Wednesday, May 22, 2019

How Can I Get Out of the Student Loan I Cosigned for My Son? Advice from Steve Rhode, the Get Out of Debt Guy

If you are thinking about taking out a Parent PLUS loan to finance your child's college education or if you've been asked to co-sign a relative's private student loan, you should read Steve Rhode's advice to a mother who co-signed her son's student loan at a pretty hefty interest rate.  Steve's column appears below and was originally posted on  Get Out of Debt Guy, Steve's consumer advice web site. You can learn more about Steve, here. 

 After reading Steve's column, I'm sure you will agree with him that this mother's son is a jerk!

____________________________________________________________________________

Question:
Dear Steve,
It took my son 6 years to get a BA degree. By the 5th year, I ran out of money so I co-signed a private loan for him. For the past 4-5 years, I pay on this loan diligently every month because he refuses to the pay the loan or give me anything towards the payment and I don’t want to jeopardize my credit.
The original loan amt was 34K it is now only down to 29K because the interest rate keeps going up ..now it is at 7.75%. Additionally, he refuses to re-finance the loan
How can I get out from under the responsibility of his debt without jeopardizing my credit?
Sue
Answer:
Dear Sue,
Your son is being kind of a jerk. You helped him finish school and he can at least make some payment, even if he can’t pay it all each month.
Unfortunately, when you cosigned the loan you agreed to be 100% responsible for the loan. There is nothing good in cosigning if you are the one signing. My universal law of cosigning is don’t do it.
If you don’t want to ding your credit then you either need to pay the loan off in full or keep making at least the minimum monthly payment.
If you wanted to remove your liability for the debt you can do that but it will have a credit impact. Some of those options include filing bankruptcy or paying less than you owe on the balance as a settlement. However, you will need to go delinquent to settle it and the balance forgiven may be reported as a bad debt and be taxable.
The only way to make this situation different without harming your credit or costing you a big chunk of change would be to go back in time to the minute before you cosigned for him.

*******
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. 

Tuesday, May 21, 2019

Brookings Institution researcher criticizes federal student-loan program: "It is an outrage"

Last month, Adam Looney of the Brookings Institution released a paper that is chock full of ideas for fixing the federal student-loan program. Looney began his paper with a withering condemnation of the program in its present form, which he accurately described as an outrage. I am quoting his critique verbatim, just putting his words into a bullet-style format:
  • "It is an outrage that the federal government offers loans to students at low-quality institutions even when we know those schools don't boost their earnings and that those borrowers won't be able to repay their loans."
  • It is an outrage that we make parent PLUS loans to the poorest families when we know they almost surely will default and have their wages and social security benefits garnished and their tax refunds confiscated . . ."
  • "It is an outrage that we saddled several million students with loans to enroll in untested online programs, that seem to have offered no labor market value."
  • It is an outrage that our lending programs encourage schools like USC to charge $107,484 . . . for a master's degree in social work (220 percent more than the equivalent course at UCLA) in a field where the median wage is $47,980."
All these failures, Looney charges, "are entirely the result of federal government policies." 

Nevertheless, for all its faults, Looney thinks the federal student loan program is worth fixing, and he makes several interesting reform proposals:

First, Looney recommends a cap on loans to graduate students. Currently, graduate students in the Grad PLUS program can take out student loans to pay the entire cost of their studies, no matter what the cost, which is nuts. 

This "sky is the limit" loan policy has led to the escalating cost of getting an MBA or law degree. In fact, the American Bar Association estimates that the average student at a private law school takes out  $122,000 in student loans. 

Second, Looney recommends applying an "ability-to-pay" standard to parent loans or eliminating them altogether. In my view, the Parent PLUS program should be shut down. It is insane to lure parents into financing their children's college education by taking on massive student-loan debt--debt which is almost impossible to discharge in bankruptcy.

Third, Looney recommends the REPAYE program as the default student-loan repayment plan for all students. Unless a student opts out, all student-loan borrowers would be automatically enrolled in the REPAYE program when they begin repaying their student loans.

REPAYE, introduced by the Obama administration, allows student debtors to pay 10 percent of the discretionary income (income minus 150 percent of the poverty level) for 20 years rather than attempt to pay off their loans in the standard 10-year repayment plan.

