DOE's Annual Report on Student Loan Defaults Is More Useful than Its Old Reports, But DOE Still Understates the Magnitude of the Student-Loan Crisis

The U.S. Department released its annual report on student-loan defaults a few days ago. For 2011, the percentage of borrowers who defaulted in the first two years of their repayment period was 9.1 percent, up slightly from the previous year.

Of course, most student-loan borrowers don't default in the first two years of the repayment period. According to a  New York Times story, the average time for an overburdened borrower to default is four years.

To get a better picture of the true default picture, DOE began publishing the three-year student-loan default rate.  Measuring default rates during the first three years of the repayment period causes the rate to rise from 9.1 percent to 13.4 percent.  For students who borrowed to attend for-profit colleges, the three-year default rate is higher--22.7 percent. In other words, more than one out of five students who borrowed to attend for-profit institutions defaulted within three years of the beginning of their repayment obligation according to DOE's most recent report.

How about the percentage of borrowers who default over the life of the loan?  The number is very high, particularly for the for-profit sector.  According to a DOE estimate (as reported in the New York Times), 49 percent of the students who borrow money to attend a for-profit college will ultimately default on their loans!

It should be obvious to everyone by now that the for-profit sector as a whole has been a failure at preparing students for the 21st century economy. The federal government should not be financing a sector that has a default rate of nearly 50 percent. Nevertheless, a sector that only enrolls about 10 percent of all post-secondary students draws 25 percent of federal student aid money.

This is a scandal, and it has brought great misery to students who borrowed money to attend for-profit colleges and then failed to get jobs that would allow them to pay back the money.

 My guess is that a great many student-loan defaulters have simply given up trying to become economically self-sufficient.  Having defaulted on their student loans, they are unable to participate in the student-loan program again until they pay back their old debt.  Under current bankruptcy law, it is virtually impossible for them to discharge their student loans in bankruptcy. Meanwhile, for most of them, the interest on their loans continues to accrue. Short of emigrating to another country, there is nothing many of these defaulters can do to get a fresh start.

References

Lewin, Tamar. Education Department Report Shows More Borrowers Defaulting on Student Loans. New York Times, September 29, 2012, p. A16..

Baloney about Higher Education from President of Wesleyan University

In Written on the Heart,  Philosopher J. Budziszewski's primer on natural law, Budziszewski argues that certain truths are innately known to all people. These truths form the natural law, and are, as it were, written on the heart. 

Midway through the book, Budziszewski describes this innate knowledge as our "baloney meter."  He maintains that all people know at some level that certain concepts are contrary to the natural law and are baloney.

Budziszewski believes (and I agree) that American higher education has adopted the mission of dismantling the baloney meters of the young people who study at our nation's colleges and universities. By the time they finish their studies, students have come to believe that there are no ultimate truths, no natural law, no fundamental principles for living. Instead they think that all truths are relative and changeable, that people make decisions based on their own self interest, and that the meaning of life is shaped by the quest for pleasure, power, and recognition. 

Yesterday's New York Times contains an example of higher education's baloney.  Michael Roth, president of Wesleyan University, responded to critics who charge that American higher education is outmoded.

Michael S. Roth, President of Wesleyan University

Basically, Mr. Roth is defending the status quo in Amerian higher education at places like Wesleyan. The purpose of higher education, Roth loftily maintains, is to "teach us habits of learning." Education should encourage students to developing an "openness to being shaped by experience."  Quoting Dewey, Roth writes, "The inclination to learn from life itself and to make the conditions of life such that all will learn in the process of living is the finest product of schooling."

In short, Roth argued, the purpose of higher education "is to give all citizens the opportunity to find 'large and human significance' in their lives and work.'"  And--Roth might have added--the cost of finding human significance at a university like Wesleyan is only about $40,000 a year.

Of course, Roth's defense of higher education is just baloney. In spite of the universities' efforts to dismantle their students' baloney meters, students are beginning to figure out that higher education is not worth what the universities are charging for it, particularly at institutions like Wesleyan, where many professors specialize in political correctness, deceptively packaged as "the liberal arts".

All university presidents can express high-minded ideals about the value of higher education, and some of them can quote John Dewey.  But we should not take these attestations seriously until we see college presidents rein in their own salaries, lower tuition costs, and figure out ways to make sure a college degree leads to a well-paying job.  By the way, Wesleyan University is one of the ten most expensive colleges in the United States.

