Biden Administration Extends Pause on Student-Loan Payments Until End of This Year: Has The Government Created A Moral Hazard?

 Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. 

 The Economic Times

Christmas came early this year for student-loan debtors. First, the Biden administration is extending the pause on student-loan payments until the end of 2022, which means that college borrowers are getting a two-and-half-year holiday from making monthly loan payments. 

That's not all. President Biden will give every borrower under an income cap of $125,000 (or $250,000 for married couples) $10,000 in student-debt relief.

Borrowers who received Pell Grants in college will get $20,000 in debt relief.

That's big news--especially for borrowers who got Pell Grants while in school. If we add the Pell Grant money these student-borrowers obtained while in college, plus the $20,000 loan write-off, many of these people will have gotten a free education.

And there's more. The Biden administration will launch a more generous income-based repayment (IBR) plan that will lower income-based payments for undergraduate loans from 10 percent of discretionary income to just five percent. The Department of Education also intends to raise the amount of income considered nondiscretionary, meaning that undergraduate borrowers will pay less than five percent of their income on their student loans.

Still, Santa's sack of gifts is not empty. Under DOE's proposed rule, the government will cover the unpaid monthly interest for people in IBRs, meaning student debtors on income-based repayment plans won't see their loan balances go up due to negative amortization.

Party poopers like Larry Summers say that all this federal generosity will fuel more inflation, but who cares? Certainly not the student-loan debtors. In fact, rising inflation will be a bonanza for them because they will be paying back student loans with deflated dollars.

Grumps also argue that the Biden student-loan forgiveness scheme acts as a moral hazard, and I think this is true. If students know they will make loan payments based on their income, not the amount they borrowed, they have every incentive to borrow extravagantly.  

And Biden's munificent changes in income-based repayment plans will likely act as a moral hazard for the colleges as well. University leaders have no incentive to keep their costs in line when they know that students will cheerfully absorb tuition hikes because their loan-repayment plans are so generous that it won't matter whether their tuition bills get larger.

In defense of Biden's sweeping student-loan reforms,  I think everyone agrees that many students took out loans to get a college education that wasn't worth much and was too expensive. 

Millions of students were scammed by for-profit colleges or private nonprofit universities that cranked out overpriced, worthless graduate degrees. Surely the victims of the higher education racket deserve some relief. 

Nevertheless, the federal government is headed for catastrophe if it rolls out student-loan repayment plans that are overly generous while doing nothing to rein in the higher-education racket.

Unfortunately, the feds are doing nothing to stop students from being scammed. Instead, federal money is propping up the colleges--both profit and nonprofit, which allows them to raise tuition prices yearly. 

At the same time, the hucksters who run the colleges offer students educational experiences that don't help them get jobs after they graduate. As a consolation, I suppose, the government is making it very easy for ripped-off students to manage their college debt.

The cold war Russian economy, it was said, ran on the principle that the government pretended to pay the workers and the workers pretended to work.

Something like that is going on in American higher education. The colleges are pretending to educate their students, and the students are pretending to pay for it.

This will end badly for everyone--students, colleges, and taxpayers.  

Merry Christmas!

Sweet v. DeVos: A federal judge calls Education Department's Borrow-Defense process "Kafkaesque"

In 2019, a group of student-loan debtors filed a lawsuit against the U.S. Department of Education and Education Secretary Betsy DeVos. 

Claiming to represent more than 100,000 student-loan borrowers, the plaintiffs accused DOE of issuing "blanket refusal[s]" when students tried to have their student loans forgiven based on claims they had been defrauded by the for-profit colleges they attended. 

More particularly, the plaintiffs accused DOE of “stonewalling” the fraud-claims process and allowing more than 200,000 fraud claims to languish for eighteen months.

In October 2019, Federal Judge William Alsup certified the lawsuit as a class action (Sweet I); and on May 22, 2020, Judge Alsup approved a preliminary settlement proposal that would end the litigation (Sweet II). 

Under the terms of the proposed settlement, DOE pledged “to decide claims and notify borrowers within eighteen months of final approval and implement relief within twenty-one [months].” DOE also agreed to be penalized if it delayed its decisions.

The plaintiff students apparently believed DOE would process the fraud claims in good faith based on a review of each individual claim. But they discovered that DOE denied almost all claims by sending a form letter that told petitioners their requests were denied based on “Insufficient Evidence.”