In conjunction with automatic REPAY enrollment, Looney calls for voiding all fees, capitalized interest, and collection costs on current borrowers--costs and fees they wouldn't have suffered if they had been automatically enrolled in REPAYE. In addition, he proposes to cancel all student-loan debt that is 20 years old or older--without regard to the status of these loans.

Finally, Looney calls for a halt in wage and Social Security garnishment, and an end to the Treasury Offset program--the program that allows the government to capture defaulted borrowers' tax refunds.

These are all good proposals, but I have reservations. First, is it good public policy to automatically enroll all student-loan debtors in REPAYE--a 20-year income-based repayment plan? If we go that route, we will be creating a massive class of indentured servants who will be paying a percentage of their income to the government for a majority of their working lives.

Moreover, most people in those plans will never pay back the principle on their loans and could wind up with huge amounts of forgiven debt after 20 years, which would be taxable to them as income.

Secondly, Looney's proposals--all good, as I have said--are complicated, and the Department of Education has a dismal record managing just about every aspect of the student-loan program. For example, individuals enrolled in the Public Service Loan Forgiveness program have been applying for debt relief, and the Department of Education has rejected 99 percent of all claims.

So these are my revisions to Mr. Looney's proposals:
  • Amend the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other consumer debt.
  • Shut down the Parent PLUS program immediately, and allow parents who took out Parent PLUS loans or cosigned private loans for their children to discharge those loans in bankruptcy.
  • Finally (and this is basically Mr. Looney's proposal) wipe out all penalties, fees, and capitalized interest for all 45 million student-loan borrowers and stop garnishing wages, tax refunds, and Social Security checks of student debtors in default.
My proposals, Mr. Looney's proposals, and for that matter, Senator Warren's debt-forgiveness proposal are shockingly expensive. Any policy that grants student-loan forgiveness to the millions of people who deserve it will cost billions--a quarter of a trillion dollars perhaps or even more.

But let's face facts. Millions of student borrowers are not paying back their loans under the present system. Indeed, Secretary of education Betsy DeVos acknowledged last November that only one debtor out of four is paying down principle and interest on student loans.

Let's admit that the student-loan program is a catastrophe, grant relief to its victims, and design a system of higher education that is not so hideously expensive.

Image credit: Quora.com


References

Adam Looney. A better way to provide relief to student loan borrowers. Brookings Institution, April 30, 2019.






Saturday, May 11, 2019

Education Secretary Betsy Devos Hires Private Accounting Firm to Audit the Student Loan program: Asking For Bad News

Secretary of Education Betsy Devos hired McKinsey & Company, a global consulting firm, to audit the federal student loan program. Why did she do that?

After all, the Congressional Budget Office, the Government Accountability Office or the Inspector General could have done the job. Why hire a private firm?

I'm thinking Secretary DeVos and the Trump administration realize the federal student-loan program is under water. They know the news is bad, but they want to know just how bad it is. After all, Secretary DeVos compared the program to a looming thunderstorm in a speech she made last November.

It took 42 years, DeVos pointed out, for the federal student-loan portfolio to reach half a trillion dollars (1965 until 2007). It took only 6 years--2007 to 2013--for the portfolio to reach $1 trillion. And in 2018--just five years later--the federal government held $1.5 trillion in outstanding student loans. In fact, uncollateralized student loans now make up 30 percent of all federal assets.

This wouldn't be a problem if student borrowers were paying off their loans. But they're not. As DeVos candidly admitted last November, "only 24 percent of FSA borrowers—one in four—are currently paying down both principal and interest." One in five borrowers are in delinquency or default, and 43 percent of all loans are "in distress" (whatever that means).

Although DeVos did not say so explicitly, she basically acknowledged that we've arrived where we are because the government is cooking the books. Student loans now constitute one third of the federal balance sheet. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk" DeVos said. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

We can hope that McKinsey and Company will give us an accurate accounting. But we already know the news will be catastrophic.  More than 7.4 million people are in income-based repayment plans (IBRPs) that stretch out for 20 and even 25 years. IBRP participants make loan payments based on their income, not the amount they borrowed. Virtually no one in these plans will ever pay off their loans. 

Millions more have their loans in deferment or are prolonging their education to postpone the day they will be obligated to start making loan payments. Thus--as DeVos disclosed--only a quarter of student-loan borrowers are paying back both principal and interest on their loans.

Over the past 15 years or so, presidential administrations have juggled the numbers to postpone the day of reckoning. "After us, the deluge," has been the watchword.  Meanwhile, university presidents are saying nothing about this looming thunderstorm. They hope the deluge won't come until they are drawing their pensions.

