crisis.  Approximately 43 million Americans owe 1.3 trillion in student-loan debt.  Although  the Department of Education's three-year default rate is only around 10 percent, that's just more bullshit.  By encouraging people to obtain economic hardship deferments, the government has artificially kept default rates down, because people with deferments aren't counted as defaulters even though they aren't making loan payments.

But of course people who accepted deferments are seeing their loan balances go up because interest continues to accrue. Now the only way they can service their loans is by signing up for 20-year income-base repayment plans.

The true student-loan default rate is probably 25 percent; and it's 50 percent for people who took out loans to attend for-profit colleges. And even this estimate may be too low.

Millions of Americans are suffering and they're  foaming with rage

In short, millions of Americans are suffering. They know the economy is deteriorating; they know their standard of living is going down. They know Barack Obama despises ordinary Americans--the poor stiffs who live in fly-over country and still go to church on Sundays.

And ordinary Americans are foaming with rage.

The political and media elites think they can keep a lid on all this anger, that they can persuade a majority of Americans to vote for Hillary and prolong the status quo. They think Americans are listening to Anderson Cooper and Don Lemon when they paint Trump as a racist and a bigot on CNN. They think columnist Froma Harrop will persuade her readers that Bernie Sanders is a racist.

But I've got news for the elites. The people who are angry aren't listening to CNN. They aren't reading Froma Harrop. The elites may succeed in crowning Hillary Clinton as the next queen of post-modern America, but the pundits will never tamp this anger down. It's real, it's ugly, and it's permanent.

References

Alan Bjerga. Food Stamps Still Feed One in Seven Americans Despite Recovery. Bloomberg News, February 3, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-02-03/food-stamps-still-feed-one-in-seven-americans-despite-recovery

Christopher Goins, 44.7 Million Americans Now on Food Stamps--More than at Any Time Under Bush, CNS News, February 3, 2012. Accessible at http://cnsnews.com/news/article/447-million-americans-now-food-stamps-more-any-time-under-bush

 Michael Greenstone and Adam Looney. The Uncomfortable Truth About American Wages. Brooking Institution, October 23, 2012. Accessible at http://www.brookings.edu/research/opinions/2012/10/22-wages-greenstone-looney

Susan Jones, Record 94,708,000 Americans Not in Labor Force; Participation Rate Drops in May. CNS News, June 3, 2016. Accessible at http://www.cnsnews.com/news/article/susan-jones/record-94708000-americans-not-labor-force-participation-rate-drops

Matthew Boesler. More College Grads Finding Work, But Not in the Best Jobs. Bloomberg.com, April 7, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-04-07/more-college-grads-finding-work-but-not-in-the-best-jobs

Nicholas Wells and Mark Fahey. What's the REAL unemloyment rate? CNBC.com, January 8, 2016. Accessible at http://www.cnbc.com/2016/01/08/

Jonathan Wright. Amidst unimpressive official jobs report for May, alternative measure make little difference. Brookings Institution, June 3, 2016. Accessible at http://www.brookings.edu/blogs/jobs/posts/2016/06/03-amidst-unimpressive-official-jobs-report-for-may-alternative-measures-wright?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=30258460&_hsenc=p2ANqtz-8wODcWxeX-Vo8PGswc2439RPH_hV1yCM05S_knJvJmuSfYUbz-xh1mWd76dc0m2GG5fhL55iubJxPERM_sbHc3qH5Hfg&_hsmi=30258460

Why the Obama administration launched its REPAYE plan: It had no choice

Late last year, the Obama administration's Department of Education launched its eighth student-loan repayment program, labeling it REPAYE.  Very similar to a previous Obama initiative titled PAYE, the REPAYE program allows college-loan borrowers to pay off their student loans over 20 years. The chief new feature of REPAYE is broader eligibility. Nearly every student-loan debtor will qualify to participate in the REPAY program.

Under both PAYE and REPAYE, college-loan debtors make monthly payments based on their income, not the amount they borrowed. Payment rates are established annually, based on the borrower's reported income for the previous year, with payments calculated to equal10 percent of the borrower's discretionary income.

In many ways, REPAYE is a good deal for overburdened student-loan debtors. Monthly payments will be lower than the standard 10-year repayment plan; and payments will be allowed to fluctuate as borrowers' income goes up or down. People who are unemployed or who live at the poverty level won't be required to make any payments at all.