As reported in Forbes, borrowers accused DOE of "skirting the spirit of the settlement agreement, by essentially, arbitrarily denying relief to everyone." DOE admitted that since April 2020 it had denied 94% of all borrower-defense claims. 

When DOE’s behavior came to Judge Alsup’s attention, he was not happy. As he explained in his order, DOE’s form letters did not explain why students’ claims were almost uniformly rejected.

  Although individuals could request reconsideration of their individual denials, they had no basis for doing so since DOE gave no reason for the rejections.  Indeed, Judge Alsup observed, “the borrower’s path forward rings disturbingly Kafkaesque” (Sweet III, p. 5).

In fact, it is hard to read Judge Alsup’s opinion without coming to the conclusion that Betsy DeVos’s DOE was determined to deny relief to almost everyone who claimed to have been defrauded by a for-profit college.

As Judge Alsup pointed out, DOE had processed fraud claims expeditiously during the Obama administration. In the final 19 months of President Obama's second term in office, DOE processed 32,000 borrower-defense applications and approved 99.2% of them (Sweet III, p. 9).

But in 2017, President Trump took office and appointed Betsy Devos as his Secretary of Education. DeVos's DOE slowed down the borrower defense review process dramatically. In fact, over an 18-month period, DOE did not issue any decisions on borrower-defense claims (Sweet III, p. 3).

Then, in December 2019, while litigation was pending, the DeVos DOE speeded up its review process and decided 16,000 cases in one day. In contrast to the 99 percent approval rate during the Obama administration, President Trump's DOE denied 95% of the borrower-defense claims (Sweet III, p. 3).

Judge Alsup’s order canceling the proposed settlement was issued less than a month before the 2020 presidential election. Donald Trump was defeated, and DeVos resigned her post as Education Secretary in January.

In short, there is a new sheriff in town. Let us hope Miguel Cardona, President Biden’s Secretary of Education, will resolve student-loan borrowers’ fraud claims quickly and in good faith. The Obama administration determined that most of these claims are valid--that most claimants were ripped off by for-profit colleges.  Surely the Biden administration will come to the same conclusion.

References

Adam Minsky. Dept. of Education Tells Court It Has Denied 94% of Loan Forgiveness Applications, Forbes.com, Sept. 14, 2020.

Sweet v. DeVos [Sweet I], No. C19-03674 WHA, 2019 WL 5595171 (N.D. Cal. Oct. 30, 2019) (granting motion for class certification).

Sweet v. DeVos {Sweet II], No. C19-03674 WHA, 2020 WL 4876897 (N.D. Cal. May 22, 2020) (approving preliminary settlement).

Sweet v. DeVos [Sweet III],  No. C19-03674 WHA, 2019 WL 6149690 (N.D. Cal. Oct. 19, 2020) (refusing to approve settlement agreement).

Bye-bye, Betsy!

Is massive student-loan forgiveness off the table? The insiders prefer long-term, income-based repayment plans and that's what student debtors are likely to get

Remember the heady days of the 2020 presidential primaries? Democratic nominees proposed massive student-loan forgiveness, and some promised a free college education. 

This is what Vice President Joe Biden promised last April:

The concept I’m announcing today will align my student debt relief proposal with my forward-looking college tuition proposal. Under this plan, I propose to forgive all undergraduate tuition-related federal student debt from two- and four-year public colleges and universities for debt-holders earning up to $125,000. . . . The federal government would pay the monthly payment in lieu of the borrower until the forgivable portion of the loan was paid off. This benefit would also apply to individuals holding federal student loans for tuition from private HBCUs and MSIs.

But the election is over, and the political insiders have had time to reflect on massive loan forgiveness. As the Washington Post editorialized just a few days ago,

[W]wholesale debt relief is actually the antithesis of progressive policy. Most benefits would flow to upper-income households, which, despite the undeniable burden of debt for lower-income families, actually owes a disproportionate share of the total [student-loan] dollars. 

 The Post disapproves of the relief plan put forward by Senators Elizabeth Warren and Charles Schumer.  They want Biden to forgive student-loan debt up to $50,000 per borrower.  Biden himself has trimmed back his April proposal and now only wants Congress to forgive $10,000 in student debt.