The McKinsey report, when it comes, will be a shock to the public consciousness. And there is only one solution. We must admit that the federal student-loan program is totally out of control and allow its victims to discharge their loans in bankruptcy.

Before the deluge: Photo Credit Yale Center for British Art

References

Michelle Hackman, Josh Mitchell, & Lalita Clozel. Trump Administration Hires McKinsey to Evaluate Student-Loan Portfolio. Wall Street Journal, May 1, 2019.

Tuesday, May 7, 2019

A Kansas bankruptcy judge grants Vicky Jo Metz a partial discharge of her student loans, and she wins her appeal

Vicky Jo Metz borrowed $16,613 back in the 1990s to attend a community college, but she never got a degree. Over the years, she filed for bankruptcy three times, but she continued making payments on her student loans under court-approved repayment plans. In fact, she paid almost 90 percent of what she originally borrowed.

Nevertheless, Metz's student-loan debt kept growing due to accruing interest. By 2018, her total debt had grown to $67,277--four times what she borrowed. 

In 2017, Metz commenced an adversary proceeding in a Kansas bankruptcy court, seeking to discharge her student loans. Her creditor, Educational Credit Management Corporation (ECMC), objected to a discharge. Put Metz in an income-based repayment plan (IBRP), ECMC demanded. 

But Bankruptcy Judge Robert Nugent disagreed. Metz, who was 59 years old, would never pay off her student loans under an IBRP, Judge Nugent reasoned. On the contrary, if Metz entered a 25-year IBRP and faithfully made her income-based monthly payments, her debt would continue to grow due to accruing interest. By the time Metz completed her repayment plan, she would owe $157,277—nine times what she borrowed! Although her student-loan debt would be forgiven after 25 years of making payments, Metz would face significant tax liability because the IRS considers forgiven debt as taxable income.

 Judge Nugent granted Metz a partial discharge of her student loans. He canceled all the accrued interest on her student debt but required her to pay the original $16,613.

ECMC appealed Judge Nugent's decision to a federal district court, and Judge John Broomes upheld Judge Nugent's ruling. Like Judge Nugent, Judge Broomes applied the three-part Brunner test to determine whether it would be an undue hardship for Metz to repay her student loans.

In Judge Broomes' view, Metz could not repay her student loans and maintain a minimal standard of living. Thus, she met part one of the Brunner test. Moreover, she met part two of Brunner because her financial situation was not likely to change. Finally, in Judge Broomes’ view, Metz met part three of the Brunner test because she had handled her student loans in good faith.

In its appellant’s brief, ECMC renewed its argument that Metz should be placed in an IBRP and downplayed the tax consequences of such a plan. Metz would probably suffer no tax consequences from an IBRP, ECMC argued, because she would likely be flat broke when her IBRP concluded.  Under current law, ECMC pointed out, individuals pay no federal tax on forgiven debt if they are insolvent at the time the debt is forgiven.

In a footnote, Judge Broome pointed out the absurdity of ECMC’s position “The import of that argument,” Judge Broome wrote, “is that under ECMC’s plan, [Metz] will be kept insolvent, if not entirely impoverished, until she is eighty years old and the debt is forgiven—what a pleasant system.”

Judge Broomes’ Metz decision is the second appellate court decision out of Kansas to uphold a bankruptcy court’s partial discharge of student-loan debt. The first decision, Murray v. ECMC, granted a partial discharge to Alan and Catherine Murray, a married couple in their late forties, whose student-loan debt had quadrupled over 20 years due to accruing interest.

Together, Metz and Murray stand for the proposition that long-term, income-based repayment plans are not appropriate for insolvent student-loan debtors when it is clear that debtors in these plans will never pay off their loans. Had ECMC had its way with Vicky Jo Metz, she would have made monthly student-loan payments for a quarter of a century—until she was in her eighties.  At that point, she would face a huge tax bill for $150,000 in forgiven debt or she would be insolvent. As Judge Broome remarked: What a pleasant system.



References

Educational Credit Management Corporation v. Metz, Case No. 18-1281-JWB (D. Kan. May 2, 2019).

In re Murray, 563 B.R. 52 (Bankr. D. Kan 2016); aff’d sub nom. Educational Credit Management Corporation v. Murray, No 16-2838, 2017 WL 4222980 (D. Kan. Sept. 22, 2017).