All in all, the Obama administration's latest student-loan program is incredibly generous. In fact, most debtors on the REPAYE plan will be making monthly payments so low that they won't cover accruing interest on their loans. In other words, at the end of the 20-year repayment program, most debtors will still have large balances on their loans, which will be forgiven.  The forgiven amount will be absorbed by taxpayers.

Why did the Obama administration launch REPAYE, which could reasonably criticized as fiscally irresponsible? I will tell you why: it had no choice.

For years, the government has permitted overburdened student-loan debtors to enroll in economic hardship deferment programs and other forbearance plans that allowed borrowers to temporarily skip their monthly student-loan payments. Colleges encouraged this practice as a way to keep their short-term  student-loan default rates down--particularly the for-profit colleges, which needed to keep their default rates below 30 percent in order to continue receiving federal student-aid money.

For some people on these plans, however, the forbearances weren't temporary--they stretched out for years while interest accrued on their original debt. Thus for virtually everyone in a forbearance or deferment program, their loan balances were getting larger with each passing month due to accruing interest.

This phenomenon was documented in a recent Brookings Institution report written by Looney and Yanelis. These scholars found that loan balances were going up, not down, two years into the repayment period for more than half of student-loan borrowers in repayment.

In fact, for millions of people who have had their student loans in nonpayment status for any considerable period of time, it has become virtually impossible to to pay back their loans. This state of affairs drove many debtors into default, which caused their balances to grow even larger due to the penalties and fees that got tacked on to their debt.

President Obama and Arne Duncan could see that there were only two ways out of this morass. Either people must be allowed to file for bankruptcy to discharge their college-loan debt or their loans have to be refinanced to make the monthly payments lower. Since bankruptcy reform is politically impossible, Obama and Duncan chose to launch PAYE and REPAYE.

But there are enormous problems with the Obama administration's fix. First, most people entering PAYE and REPAYE are not enrolling immediately after graduating from college. Most struggle for a few years to make payments under the standard 10-year plan and then enter REPAYE because they can't service their loans. For these people, enrolling in a 20-year repayment plan extends their repayment period out over their entire working lives.

Butler v. Educational Credit Management Corporation, decided earlier this year, illustrates this problem. Beverly Butler struggled for almost 20 years to make payments on loans she took out to get her college degree, which she obtained in 1995. Eventually, she enrolled in a 25-year repayment plan that stretches out her loan repayment period until 2037--42 years after she graduated from college!

And of course the other big problem with PAYE and REPAYE is that most people in these programs are not paying back their loans at all; they are making token payments that don't cover accruing interest. In essence, these programs are designed to disguise the fact that for all practical purposes, people in long-term repayment programs have defaulted on their loans.

This is no small matter. Almost 5 million people are in income-based repayment plans now; and the Department of Education wants to enroll 2 million more by the end of next year. Without question, REPAYE is going to be the default option for most student-loan debtors in the years to come, which is what the Brookings Institution and other higher-education industry insiders want to happen.

In reality, the Obama administration has imposed a tax on most people who borrow money to attend college;  REPAYE participants will be obligated to pay a percentage of their incomes for a majority of their working lives in return for the privilege of going to college.

How ironic. Barack Obama, self-proclaimed friend of the disadvantaged, has established a huge sharecropper program for college goers. Ultimately of course, all Obama did was buy time for the college industry. In the long run, REPAYE can't sustain the status quo. At some time in the not too distant future, higher education as we now know it will collapse.

And the first cards to fall in this house of cards will be the for-profit colleges and the small private liberal arts colleges. Be patient. You don't have long to wait.

Enrollment at four-year for-profit colleges declined 9.3 percent from last year, and the University of Phoenix's enrollment has declined by half from its peak years. The private liberal arts colleges are behaving like a Texas fireworks stand (Buy One, Get One Free!!), discounting tuition for first-time freshman by 48 percent.

The end is near.

 References

Erin E. Arvedlund. A new way, REPAYE, to get out of college debt. Philadelphia Inquirer, March 29, 2016. http://articles.philly.com/2016-03-29/business/71877131_1_income-based-repayment-plan-loan-debt-standard-repayment-plan.