I think massive student-loan relief is off the table. Instead, I think the Department of Education--acting with or without Congressional action--is more likely to offer more generous income-based repayment plans.

In fact, that is exactly what the Washington Post is endorsing. Citing a study by Sylvain  Catherine and Constantine Yanellis, the Post says the feds should "mak[e] sure that everyone who qualifies enrolls in an existing plan that links repayment to a borrower's income."

But tinkering with income-based repayment plans (IBRPs) will not solve the student-loan crisis. 

Nine million people are in them now, and virtually none of them are paying down the principal on their loans.  College borrowers who stick it out will eventually get their student loans forgiven, but the canceled debt is considered taxable income by the Internal Revenue Service.

Making IBRPs more generous, which the new administration might do, is just a student-loan forgiveness program in disguise.  It would do nothing to change the status quo, allowing students to borrow too much money to attend college and the universities to charge tuition that is far too high.

As Steve Rhode argued in a recent essay, the solution to the student-loan crisis is to ease restrictions on bankruptcy relief for distressed college-loan borrowers.  All that needs to be done is to remove the "undue hardship" language from the Bankruptcy Code and allow student-loan debtors who are truly insolvent to discharge their loans in bankruptcy.

But perhaps that solution is too simple for the crafty minds of our politicians and our college leaders.  Instead of giving student borrowers a fresh start in bankruptcy,  they will likely concoct another complicated and labyrinthine IBRP.

Steve Rhode points out that wholesale forgiveness of student loans is impossible. Bankruptcy Relief for distressed college debtors is the best option

 Millions of words have been written about the student loan crisis. Heck, I've probably written a couple of million words about it myself. 

For my money, Steve Rhode's succinct and cogent essay, published yesterday, is the best analysis of this catastrophe. Mr. Rhode explains why massive student-loan forgiveness is a bad idea. Instead, he argues that bankruptcy relief is the better option. He also points out the fatal flaws in the federal student-loan program, which have brought us to the brink of calamity.

I urge you to read Steve Rhode's essay in its entirety.  My commentary will highlight a few key points.

First of all, Rhode points out that taking out student loans to pay for a college education was a mistake for millions of Americans. He cites a New York Life survey, which found that the average student-loan borrower took 18.5 years to pay off student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

Shockingly, millions of Americans took out student loans and never finished their degrees. For those people, student loans are a dead loss.  Instead of enhancing their economic future, dropouts shot themselves in the foot by taking out student loans.

Rhode also points out (as have many others) that the for-profit college industry has wreaked havoc among a population of Americans who took out student loans to attend for-profit schools. He cites a study by the Federal Reserve Bank of New York, which found that “[s]tudents who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The Federal Reserve Bank study then went on to say: "Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes."

The federal student loan program is a mess. It is probably the worst public policy decision Congress ever made when it launched a program more than a half-century ago that now has more than 40 million people ensnared by a total of $1.7 trillion in outstanding student-loan debt.

But massive student-loan forgiveness is not a viable option. 

First of all, wiping out all that debt is fundamentally unfair. And here I will quote Steve Rhode's analysis:

As Howard Dvorkin, Chairman of  Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.” 

As Mr. Dvorkin pointed out, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

In any event, as Mr. Rhode explained, millions of people are already in a loan forgiveness plan. About 9 million people are in income-based repayment plans that allow them to make minimal loan payments that don't even cover accruing interest on their underlying debt.

So what is the solution to the train wreck we call the federal student-loan program? This is what Steve Rhode recommends:

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

It was this pernicious law that made even private student loans virtually nondischargeable in bankruptcy.  Many of the congresspeople who voted for this bill still hold elected office. They should be ashamed of themselves. 

Just as importantly, Mr. Rhode argues, Congress needs to remove the "undue hardship" language from the Bankruptcy Code and allow distressed debtors to discharge their college loans in bankruptcy like any other consumer debt.

Steve Rhode succinctly points out the merits of reasonable bankruptcy relief:

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines. 

2.      The debt is forgiven tax-free. 

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc. 

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy. 

5.      Forgiveness will be restricted to only those that qualify. 

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody. 

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available. 

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy. 

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

As I said at the beginning of this commentary, I urge people to read Steve Rhode's article in its entirety. I agree with him completely.