Tuesday, April 30, 2019

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



Wednesday, April 24, 2019

Senator Elizabeth Warren's Proposal to Cancel Student Debt: A Great Idea (Just Needs a Little Tweaking)

Earlier this week, Senator Elizabeth Warren astonished the higher education community (and me in particular) by announcing three bold proposals: 1) free undergraduate education at public universities; 2) massive student-loan forgiveness, and 3) a ban on federal funding for for-profit colleges.

Student-loan debtors all over America should stand up and applaud Senator Warren. She is the first national political figure to call for an end to federal aid for the for-profit colleges. This sleazy racket gets about 90 percent of its revenues from federal student-aid money. If Congress shut off that spigot as Warren proposes, most of them would close in less than 30 days.

The for-profit college industry, with its armies of lawyers and lobbyists, has Congress in its back pocket. They surely understand that Senator Warren's proposal is an existential threat. Watch how this sleazy racket starts shifting resources to sabotage Warren's presidential bid.

On the other hand, Warren's call for free college education is not original. Senator Bernie Sanders promised free college during his 2016 presidential run and Senator Kamala Harris has put free college on her campaign platform. Nevertheless, it's a good idea.

It's Warren's third proposal, however, that is the real stunner. She's calling for massive student-loan debt forgiveness for 95 percent of student borrowers.

Senator Warren's student-loan forgiveness plan is a little complicated and has some limitations. she wants to forgive up to $50,000 in student-loan debt but would reduce this benefit for high-income families.  But her basic idea is sound. Why?

First of all, millions of Americans will never pay back their student loans whether Warren's proposal is implemented or not, so we might as well forgive the debt. Almost 8 million people are in income-based repayment plans (IBRPs) that allow them to make monthly payments based on their income and not how much they owe.  For most of these people (almost all of them actually), their loan payments are so small that they don't cover accruing interest.  For people in IBRPs, their debt grows larger each month as interest accrues. They will never pay back the amount they borrowed.

Several million more student-loan borrowers have their loans in deferment while the interest accrues and capitalizes on their original debt. Most of those folks will never repay their loans.

Finally, there is a good argument that forgiving all this student debt--$1.56 trillion--would boost the economy. Unburdened by debt they will never repay, millions of Americans will be able to rejoin the middle class--buy houses and cars, have children, save for retirement.  Indeed, a study by researchers at Bard College's Levy Institute makes that very argument.

Conservatives recoiled in horror at Warren's proposal to forgive student debt, spewing a lot of blather about the sacred nature of contract obligations, the unfairness to people who paid off their student loans, etc.

But in my view, Warren's student-loan forgiveness proposal does not go far enough. Millions of student-loan debtors are entitled to student-loan forgiveness with no $50,000 cap. And millions of parents have co-signed student loans or taken out Parent PLUS loans, and they also are entitled to relief.

So I propose a few tweaks to Senator Warren's brave proposal:

First, all Parent Plus loans should be forgiven immediately for any family with household income under $200,000. And all parents and relatives who cosigned private student loans should be relieved of any legal obligation to repay that debt.

Secondly, instead of instituting a loan-forgiveness plan, I propose that distressed student-debtors be allowed to discharge their student loans in bankruptcy as proposed in Representative John Katko's recently filed bill. People who took out student loans to go to law school and then got rich as corporate lawyers should pay back their loans. But people who otherwise qualify for bankruptcy relief should be able to discharge their student loans like any other consumer debt.

But let's not quibble about the details. Senator Warren's call for free college and student-loan forgiveness are basically good ideas. And her call for shutting off federal aid to the for-profit colleges is stunningly brave.

In my view, it is time to stop heckling Senator Warren about Cherokee-Gate. She is a serious presidential candidate who has made bold and thoughtful policy proposals. Americans should listen to what she has to say about the student-loan crisis because--let's face reality--a lot of student-loan debt will never be paid back.

References

Elizabeth Warren. I'm calling for something truly transformational: Universal free public college and cancellation of student loan debt. Medium, April 22, 2019.

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.

Saturday, April 20, 2019

Dicent v. Kaplan University: An unhappy student sues a for-profit university, but the Third Circuit forces her to arbitrate her claims

Maria Dicent enrolled in an online legal studies program at Kaplan University in 2014. She did not have a good experience. In 2017, she sued Kaplan in a federal court, accusing the for-profit university of making false claims and disseminating false advertisements.