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). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Rick Seltzer. Discount rates rise yet again at private colleges and universities. Inside Higher Ed, May 16, 2016. Accessible at https://www.insidehighered.com/news/2016/05/16/discount-rates-rise-yet-again-private-colleges-and-universities.

Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653

Enrollments slide, particularly for older students. Inside Higher Ed, May 24, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/05/24/enrollments-slide-particularly-older-students?utm_source=Inside+Higher+Ed&utm_campaign=74ec3a191d-DNU20160524&utm_medium=email&utm_term=0_1fcbc04421-74ec3a191d-198564813

A liberal arts degree is not worth much: Don't borrow a lot of money to pay for one

Christ. Seven years of college down the drain. Might as well join the f-cking Peace Corps."

Bluto (played by John Belushi)

Animal House

Americans cling to the touchingly pathetic belief that a college degree will improve their lives. And it is true that people who graduate from college make more money over their lifetimes than people who only have high school diplomas.

But in many instances, a college degree represents nothing more than an individual's dogged tenacity and willingness to sit through four years of meaningless classes--traits that make college graduates adaptable to the sterility and boredom of the American workplace.

That's not always true, of course. I feel quite sure that people who get degrees in engineering, journalism, and the health professions often learn valuable skills.  

But a degree in the liberal arts or the social sciences is highly overrated as a ticket to a good job. Reflecting back more than 40 years from my time at Oklahoma State University ("the Princeton of the Prairies"), I realize I learned more about how to make my way in the world from delivering newspapers as a 12-year-old for the Anadarko Daily News than I did from any of my college courses.

And I received much more vocational guidance from my father than from any college professor. Not that my father gave a damn about what I would do for a living when I left home. But after holding down several hundred bull calves while he castrated them with his Schrade pocket knife, I came to the firm conviction that I would never make it as a cattleman.

At one time, going to college was a relatively harmless activity. Rattling around a campus for four (or five, or six) years didn't do young people much harm other than delay their entrance into remunerative employment. And no question about it--studying for exams improves people's short-term memory.

But things have changed. Today, making the wrong choices about going to college can lead to a lifetime of economic hardship, at least for people who borrow too much money to pay for their college education.

What can go wrong about obtaining a liberal arts education, you might ask?  Here are some mistakes that many people make:

1) Getting a liberal arts degree from a for-profit college. By and large, for-profit colleges are more expensive than public schools; so if you attend a for-profit college you will probably borrow more money than if you attended a public institution. And the for-profits have high default rates. According to a Brookings Institution report, almost half of the people in  a recent cohort who borrowed to attend a for-profit school defaulted on their loans within five years. Thus, attending a for-profit college increases the risk of default.

So if you want to get a degree in sociology, history, literature, or women's studies, you should probably get it at a public university--even a mediocre one--rather than pursue a liberal arts degree at a for-profit institution.

2) Paying the sticker price to attend a prestigious private college.  Private colleges are more expensive than public colleges, but they are now discounting their tuition drastically. In fact, the average institutional discount rate at private colleges was 48.6 percent for first-time freshmen in 2015-2016. And the discount rate for all students attending private schools was 42.5 percent.

So don't pay the sticker price to attend a fancy private college. Keep in mind that many private schools are scrambling to keep their enrollments up, and they need you more than you need them.

3) Doubling down by going to graduate school without a clear idea how a graduate degree will improve your earning potential. About 40 percent of all outstanding student-loan debt was acquired by people who went to graduate school. Graduate education in some fields has become outrageously expensive--especially for law degrees and MBAs. But graduate degrees in the liberal arts are also pricey.

There was a time when graduate school was a reasonable default option for people with no clear vocational goal. Graduate school was a respectful place for people to park themselves while they decided what they wanted to do with their lives. And opportunity costs were relatively low because tuition was often low--particularly at public colleges.

But the game has changed. Individuals who borrow money to get a liberal arts education and then borrow more money to go to graduate school are playing Russian Roulette with their financial futures; and they're playing with three bullets in their revolvers. Don't go to graduate school unless you have a clear idea about how a graduate degree will lead to a job that pays well enough to make the investment worthwhile.

Beware: A liberal arts degree is no sure path to a middle-class lifestyle

In sum, a liberal arts degree provides no sure path to making a living, and borrowing a lot of money to get a liberal arts education can lead to financial disaster. It is a fine thing to know a little Shakespeare and to be able to identify the causes of Thirty Years' War; and it's nice to talk literature with the swells. But if you leave college with a hundred grand in student loans, you will find that the liberal arts degree you acquired didn't enhance your life; in fact, it might have destroyed it.