Let's see what Congress does in the coming months. The way out of the nightmare is to amend the Bankruptcy Code.  Various student-loan forgiveness scenarios will not fix this enormous problem. 

If loan forgiveness is the best idea Congress has to offer, then our nation's political leaders will have opted for the status quo. And the status quo will ultimately destroy our nation's colleges and universities along with the lives of millions of student-loan debtors. 

"Deserves got nothin' to do with it": Is Elizabeth Warren's student-loan forgiveness plan fair to people who played by the rules?

An Iowa man challenged Senator Elizabeth Warren about her student-loan forgiveness plan during a campaign event in Grimes, Iowa.

"I just wanted to ask one question," the man said to Warren. "My daughter is getting out of school. I've saved all my money. She doesn't have any student loans. Am I going to get my money back?" he said.

"Of course not, Warren replied.

"So you're going to pay for people who didn't save any money and those of us who did the right thing get screwed," the man said.

"No, you're not going to get screwed," Warren lamely responded.

I get the Iowa guy's point. It seems unfair to grant wholesale student-loan forgiveness to millions of people, while parents who made severe financial sacrifices to pay for their children's college education get no relief.

But let's face it. About half of all student loans are not being paid back anyway. That's right--about half.

More than a quarter of all student-loan borrowers default on their student loans within five years. Another 20 percent or so are in income-based repayment plans that are structured so that the borrowers never pay off their loans. And then there are millions of people who have their loans in forbearance or deferment, while interest piles upon the principal of their debt. 

In a way, Senator Warren's student-loan forgiveness plan is like President Jimmy Carter's decision to grant amnesty to the young men who fled to Canada to escape the draft during the Vietnam War. Critics said it was unfair for draft dodgers to suffer no penalties while millions of Americans went into the Army and more than than 50,000 Americans died in the jungles of Vietnam.

Unfortunately, huge moral quagmires have no clear-cut solutions. The Vietnam War was an enormous national tragedy, a senseless and immoral affair. Or so I believe.

Likewise, the student-loan crisis is a moral crisis. Forty-five million people are carrying student-loan debt that totals $1.6 trillion and millions of these people got little or no financial benefit from their college experience.  

The for-profit colleges raked in enormous wads of federal cash and dished out overpriced and often worthless college degrees. The law schools and business schools jacked up the prices of their professional programs simply to suck up more federal money, and a lot of that money went toward bloated salaries for college administrators.

There is no perfectly fair solution to this crisis.  As a nation, we simply must grant relief to suffering college-loan debtors.  And Senator Warren's plan is a reasonable proposal for doing that.

Personally, I would prefer for Congress to amend the Bankruptcy Code and allow insolvent debtors to discharge their student loans through bankruptcy.  That would be fairer to people like Senator Warren's critic in Grimes, Iowa.

But the student-loan catastrophe has got to be addressed head-on.  Senator Warren's plan and Senator Sanders' plan are pretty good solutions.  In my opinion, bankruptcy relief is a better solution. 

Any plan will benefit some people who do not deserve student-debt relief. But as Clint Eastwood's character said in the movie The Unforgiven, "Deserves got nothin' to do with it." 

Let's move forward to clean up the student-loan program before it totally destroys the integrity of higher education--not to mention America's middle class.

"Deserves got nothin' to do with it." 

Education Department official says he will resign and calls for massive student-loan forgiveness: Does he have a good idea?

Mr. A. Wayne Johnson, the Department of Education's "chief strategy and transformation officer," announced his resignation this week and called for massive forgiveness of student-loan debt.

 Johnson, who was appointed to his DOE position by Education Secretary Betsy DeVos, proposes to forgive all federal student loan debt up to $50,000 per student. And he's also calling for a $50,000 tax credit for people who have already repaid their loans.

Senators Bernie Sanders and Elizabeth Warren, both presidential candidates, are also calling for wholesale forgiveness of student loans. Johnson's plan is more generous than Senator Warren's proposal, which puts income caps on student-loan forgiveness. On the other hand, Senator Sanders'  plan is even more generous than Johnson's. Bernie calls for forgiving all student-loan debt--about $1.6 trillion dollars with no income cap. Johnson's proposal would cost taxpayers less--an estimated $925 million.