According to Ms. Dicent, Kaplan lured her into enrolling in Kaplan's online program by using deceptive tactics. She said she had not been informed that she would need 180 hours to graduate, far more hours than a typical four-year degree program requires and that she had not been able to keep her eBooks, which she apparently paid to use. She also said Kaplan's financial aid office retaliated against her because she refused to allow her photo to be used to promote Kaplan.

Unfortunately for Ms. Dicent. she signed an arbitration agreement when she enrolled at Kaplan back in 2014. In that agreement, Dicent promised not to sue Kaplan and to arbitrate any claims she might have against the for-profit. She also agreed to waive her right to a jury trial.

Based on the arbitration agreement, a federal trial court threw out Dicent's suit and ordered her to arbitrate her clam. Dicent, who pursued her case without a lawyer, then appealed to the Third Circuit Court of Appeals, which sided with the trial court.

Dicent argued on appeal that she was not aware of the arbitration agreement, but the Third Circuit did not buy her argument. A clearly labeled Arbitration Agreement was included in Dicent's enrollment packet, the court noted; and Dicent admitted having signed the packet with an e-signature.

Dicent v. Kaplan University is an unfortunate decision. The Obama administration recognized that for-profit colleges were using arbitration agreements to prevent students from suing them for fraud or other misconduct. Obama's Department of Education adopted a regulation forbidding the for-profits from forcing their students to sign arbitration agreements.

 Betsy DeVos, President Trump's Secretary of Education, scuttled the Obama ruled shortly after taking office, but a federal court ordered her to implement it. In light of that ruling, Secretary DeVos released new guidance to the for-profit colleges, instructing them to drop enforcement of mandatory arbitration agreements.

In recent years, a few courts have invalidated arbitration agreements on various grounds. Some courts have labeled them adhesion contracts--agreements which a stronger party forces a weaker party to sign on unfavorable terms. Other courts have looked at the inherent unfairness in some of these agreements. For example, a California court refused to enforce an arbitration agreement that required California students to arbitrate their disputes against a medical-training school in Indiana.

Poor Ms. Dicent. Acting without an attorney, she was probably unaware of the legal arguments that can be made against arbitration agreements that for-profit colleges require students to sign as a condition of enrollment. She may not have known that the Obama administration recognized these agreements for what they are--a shyster tactic to protect for-profit colleges from being sued for fraud.

I feel quite certain that Ms. Dicent was telling the truth when she said she did not know about the mandatory arbitration agreement until Kaplan submitted it in district court. Almost all students sign long, turgid documents as a condition of enrollment, and most of them sign without reading. What would be the point? When students enroll at a for-profit college, they are enrolling on the college's terms, and they realize they have no power to negotiate.

What is so bad about arbitration agreements? First of all, the complaining party is usually required to pay half the arbitrator's fees, so arbitration may be more expensive for the student than a lawsuit. Second, arbitration agreements often bar students from banding together to file class actions suits, which is virtually the only way students can obtain justice against the well-funded for-profits with their battalions of lawyers.

Finally, it is well known that arbitration generally favors the corporate party. That is why banks, financial-services institutions, and for-profit colleges force their customers to sign them. The arbitrators know they will see a defrauded student only once, but they will see the corporate party again and again. If they get a reputation for siding with the underdog, the corporations won't choose them to arbitrate their disputes.

The for-profits know they will repeatedly be accused of defrauding their students. The best way to deal with this constant threat is to get the students to promise not to sue before allowing them to enroll. Then when students get defrauded--as many of them will--there will be damn little they can do about it.


References

Dicent v. Kaplan University, Civil Action No. 3:17-cv-01488 (M.D. Pa. June 15, 2018), aff,d No-18-2982 (3d Cir. Jan. 3, 2019).

Dicent v. Kaplan University, WL 158083, No-18-2982 (3d Cir. Jan. 3, 2019) (unpublished opinion).

Kreighbaum, Andrew (2019, March 18).  DeVos Tells Colleges to Drop Arbitration Agreements, Inside Higher Ed.


Tuesday, April 16, 2019

More than a thousand college campuses closed over the past five years: The for-profit scourge

Earlier this month, Chronicle of Higher Education reported that 1,200 college campuses have closed over the last five years, displacing nearly half a million students. As Chronicle reporters Michael Vasquez and Dan Bauman explained, most of these campuses were operated by for-profit colleges, which often have campuses in multiple locations.