References

Budziszewski, J. Written on the Heart: The Case for Natural Law. Intervarsity Press, 1997.

Dawson, Christopher. The Crisis of Western Education. Steubenville, OH: Franciscan University Press, 1989.

Roth, Michael. "Learning as Freedom." New York Times, September 6, 2012, p. A23.

How Many People Are Behind on Their Student Loans? At Least 6 Milion

College loans have been a problem for students for more than 20 years.  Yet the national dialogue on the student loan crisis is just getting started. Why did we wait so long to examine the student loan morass?

I think we are aware of the student loan crisis now because objective parties outside of higher education have begun issuing reports about it.  The Federal Reserve Bank of San Francisco, the Federal Reserve Bank of New York, Moody's, the Consumer Financial Protection Bureau and other independent entities are giving us objective assessments of this problem.

If we look closely at these reports, we can see just how big the student loan crisis is.  In fact, it is now apparent that millions of people have stopped making payments on their student loans.  How many millions?  Let's take a look.

According to a recent report by the Consumer Financial Protection Bureau, 850,000 private loans are delinquent.  That is an astonishing number when we consider that private loans are only a small part of the overall student loan industry--less than 10 percent.  Also, private loans undoubtedly have a lower default rate than federally guaranteed student loans.  This is because the vast majority of private loans include a co-signing guarantor.  In other words, Mom or Pop usually sign on private student loans; and Mom or Pop must pay off the loan if their child defaults. 

How many people have stopped paying on their federal student loans? According to a report issued this year by the Federal Reserve Bank of New York, 27 percent of 20 million student-loan borrowers in the repayment stage are behind on their payments or in default--that's 5.4 million people.

When we add the number of people who are behind on their private loans with the number of people who are behind on their federal student loans, we get a big number.  More than 6 million people are not current on their student loans and many of these people are in default.

We know from newspaper stories and the bankruptcy cases that people who default on their student loans are in financial purgatory.  They are subject to having their wages garnished, their credit ratings are ruined, they are unable in most cases to file bankruptcy.  Six million people--that is a lot of human misery.

References

Consumer Financial Protection Bureau. Private Student Loans. Washington, DC: author, 2012.

Meta Brown, Andrew Haughwout, Donghoon Lee, Maricar Mabutas, & Wilbert van de Klaaw. Grading Student Loans. New York: Federal Reserve Bank of New York, 2012.

Dear New York Times: Your Suggestion for Controlling Abuse in the Private Student-Loan Industry is Pathetic

Some people think all the problems of the world will be solved when people are better informed. That seems to be the view of the New York Times--the nation's nanny.

Today the Times--in other tepid and timid editorial--calls for better disclosure for private student loans.  The Times is responding to the recent report by the Consumer Financial Protection Bureau.   The report found that 40 percent of students who took out private loans were eligible for less costly federal loans.

 The Times supports a pending bill "that would require colleges and lenders to thoroughly explain borrowing options to students." In addition, the Times reports, the proposed law will "prevent unnecessary borrowing by requiring lenders to check with colleges to determine how much money students are eligible to receive."

Blah, blah, blah.

Here are the central facts about private student loans.

1. Like federal student loans, private student loans are almost impossible to discharge in bankruptcy.
2. Ninety percent of private student loans are issued to student borrowers with a co-signor. In other words,  parents are often co-signing their children's student loans and obligate themselves to pay them back if their child defaults.
3. According to the CFPB report (p. 64), 850,000 private student loans--an astonishing number--are in default.

Congress can do one simple thing to protect private student-loan borrowers; it can amend the Bankruptcy Code to make private student loans dischargeable in bankruptcy.  

References

Editorial, "Better Disclosure for Private Loans," New York Times, July 26,2012.

The Underemployed Law School Graduate With Massive Student-Loan Obligations: The Hedlund Bankruptcy Case

Almost 37 million people owe money on their college loans, and millions are in default or behind on their loan payments (Brown et al. 2012). Most overburdened student-loan debtors suffer their college-loan debt in silence, and the public is generally unaware of their plight. In a few cases, however, student-loan debtors file for bankruptcy, seeking a discharge from the loan obligations. Often the court decisions in these cases provide details of a particular student-loan debtor’s financial situation.  In particular, the Hedlund case (2012) provides a window into the world of the underemployed law-school graduate who is swamped by massive student-loan obligations.

