Earlier this month, DOE acknowledged that a "coding error" had caused the Department to mistakenly under report the student-loan default rates at many schools and colleges. But the magnitude of the error wasn't generally known until the Journal published its own analysis.
According to WSJ, at least half the students who attended more than a thousand colleges and trade schools had either defaulted on their student loans within 7 years of beginning repayment or failed to pay down even one dollar of their student loan debt.
This news is shocking, but not surprising. DOE has been misleading the public for years about student-loan default rates. Last autumn, for example, DOE reported a 3-year default rate of about 10 percent, a slight decrease from the previous year. But that figure did not take into account the people who had obtained forbearances or deferments and weren't making payments. The five-year default rate for a recent cohort of student debtors is more than double DOE's three-year rate: 28 percent.
And last September, DOE mislead the public again. The Department identified 477 schools where more than half the students had defaulted or failed to pay down their loan balances 7 years into repayment. But we now know the figure is more than double that number: 1029.
The implications of this new data are staggering. Obviously, the federal student-loan program is a train wreck. Millions of people have student loans they will never pay back. Eight million have defaulted and millions more are making payments so low that their loan balances are growing due to accruing interest.
Several large for-profit colleges have closed under allegations of fraud. Corinthian Colleges and ITT together have a half million former students. DeVry, which just reached a settlement with the Federal Trade Commission, has a total of more than a quarter of a million students who took out federal loans to finance their studies. Accumulated debt for DeVry students alone is more than $8 billion.
Like the inmate musicians of Auschwitz, DOE's response to this calamity has been to play for time. It has encouraged millions of people to sign up for income-drive repayment plans (IDRs) under terms such that IDR participants will never pay off their loans. And DOE has set up a cumbersome procedure whereby students who believe they were defrauded by a college can apply to have their student loans forgiven.
But there is only one way out of this nightmare: bankruptcy relief. Ultimately Congress will have to repeal the "undue hardship" provision in the Bankruptcy Code, which has made it virtually impossible for overburdened student debtors to discharge their loans in bankruptcy.
Until that happens, President Trump's Department of Education should modify its harsh stance toward bankrupt student loan debtors. DOE must stop insisting that every bankrupt student borrower should be pushed into an IDR that stretches loan payment periods out for 20 or 25 years.
Student loan debtors who are honest and broke should be able to discharge their student loans in the bankruptcy courts. Within a couple of years that simple truth will be apparent to everyone. Why not start now to relieve the suffering of millions of Americans who got in over their heads with student loans and can't pay them back?
And let's not sell the Trump administration short. Liberals have assumed that Donald Trump will protect the for-profit colleges because of his history with Trump University. But I am not so sure. President Trump knows how to read a financial statement and he understands the value of bankruptcy. He might just do the right thing and turn this calamity over to the federal bankruptcy courts.
|Playing for Time|
Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.