For example,Vatterot College, Education Corporation of America, and Dream Center Education Holdings closed their doors during the last six months, and together these colleges operated 126 campuses.

As the Chronicle article pointed out, college closures can be traumatic events for students, who are forced to interrupt their studies and search for replacement colleges. Low-income and minority students are disproportionately affected. Seventy percent of the students who attended the closed institutions received Pell Grant aid, and 57 percent are black or Hispanic.

Betsy DeVos's Department of Education is doing everything it can to prop up the venal for-profit college industry, and yet this sleazy sector continues to be under stress. The for-profits are facing increased competition from public universities, which are rolling out their own online degree programs and encroaching on the for-profit colleges' target population. Arizona State University and Purdue University, both public institutions, now have big online footprints.

In addition, more and more Americans have figured out that a degree from a for-profit college almost always costs more than a comparable degree from a public institution and rarely leads to a good job. No wonder the student-loan default rate among for-profit-college students is so high. More than half of the students who borrow money to attend a for-profit college default within 12 years after beginning repayment--four times the default rate of students who attended community colleges.

It is regrettable that so many for-profit college students are having their lives disrupted by the closure of their institutions, but these shutdowns are a blessing in disguise.  Some students will transfer to low-cost community colleges, which will allow them to take out smaller student loans or avoid student loans altogether.  Those that transfer to public institutions are likely to  have more rewarding educational experiences than they were getting at these dodgy for-profit outfits.

In short, it may seem shocking that so many for-profit colleges are closing, but it is undoubtedly a good thing. In spite of everything that Trump's Department of Education has done to aid the for-profit college racket, this industry is in trouble. The for-profit colleges are a blight on American higher education. Let us look forward to the day when they are extinct.


Friday, April 12, 2019

Democrats are "woke" about Public Service Loan Forgiveness: Senators Kaine and Gillibrand file legislation to overhaul PSLF

The Trump Administration hates the Public Service Loan Forgiveness Program (PSLF). Signed into law by President George W. Bush in 2007, PSLF allows student-loan debtors who work in public-service jobs to have their student loans forgiven if they make 120 student-loan payments in a qualified repayment plan.

The first PSLF participants to have accumulated 120 student-loan payments became eligible for debt relief in 2017--10 years after the program was introduced. As has been widely reported, the Department of Education approved less than 1 percent of the applications for PSLF forgiveness that it had processed as of  September 2018.  In fact, DOE said 70 percent of the applicants were not eligible for PSLF participation.

So far, over one million student-loan borrowers have applied to DOE to have their employment certified as PSLF eligible, and millions more are counting on PSLF for debt relief but haven't applied yet. It's a mess.

And it is especially a mess for people who borrowed $100,000 or more to get a law degree or other graduate degree. According to the American Bar Association, the average debt load for people who attended a private law school is $122,000. For many of the people who accumulated six-figure student-loan debt to finance their graduate studies, PSLF is the only viable option for debt relief.

Betsy DeVos, Trump's Secretary of Education, apparently does not care that her agency has frightened or angered millions of people who are counting on PSLF to manage their student loans. According to a news report, a senior DOE official said that DOE does not support PSLF and would not implement it if it were not legally obligated to do so.

But the Democrats are "woke" about this problem. This week, Senators Tim Kaine and Kirsten Gillibrand introduced a bill to overhaul the PSLF program. Thirteen Democratic senators signed on as co-sponsors, including all the U.S. Senators running for President (Elizabeth Warren, Kamala Harris, Bernie Sanders, Amy Klobuchar and Cory Booker).

The Kaine-Gillibrand proposal defines eligible public-service organizations broadly to include all federal, state, and local government agencies and all charitable organizations that qualify  for tax-exempt status under 501(c)(3) of the tax code. As Jason Delisle pointed out in a 2016 analysis of PSLF, that definition applies to one quarter of the American workforce.

In fact, the bill's definition of public service differs markedly from the one developed by DeVos's DOE. DOE defines a public service organization as one that is primarily involved in public service,thus excluding organizations like the American Bar Association, which is primarily devoted to serving the legal profession, although it engages in some public service work.

The Kaine-Gillibrand bill also specifies that all student-loan debtors qualify for PSLF, regardless of the federal loan program or repayment plan they are in. This provision also expands eligibility for PSLF participation far beyond what the DeVos DOE permits.