A Young Man Borrows Money to Go to Law School But Can’t Pay Back the Loans

In the early 1990s, Michael Eric Hedlund borrowed more than $85,000 to go to law school. It must have seemed like a good idea at the time. Michael’s father and brother were attorneys, and he anticipated going to work in his father’s law firm.

Things did not work out as Michael hoped. After graduating from Willamette University’s law school in 1997, Michael took a job in the District Attorney’s office in Klamath Falls, Oregon. He planned to work there for a couple of years and then join his father’s law firm. Unfortunately, Michael failed the bar exam twice. Unable to practice law, he received several extensions on his loan obligations. He applied for a student-loan consolidation, but was told he was ineligible for consolidation because he was not current on his loan payments.

In 1999, Michael found a job as a juvenile counselor, which paid him about $40,000 a year.  His monthly loan payments were $800, which he did not pay regularly. In fact, he only made one loan payment.  In 2002, two loan creditors began garnishing his wages; and in May 2003, Michael filed for bankruptcy.

Michael’s bankruptcy proceedings stretched on for years. In fact, the original bankruptcy judge who presided over his case died before the case was resolved. In March 2012--nine years after Michael filed for bankruptcy, a federal district court ruled that Michael was not entitled to discharge his student loans in bankruptcy.  According Judge Ann Aiken, Michael was not entitled to bankruptcy relief because he had not made a good-faith effort to pay on his loans.

The Pathetic Plight of Many Law School Graduates

Although Judge Aiken rejected Michael’s plea to have his student loans discharged, she was not unsympathetic.  Judge Aiken pointed out that law school tuition rose more than three hundred percent between 1989 and 2009, which is twice the rate of inflation for that period and four times the rate of job growth. “Accordingly,” Judge Aiken observed, “with the exception of the independently wealthy, students must take out loans in order to finance their [law] degrees” (p. 907).

Meanwhile, as tuition costs keep going up, wages for beginning attorney are going down. Citing a report by the National Association for Law Placement, Judge Aiken pointed out that annual compensation for first-year associate attorneys in private practice went down in 2010.  In addition, the demand for new attorneys is shrinking. According to Judge Aiken, “The most recent statistics indicate that, through the year 2018, there will only be 25,000 openings for the law schools’ 45,000 new graduates each year” (p. 907).

In Judge Aiken’s opinion, “[T]he current higher education system is untenable and unsustainable; as a result, increasing numbers of students will be forced to file for bankruptcy” (p. 908). In the judge’s view, the student loan issue--she did not use the word “crisis”--needs to be addressed at a systematic level.

What is the Significance of the Hedlund Case?

Judge Aiken’s opinion in the Hedlund case paints a poignant picture of the plight of underemployed law-school graduate who borrowed heavily to attend law school.  As Judge Aiken pointed out, law school tuitions are now so high that most people must borrow money--a lot of money--to get a legal education. A few years ago, borrowing money to get a law degree was a good bet, but the demand for new lawyers is shrinking and salaries for beginning attorneys are going down.  Thousands of law school graduates are finding themselves underemployed in jobs outside the legal field and unable to pay back their student loans.  Obviously, this is a huge national problem, not only for law-school graduates, but for law schools and for the legal profession as well. 

Under federal bankruptcy law, student-loan debtors cannot discharge their student loans in bankruptcy unless they can show “undue hardship.”  Most law-school graduates are able to find some kind of employment and thus will not qualify for a bankruptcy discharge under this rigorous standard.  Mr. Hedlund, for example, found a non-legal job paying $about 40,000.

Nevertheless, most underemployed law school graduates who have massive student loans will be in dire economic circumstances.  Mr. Hedlund was obligated to pay $800 a month on his loans after he graduated, almost an impossible burden for someone making $40,000 a year.

Unable to discharge their student loans in bankruptcy, a lot of underemployed law-school graduates will be forced to apply for an Income-Based Repayment plan (IBR) in order to manage their loan obligations. Under an IBR, as modified by the Obama administration, debtors will obligate themselves to pay 10 percent of their discretionary income for a period of 20 years (White House, 2012).