"Seven years of college down the drain . . . ."

References

Rick Seltzer. Discount rates rise yet again at private colleges and universities. Inside Higher Ed, May 16, 2016. Accessible at https://www.insidehighered.com/news/2016/05/16/discount-rates-rise-yet-again-private-colleges-and-universities

Susan Dynarski, Brookings Institution, and the U.S. Housing Market: Lies, Damned Lies and Statistics

Larry Summers, former Secretary of the Treasury and President Emeritus of Harvard, has expressed concern about growing student-loan indebtedness, which he linked to a slowdown in home ownership in the United States. Joe Stiglitz, Nobel Prize winner in economics, and the Federal Reserve Bank in New York have also expressed the view that growing levels of college-loan debt is hurting the housing market.

But Susan Dynarski, writing for the Brookings Institution, says this is nonsense. Crunching the data from the Federal Reserve System in a different way than the Federal Reserve Bank, she came to this conclusion: education levels, not student-loan indebtedness, explain the difference in home-ownership rates among Americans. In a nutshell, here are Dynarski's conclusions:

Those who borrow for college do have a slower start to homeownership than those who went to college debt-free. . . . But by the time people are in their thirties, when the typical borrower would have finished paying off her student loans, the home ownship rates of the two college-educated groups are statistically indistinguishable. The striking, large gap is between the college-educated and those who stopped with high school.

I have two observations to make about Dynarski's paper for the Brookings Institution.  First, if Dynarski disagrees with Larry Summers, Joe Stiglitz and the Federal Reserve Bank of New York, I"m inclined to be persuaded by these eminences rather than Dynarski.

Second, speaking purely as a layperson with no expertise in economics, Dynarski's arguments simply defy common sense. How can she say that rising levels of student-loan indebtedness has no impact on home ownership given what we know about the massive hardship that millions of college-loan borrowers are suffering?

As the New York Times noted several months ago, 10 million people have either defaulted on their student loans or are in delinquency. Can anyone say this group of people have not been shut out of the housing market?

Another 5 million people have been shoved into long-term income-based repayment plans that stretch out for 20 years or more; and the Obama administration hopes to increase that figure by another 2 million people by the end of 2017. Can anyone argue that having a 20-year financial obligation hanging around one's neck has no impact on the ability to buy a home?

Susan Dynarski and the Brookings Institution have published numerous papers that basically contend  that the student-loan program is under control. Like those cops at a murder scene in a 1950s detective movie, they constantly mutter, "Move along, folks; nothing to see here; move along."

But everyone from Joe the Plumber to Larry Summers knows the federal college-loan program is out of control, with millions of people unable to make their loan payments. In my view, the Brookings Institution and many of its researchers are nothing more than shills for the higher education industry, which desperately needs large infusions of federal cash to keep the doors open.

Like all of higher education's apologists, Dynarski repeats the old bromide that people who graduate from college make more money than people who only hold a high school diploma. Of course that is true. But this platitude doesn't excuse higher education for running up tuition costs at twice the rate of inflation. It doesn't justify the behavior of the for-profit universities, which charge far too much for substandard programs and have shockingly high student-loan default rates.

In my opinion, policy makers and the public in general should discount almost everything the Brookings Institution says about the student-loan crisis, which by and large the Brookings people don't even acknowledge.  We should listen to the Vermont House of Representatives, which adopted a resolution a few days ago calling on Congress to lift restrictions on bankruptcy for student-loan debtors. After all, the small-town legislators in the Green Mountain State live in the real world, which is not the world that Susan Dynarski and her Brookings colleagues live in.

References

Micahel Bielawski. Vermont House asks Congress to let student-loan borrowers file for bankruptcy. VermongtWatchdog.org, May 3, 2016.  Accessible at http://watchdog.org/264079/legislature-requests-student-debt-relief-bankruptcy/

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26. Accessible at: http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html

Susan Dynarski. The dividing line between haves and have-nots in home ownership; Education, not student debt. Brookings Institution, May3, 2016. Accessible at http://www.brookings.edu/research/reports/2016/05/03-dividing-line-between-haves-have-nots-home-ownership-education-not-student-debt-dynarski

Bernie Sanders and Student Loan Debtors: If you are ovewhelmed by college-loan debt, Bernie is your only hope

Help me, Obi Wan Kenobi. You're my only hope.