Is massive student-loan forgiveness a good idea? I think it is. Johnson is right; the student loan program is "fundamentally broken." Even Secretary DeVos compared the program to a looming thunderstorm and admitted last year that only 24 percent of student debtors are paying back both principal and interest on their loans.

Indeed, virtually no one in the government's income-based repayment plans (IBRPs) will pay back their student loans because their monthly payments are not large enough to pay down accumulating interest on borrowers' underlying debt.  About 7.3 million people are in IBRPs, and millions more have defaulted on their loans or have them in deferment.

We know that massive student-loan indebtedness is hindering young people from getting married, having children, and buying homes. Researchers at Bard  College's Levy Economics Institute concluded that student-loan forgiveness would actually stimulate the national economy by freeing up money for student debtors to purchase houses and consumer goods.

Personally, I'm OK with all three student-loan forgiveness proposals: Johnson's, Warren's and Sanders'. Let's face facts; most of these loans will never be paid back.

But I think a better option would be for Congress to remove impediments to discharging student loans in bankruptcy, which it can easily do.  Congress just needs to pass a law that would remove the words "undue hardship" from the 11 U.S.C.  § 523(a) of the Bankruptcy Code.

Amending the Bankruptcy Code would allow federal bankruptcy judges to decide, on a case-by-case basis, which student-loan borrowers are truly insolvent and deserving of relief. These judges have the experience and the authority to weed out fraudulent claims and restrict debt relief to worthy candidates.

Massive student-loan debt relief without regard to individual circumstances would allow all 45 million student-loan borrowers to shake off their student debt--even those who obtained good value from their educational experiences and have the financial means to pay off their loans. I don't think that is good public policy.

Nevertheless, if the choice is between massive student-loan relief and the present system, I'm in favor of the plans put forward by Mr. Johnson, Senator Warren, and Senator Sanders. As I said, most of these loans will never be paid back and forcing millions of distressed student-loan debtors into 20- or 25-year income-based repayment plans just subjects them to a lifetime of stress, anxiety, and needless suffering.

A. Wayne Johnson will resign from Department of Education: Bye-bye, Betsy

Senator Elizabeth's Student-Loan Forgiveness Plan Isn't Radical: The Feds are Already Forgiving Billions of Dollars in Student Debt

Adam Levitin, writing for Credit Slip, made a profound observation about Senator Elizabeth Warren's proposal to forgive massive amounts of student-loan debt.  Her harsh critics, Levitin, writes, moan and grown about the morality of contracts, the unfairness of allowing some student borrowers to escape their legal obligations, and the enormous cost of forgiving billions of dollars of accumulated student-loan debt.

In Levitin's view, these critics are only demonstrating that they don't know anything about how the federal student-loan program works. If they did, Levitin explains, they would know that "we crossed the debt forgiveness Rubicon long, long ago." In fact, enormous debt forgiveness is already "baked into the federal student loan program."

Levitin is absolutely right. Far less than half of student borrowers who have entered into repayment are paying down the principal of their loans. Millions of student-loan debtors have their loans in deferment, which means they aren't paying anything on their debt. Another 7.5 million borrowers are in income-based repayment plans (IBRPs) with their repayment schedules set so low that their monthly payments don't even cover accruing interest on their loan balances.

And then we have the Public Service Loan Forgiveness Program (PSLF), which allows qualified public-service workers to make income-based payments for 10 years, after which their loan balances are forgiven. How many people are in the PSLF  program (or think they are in it)? We don't really know, but well over a million student borrowers have applied to become PSLF eligible.

Even Betsy DeVos, Trump's Secretary of Education, publicly admitted that the student loan program is a mess. As DeVos revealed last November, only one borrower out of four are paying down both principal and interest on their student-loan debt.  Almost one out of five borrowers are delinquent on their loans or in default. And 43 percent of student loans, by DeVos's calculation, are currently "in distress."

As Mr. Levitin succinctly put it:

The only real difference between Senator Warren's proposal and the existing forgiveness  feature in the student loan program is whether the forgiveness comes in a fell swoop or is dribbled out over time. Given the federal government's infinite time horizon, the difference is really just an accounting matter. 

In other words, to baldly state the point, millions of student-loan debtors aren't paying back their loans and never will. Probably half of the $1.56 trillion in outstanding student loans will never be paid back.