Obviously, IBR plans are not an ideal solution for law-school graduates who can’t find well-paying jobs. Instead of beginning good careers practicing law, many graduates will wind up being long-term indentured servants to the government, forking over a percentage of their income over a 20-year period. If Michael Hedlund ultimately chooses the IBR option, he won’t be free of his law-school loan obligations until he is in his 60s.  Somehow, that does not seem fair.

References

Brown, M., Haughwout, A., Lee, D., & Mabutas, M. (2012). Grading student loans.  Federal Reserve Bank of New York.

Hedlund v. Educational Resources Institute, Inc., 468 B.R. 901 (D. Or. 2012).

White House, Office of Press Secretary (2012, June 6). Fact Sheet: Helping Americans manage student loan debt with improvements to repayment options. Retrieved from: http://www.whitehouse.gov/the-press-office/2012/06/06/fact-sheet-helping-americans-manage-student-loan-debt-improvements-repay

Wacky: A University of Chicago Professor Says Investors Should Finance Students' College Costs for Cut of Future Income

Luigi Zingales,an economics professor at the University of Chicago, recently proposed an innovative way to finance students' college education costs: allow the venture-capital industry to finance students' college education in return for a share of the students' future income. 

This is how Zingales explained his proposal in a recent New York Times essay: "Investors could finance students' education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student's future income--or, even better, a fraction of the increase in her income that derives from college attendance."

Zingales insists that his plan is not a new form of indentured servitude but a way of having the beneficiaries of a college education pay for it--not the taxpayers.

Only an economist from the University of Chicago could come up with such a wacky idea.

A few comments:

First, contrary to Professor Zingales's assertion, the plan is indeed a modern form of indentured servitude, whereby the rich finance the education of  the poor for a share of the poor person's future wages. 

Second, until recently, most Americans considered a college education as a benefit not only for the degree holder but for society at large. We all grow richer when we enable people to become more productive through becoming better educated.  Thus, it makes sense for our society to invest in higher education and to broaden opportunities for people to earn college degrees. To suggest that venture capitalists--not the taxpayers--should finance students' college costs negates the American philosophy of public education, which is to make it available to everyone and to at least partially subsidize it so that no one is excluded based on poverty.

The federal student loan program is indeed in crisis, but we won't end the crisis with oddball ways to finance it cooked up by economics professors. We saw what happened to the housing market when the venture capitalists got involved with it.  Why would we want venture capitalists mucking up higher education?

Thanks, NY Times, for Another Tepid Editorial About the Student Loan Crisis

In The Big Lebowski, Bunny Lebowski tells the Dude that her boyfriend is a nihilist. "He doesn't care about anything," she explains.

The Dude, Donny and Walter:

"That must be exhausting," the Dude replies sympathetically.

This scene reminds me of the New York Times editorial writers. Every day, they go to work and pen editorials opining on all the world's problems: global warming, the crisis in the Middle East, the European Debt crisis, obsesity--it must be exhausting!

Of course, not all of the Times' editorial advice is useful.  Earlier this week, a Times editorial, entitled "College's True Cost," commended the Obama administration's efforts to get colleges to communicate more clearly with students about the cost of attending college. As the Times reported approvingly, "[t]he Obama administration is developing a standardized form" that all colleges can use to report on how much a year of college costs and estimating the monthly payments students will owe when paying off their student loans.

"Unfortunately," the Times concluded, "colleges are unlikely to embrace this forthright approach unless the federal government makes it mandatory." Right. More government regulations will solve all our problems.

Obviously, givng students more information about their student-loan obligations is a good thing. But giving students clearer information about their student-loan debt burden is not going to solve the student-loan crisis any more than telling people how many calories are in a Big Mac will solve the nation's obesity crisis. People are still going to buy those Big Macs and students are still going to take out college loans because most of them can't afford to attend college without borrowing a lot of money.

Solving the student-loan debt crisis is going to take more than the creation of a standardized form for colleges to give students when they dole out student-loan money. As I've said before, these things must be done:

• The Department of Education must stop hiding the true student-loan default rate and give the public more accurate reports on how many people have stopped paying on their student loans.
• Insolvent student-loan debtors must be given reasonable access to the bankruptcy courts.
• The Federal government must stop financing the for-profit schools and colleges, which have extraordinarily high student-loan default rates.
• Colleges must operate more efficiently and rein in their costs.

Unless these things are done, other reform tactics are just a cosmetic approach to a very serious national problem.

References

Editorial (2012, June 7). College's true cost. New York Times, p. A24.