Princess Leia

Star Wars

Bernie Sanders beat Hillary Clinton in Michigan--stunning everybody, including Bernie.

Bill O'Reilly scoffed, and pundits dismissed Bernie's victory as a blip; but change is in the wind. Bernie has the support of young people, and Hillary will never win them away. They are attracted to Bernie's clarity and straightforward message.

In particular, Bernie's call for a free college education at a state college is very appealing. And--as I've written before--his free college plan is not wacky. It would actually be cheaper than the cumbersome student aid program we now have in place..

Now I encourage Bernie to reach out specifically to overburdened student-loan debtors--and there are 20 million of them.  If he will make four simple promises to this weary and oppressed multitude, I think he will win over millions of voters to the Bernie Crusade.

And these are the promises:

1) If I am elected President, the federal government will stop garnishing Social Security checks of elderly student-loan defaulters.

2) If I am elected President, I will forbid the government and its debt collectors from slapping unreasonable fees and penalties on student-loan balances.

3) If I become president, student borrowers who complete long-term income-based repayment programs will not be taxed on any forgiven student-loan debt (a policy recommended by President Obama).

4) If I become your President, I will draft regulations forbidding for-profit colleges from requiring students to sign arbitration agreements that cut of their right to sue their college for fraud.

None of these promises are radical, and none are expensive. And in fact, if all four of these promises were fulfilled by the next President, the impact on student-loan debtors would be minimal.

But these promises would be a signal to oppressed student-loan borrowers that Bernie understands their suffering and will do what he can to give them some relief.

But whether or not Bernie makes these particular promises, he has my unwavering support right through the election process. Of all the candidates vying for the Presidency, Bernie is the only one who will do something substantive to address the student-loan crisis.  Indeed, as Princess Leia might have put it, Bernie is our only hope.

Help me, Obi Wan Ka-Bernie. You're my only hope.

Rising Student-Loan Default Rates and Ridiculously High Tuition Costs: The Big Short

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball... What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did

Mark Baum (played by Steve Carell)

The Big Short 

The Big Short, the Academy-Award winning movie on the home-mortgage crisis of 2008, shows movie goers how greedy banking institutions created a housing bubble that burst in a shower of home foreclosures and trillions of dollars in financial losses.

A similar bubble has emerged in the federal student-loan program. And although the housing bubble is more complicated than the student-loan bubble, there are some eerie similarities between the collapse of the housing market a few years ago and the student-loan crisis. For example:

Hiding risk. The Big Short includes a scene in which  Mark Baum, a skeptical investment banker played by Steve Carell, quizzes a representative of one the bond rating agencies--Moody's or Standard & Poor. The rating-agency representative admits that  the agency gives mortgage-backed securities  the highest rating--AAA--even  though the agency knows that many of the instruments are packed with risky home mortgages that are headed for foreclosure.

Something similar is happening in the federal student-loan program. Although the Department of Education recently announced that student-loan default rates went down last year--especially in the for-profit sector, that's not really true.  The for-profits have been aggressively signing up their former students in economic-hardship deferment programs that excuse borrowers from making loan payments without being counted as defaulters.

When we look at the five-year default rates in the for-profit sector, the numbers are scary. Almost half the people who took out student loans to attend a for-profit institution default within 5 years of beginning the repayment phase on their loans. And two years after beginning the repayment phase, 3 out of 4 of these students are seeing their loan balances go up--not down--due to accruing interest that is not being paid down.

In short, about half the people who take out student loans to attend for-profit colleges don't pay back their loans. Clearly, this sector of the student-loan program is a train wreck.

Unsustainable rising costs.  As many people still remember, the cost of housing went up rapidly during the early 2000s, with people buying homes and flipping them for huge profits over a matter of months or even weeks. Everybody was making money in real estate--until the housing market collapsed.

Similarly, America has seen college tuition costs rise faster than the inflation rate for many years. The cost of attending law school, obtaining an MBA, or studying at an elite private college has gone through the roof.  I graduated from University of Texas Law School in 1980 and only paid $1,000 a year in tuition. If I enrolled at UT Law School today, it would cost me 36 times as much--$36,000 a year for Texas residents!