Levitin argues that all student borrowers should be enrolled in income-based repayment plans by default when they finish their studies.  But I disagree. Putting every college graduate into a 20- or 25-year repayment plan is basically making these degree recipients indentured servants for the government--bound to pay a percentage of their wages to the Department of Education for a majority of their working lives.  If we do that, we will have basically created a permanent underclass of 21st century sharecroppers.

Moreover, as Levitin correctly points out, there is an enormous psychological benefit to Senator Warren's plan, which grants immediate debt forgiveness rather than dribbling it over over two decades or more in income-based repayment plans. "Consumers feel weighed down by the stock of their debt, even if they won't actually have to repay a large chunk of it." Indeed, it is well established that student-loan debt is preventing Americans from buying homes, having children, or saving for their retirement.

And then there is a rarely discussed problem with  the current debt-forgiveness system: tax liability. People whose loans are forgiven after a quarter century of making income-based payments will get tax bills for the amount of their forgiven debt because the IRS considers forgiven loans as taxable income.  Of course that problem could be easily fixed if Congress would enact legislation making forgiven student-loan debt nontaxable.

But Congress hasn't done that. Why? Because our politicians want to pretend that the federal student loan program isn't broken. It's like that old explanation of the Russian economy during the days of the Soviet Union. "The government pretends to pay us," a proletarian explained, "and we pretend to work."

Student-loan debtors: The new sharecroppers

It's official: The Republicans hate student-loan debtors

A few days ago, Republicans introduced their bill for revising the Higher Education Act. Some provisions in the GOP proposal are astonishing in their cruelty and contempt for student debtors.

• Abolishing income-drive repayment plans. For starters, the Republicans want to end all student-loan forgiveness. Goodbye PAYE. Goodbye REPAY. Students who can't pay off their loans under the standard 10-year repayment plan will be forced into income-driven repayment plans that continue until their loans are paid off--which for many of them will be never.

• Abolishing the Public Service Loan Forgiveness Program. The GOP wants to abolish the Public Service Loan Forgiveness Program, which Congress created in 2007. Hundreds of thousands of students have entered into public-service jobs expecting to have their college loans forgiven after 10 years. If the Republican proposal becomes law, some of these people may be grandfathered into the PSLF program, but the program will be shut down.

• Forbidding states from enforcing consumer protection laws against student loan servicers. Buried on page 464 of the GOP's bill is a provision that forbids states from regulating the student-loan serving companies.  Some state AGs have vigorously pursued wrongdoers in the loan servicing business, and Republicans apparently want to shield the debt collectors from state consumer protection laws.

Where are these pernicious Republican ideas coming from? Representative Virginia Foxx (R-NC) is Chair of the House Education Committee, and she supports all these nasty proposals. But Foxx is not pulling the strings. These toxic proposals are coming from the heart of the Trump administration--and undoubtedly from Secretary of Education Betsy DeVos.

I don't know if these punitive GOP proposals will make it into federal law. But if they do, Republicans will push millions of college borrowers into a lifetime of indebtedness.  It's almost as if the GOP wants to create an underclass of sharecroppers.

President Trump and his fiendish Secretary of Education (who has financial ties to the debt collection business) may think their scheme to punish student borrowers will play to the Republican base. But if these proposals get through Congress, there will be hell to pay in coming elections.  

The Democrats are missing a golden opportunity if they don't take up the banner of student-debt relief.  In my view, they should forget Russia and turn their venom toward Betsy DeVos, who may be Trump's Achillese heel. The Dems need to educate college borrowers about the nation's venal Secretary of Education and rouse them to righteous fury.

Betsy DeVos summer home: Maybe you could get a job there as pool boy

References

Douglas Belkin, Josh Mitchell, & Melissa Korn. House GOP to Propose Sweeping Changes to Higher Education. Wall Street Journal, November 29, 2017.

Jillian Berman. House Republicans seek to roll back state laws protecting student loan borrowers. Marketwatch.com, December 7, 2017.

Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment program, overhaul federal financial aid. Washington Post, December 1, 2017.

Danielle Douglas-Gabriel. Dems raise concern about possible links betwen DeVos and student debt collection agency. Washington Post, January 17, 2017.

Steve Rhode. GOP Proposed Change to Higher Education Act to Gut Consumers and Debt Relief Companies. Get Out of Debt Guy, December 5, 2017.

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

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

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

Here are my specific critiques:

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

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

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

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

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

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

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

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

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

Several prominent bankruptcy scholars have recommended that the 2005 legislation be repealed and that private student loans be dischargeable in bankruptcy like any other nonsecured debt. But the DOE doesn't go that far. Here's what the DOE report says:

[T]he report recommends allowing private loans that do not offer [pay-as-you-earn or PAYE]-like borrower protections to be dischargeable in bankruptcy similar to other forms of consumer debt. Allowing private lenders the protection of non-dischargeability if they offer PAYE-like features will provide an incentive for private lenders to create meaningful ex ante payment modification options available for when borrowers cannot make standard payments. (p. 17)

In other words, Obama and Duncan propose that banks will still have the protection of having their student loans virtually impossible to discharge in bankruptcy if they will allow distressed student-loan borrowers to switch from standard loan payments to long-term income-based repayment plans. Of course, the banks might be willing to add an income-based repayment feature to their student loans, but that would mean that most private student loans would negatively amortize due to the fact that the income-based payments would almost certainly not be large enough to pay accumulating interest.

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

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

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

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

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

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

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

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

Conclusion

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

Frankly, my dear, we don't give a damn.

References

AnnaMaria Andriotis. Banks Take Interest in College Lending. Wall Street Journal, February 24, 2015. Accessible: http://www.wsj.com/articles/SB10001424052702304834704579403580057408114

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

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

Student Loan Forgiveness for Students Who Attended One of the Schools Owned by Corinthian Colleges: I Recommend Chiang Kai-Shek's Fire Hose Approach

Chiang Kai-shek was the  leader of the Nationalist government of China for many years, but he was also a Methodist of sorts. I read somewhere that he once baptized his soldiers en masse, using a fire hose.  I'm not sure that story is true, but I like to think of all those Chinese soldiers who became Methodists. I'm sure it did them a world of good.

Regardless of the truth of that story, I believe the Department of Education should adopt Chiang Kai-shek's  fire-hose technique when designing a student-loan forgiveness program for all the people who attended one of  institutions operated by Corinthian Colleges--which is now bankrupt.

Chiang Kai-shek: Did he baptize his troops with a fire hose?

The Department of Education is designing a process whereby students who attended a Corinthian campus can apply for loan forgiveness, which at least some of them are legally entitled to do due to Corinthian's shutdown. According to the New York Times, DOE estimates that 350,000 people attended one of the Corinthian  campuses over the past five years. If all of them apply for loan forgiveness and receive debt relief, it will cost taxpayers $3.5 billion.

In the past, DOE has utilized a cumbersome loan-forgiveness process for  students who attended colleges that closed, and DOE says that only 6 percent of students who were eligible for debt relief due to a college closure  actually applied for that relief (as reported in the New York Times).

Secretary of Education Arne Duncan promises a streamlined loan-forgiveness process for former Corinthian students. "We will make this process as easy as possible for them, including by considering claims in groups wherever possible" Duncan said.

But why make Corinthian students jump through hoops to have their student loans forgiven--any hoops at all? Why not adopt Chiang Kai-shek's methods and forgive all those loans en masse? I agree with Luke Herrine, a member of the Debt Collective, who argued that all Corinthian students should be given "blanket relief."

Why give blanket loan -forgiveness to former Corinthian students? First of all, the government is not going to get that money back anyway. In all likelihood, a majority of Corinthian students will either default on their loans or apply for economic-hardship status that will exempt them from making loan payments until they get on their feet financially, which for many Corinthian victims will be never.

Second, the Department of Education is morally responsible for the mess it created by shoveling student-aid money to for-profit colleges that paid their executives lavish salaries while delivering substandard educational programs. A quarter of all student-aid money goes to for-profit colleges, which have the highest default rates. 

The for-profits have kept this shell game going by hiring lobbyists to represent their interests, employing lawyers to file lawsuits to stop DOE's regulatory efforts, and making campaign contributions to strategic members of Congress.  In fact, Corinthian's bankruptcy filings lists its lobbyists as some of its creditors.

No, DOE needs to spray all these students with a metaphorical fire hose, forgiving Corinthian's former students' loans through executive action. These unfortunate folk have been through enough. Duncan shouldn't make them fill out any more forms in order to rid themselves of student-loans they took out to attend one of Corinthian's colleges.