Of course, these tuition hikes can't be justified any more than the dizzying cost of a split-level home in Coral Gables, Florida in 2005.  And of course, those costs must eventually come down.  Already, law school enrollments have plummeted and the schools have lowered admissions standards to attract students.  And the elite private colleges are now giving huge discounts on their posted tuition rates; the average freshman now pays about half the college's sticker price.

Hidden costs and fees. Finally, the home mortgage bubble was fueled by greed and fraud. The bankers who packaged mortgage-backed securities were not taking any risks--they took their fees from the transaction costs.  The banking industry was selling toxic financial instruments to gullible investors, including pension funds and people invested in mutual funds.

Similarly, the college industry is charging a gullible public more than a liberal arts degree is worth, and the suckers enroll because, hey, going to Barnard or Brown or Amherst must be a good investment. And the colleges aren't assuming any risks. Their pliant students are borrowing from the federal student loan program, and the government guarantees the loan. Ivy League U doesn't care if its graduates default on their loans any more than Goldman Sachs cared what happened to the investors who bought their mortgage-backed securities.

And the fees! People who default on their loans get assessed huge collection fees and penalties. People are routinely going into the bankruptcy courts trying to discharge student-loan debt that is two or even three times the amount they borrowed due to accrued interest, penalties, and fees.

So if you haven't seen the Big Short, go see it. And as you watch this riveting drama, think about the student-loan program. A bubble is about to burst at a college near you.

"I thought we were better than this."

Student Loan Debtors and the Presidential Race: Hillary still has an opportunity to win over young voteers

Hillary Clinton devastated Bernie Sanders in the South Carolina Democratic Primary election. As Bernie candidly admitted, the Sanders team was "decimated." The only good news, he said, was this: Bernie beat Hillary among voters age 29 and younger.

Hillary talks herself hoarse telling voters how much she has done for them and much more she will do if she is elected President. But young people don't buy it. Essentially, they see her as an elderly political hack who sucks up to the banks.

But Hillary can still make headway with young voters if she would only promise some tangible and substantive reforms to the student-loan program. After all, there are 43 million Americans with outstanding student-loan debt; and most of them are young.

What could she promise? How about this:

1) "If elected president, I will instruct the IRS to draft regulations specifying that forgiven student-loan debt is not taxable."  

Under current law, about 4 million people are in income-based repayment plans, and most of them are seeing their total debt grow larger with each passing month due to accruing interest. When they complete their long-term repayment plans (after 20 or 25 years), their loan balances will be forgiven, but the forgiven amount will considered taxable income by the IRS. This is a real problem for people in income-based repayment plans. Why not just fix that problem with an IRS regulation?

2) "If elected president, my Department of Education will enact regulations that will cut off federal funding to any for-profit college that forces students to sign a promise not to sue the college for fraud or misrepresentation. And I will instruct the Department of Justice to cooperate with State Attorney Generals who are investigating and suing for-profit colleges that exploit students."

This promise demonstrates nothing more than common decency and would be well received by young people.

3) "When I am your president, the government will stop garnishing Social Security checks of elderly student-loan defaulters. And my administration will not oppose bankruptcy relief for elderly student-loan defaulters who are living below the poverty level."

There is nothing radical about this proposition. In fact, last month, in Precht v. U.S. Department of Education, DOE agreed to bankruptcy discharge of an elderly person's student-loan debt and stopped garnishing his Social Security check.

4) "My administration will renegotiate all contracts with student-loan debt collectors like Educational Credit Management Corporation. All these entities will be required to disclose the salaries of their executives and employees. They will also be required to disclose their profits. And I will eliminate the penalties and fees that the collection agencies have been charging distressed student-loan borrowers."

The beauty of these promises is this. All the reforms I listed could be implemented by President Hillary Clinton on the day she takes office. None of them require congressional approval.  And even if they did require statutory changes, what federal legislator would say no to these modest reforms if President Hillary asked for them?

If Hillary made these promises, she would demonstrate that she understands the magnitude of the student-loan crisis and that she  plans to take energetic action to grant some relief.  But my prediction is this: Hillary won't promise any substantive reforms of the student loan program because Goldman Sachs and the banks would disapprove. And that--in a nutshell--is why young people are not voting for Hillary.

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

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