References

Tamar Lewin. Government to Forgive Student Loans at Corinthian. New York Times, June 9, 2015, p. A11.

Help for Victims of College Fraud (Editorial). New York Times, June 10, 2015, p. A24.

It Seemed Like a Good Idea at the Time: Student-Loan Forgiveness Programs are Making the Student Loan Crisis Worse

The federal government's student-loan forgiveness programs--like  Germany's decision to invade Russia in 1941--must have seemed like a good idea at the time.

After all, millions of college students are burdened by crushing student loans, the student-loan default rate creeps ever upward, and many college graduates have not gotten jobs that pay well enough to service their student-loan debt.

So why not create some programs that will lower student borrowers' monthly loan payments?

  And so the government created two programs that are essentially student-loan forgiveness programs. One program allows people who take public service jobs to make loan payments based on a percentage of their income for ten years. At the end of the ten-year period, the balance of their loans are forgiven.


Germany invaded Russia in the summer of 1941
It seemed like a good idea at the time.

The other program--income-based repayment plans (IBRPs) --allows borrowers to make monthly student-loan payments based on a percentage of their income for 20 or 25 years (there are several variations). Just as with the public-service loan forgiveness plans, student-loan debtors will see the balance of their loans forgiven at the end of the repayment period.

The attractiveness of these programs for student-loan borrowers is obvious. They see their monthly payments go down, which may keep many student-loan debtors from going into default.

Currently, about 1.3 million borrowers are enrolled in public-service loan forgiveness plans, and about the same number are enrolled in IBRPS. 

But here is the downside.  None of these programs contain provisions to discourage students from borrowing more money than necessary.  In fact--since the monthly payments are based on a percentage of borrowers' income and not the amount borrowed, the programs contain a perverse incentive to borrow as much as possible.  As a result, many of the people making income-based loan payments will never pay back even a portion of their loans.

Here are a couple of examples--one taken from a Wall Street Journal article and one taken from a New York Times story--that illustrate the problem.

Haley Schafer borrowed $312,000 to attend veterinary school in the Caribbean, even though the job market for veterinarians in the United States is terrible  Schafer got a job making about $60,000 a year, not nearly enough to comfortably pay back her student loans under the standard 10-year repayment plan.

So Schafer signed up for a 25-year income-based repayment plan that lowered her monthly loan payments to about $400 a month. Unfortunately,  her monthly payments aren't large enough to cover accruing interest on her loans.  The New York Times estimated that her loan balance will continue to grow, and when she finishes her 25-year repayment plan her loan balance will be more than twice the amount that she borrowed--$650,000!

And that's Haley Schafer's story. Now let's hear about Max Norris, a public-service attorney who borrowed $172,000 to go to University of California's Hastings College of Law.  Under the public-service student-loan forgiveness plan, he only pays $420 a month on his loan balance, not enough to cover accruing interest.

Norris's loan balance will be forgiven after 10  years. Assuming Norris stays in public service and gets annual raises of 4 percent, the government will forgive $225,000 in student-loan indebtedness--more than Norris borrowed!

In other words, the federal government is giving Morris a 100 percent subsidy to go to law school, even though the market is flooded with lawyers. In fact there are currently two law-school graduates for every new legal job.

Surely, anyone can see that it makes no sense for the federal government to permit people to borrow $100,000 or more to train people for professions that are already overcrowded and then allow them to make loan payments that are so small that the payments don't cover the accruing interest.

But that is what our federal government is doing.  

And, although these programs may help keep the student-loan default rate down, they are actually making the student loan-crisis worse.  Not only do we have 7 million people who stopped making loan payments and are in default, we have another 9 million who aren't making payments because they received an economic hardship deferment or are entitled to some other form of forbearance.  And then we have 2.5 million people who are making loan payments based not on the amount they borrowed but on their income, which means most will never pay off the principal of their loans.

In short--the number of people who will never pay off their student loans is in the millions--many, many millions.

References

Josh Mitchell. Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Costs, Higher Tuition. Wall Street Journal, April 22, 2014.

David Segal. High Debt and Falling Demand Trap New Vets. New York Times, February 23, 2013. Available at: http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?_r=0