I support passage of the Kaine-Gillibrand bill, and I hope it is enacted by Congress. But we should not deceive ourselves about the cost of PSLF. Thousands of people seeking debt relief under PSLF owe $100,000 or more. Most of these people are making income-based monthly payments on their loans that are not large enough to cover accruing interest. Their debt load is increasing month by month as accrued interest gets capitalized and added to their loan balances. If these people's student-loan debts are forgiven after 10 years, the government will essentially be forgiving the entire amount that was borrowed plus a lot more due to the accrued interest that will also be forgiven.

Remember Josh Mitchell's story in Wall Street Journal about Mike Meru, who borrowed $400,000 to go to dental school? Dr. Meru is making payments of about $2,000 a month in an income-based repayment plan, but his debt has grown to $1 million due to accrued interest. If Meru gets a qualified public-service job and holds it for ten years, DOE will forgive the entire $1 million plus additional interest!

This is a huge problem, and the Kaine-Gillibrand bill won't solve it. Under the GRAD Plus program, graduate students can borrow the total cost of their graduate education--tuition, books, and living expenses--no matter what the cost. It is not surprising then that graduate-school tuition prices went up dramatically after the GRAD Plus program was enacted.

If the bill becomes law, the Kaine-Gillibrand proposal will give relief to millions of student-loan borrowers. But the bill is just a stop-gap measure. As I have said, the only solution to the student-loan crisis is bankruptcy relief for honest debtors who can't pay back their student loans.  More than 45 million Americans have outstanding student loans. I think most of them would vote for a presidential candidate who endorses bankruptcy relief for distressed student-loan debtors.




Thursday, April 11, 2019

Rep. Maxine Waters didn't ask mega-bank executives a stupid question at a congressional hearing; She asked them the wrong question

Congresswoman Maxine Waters, Chair of the House Financial Services Committee, asked seven big-bank executives an ignorant question when she had them appear before her committee earlier this week.

“What are you guys doing to help us with this student loan debt?" Waters asked the bankers.  Three of them  separately informed Waters that their banks have been out of the federal student-loan business since 2010, when the federal government began dispersing student loans directly. 

Ms. Waters apparently didn't know that, which must have been embarrassing to her. Nevertheless, Waters did not ask a stupid question. She asked the wrong question. In fact, several banks are involved in the private student-loan market: Wells Fargo, Citizens Bank, Suntrust, and Sallie Mae--to name a few. 

And it is a dirty business. Several banks are bundling their private student loans and selling them to investors as student-loan backed securities called SLABS, very much like the mortgage-backed securities that went south during the 2008 home-mortgage crisis. 

Moreover, most banks require student borrowers to find co-signers for their private student loans, which usually means Mom and Dad.  If a student defaults on a private student loans, the co-signer is on the hook to pay back the debt.  Can a co-signer discharge a child's student loan in bankruptcy? Probably not.  When Congress passed the so-called Bankruptcy Reform Act in 2005, it inserted a clause in the Bankruptcy Code making private student loans nondischargeable in the absence of "undue hardship."

So this is the question Congresswoman Maxine Waters should have asked the bankers who were arrayed before her at the Financial Services Committee hearing yesterday. "Do you support a change in the Bankruptcy Code that would make student loans dischargeable in bankruptcy like any other consumer debt?"

Put another way, she might have asked the bankers if they support Representative John Katko's bill to remove the "undue hardship" language from the Bankruptcy Code, which would allow destitute debtors to shed burdensome student-loan debts in the bankruptcy courts. How would the bankers have answered if Maxine Waters had asked them the right question? 

And here are a two questions for Congressman Waters:

Do you support Congressman Katko bill, which calls for taking the "undue hardship" language out of the Bankruptcy Code? 

Will you agree to be a co-sponsor of Representative Katko's bill, even though Mr. Katko is a Republican?

Megabank CEOs: "We don't know nothin' bout no student loan program."





Thursday, April 4, 2019

Commercial student-housing securities have high delinquency rates: Student slums on the Mississippi River flood plain south of LSU:

I live on LSU Avenue about two blocks from Louisiana State University. I also live about a block from Highland Road, an old thoroughfare dating back to the early 19th century. Highland Road received its name because it is above the Mississippi River flood plain--on high land.

Over the past few years, I have seen a frenzy in the construction of private student-housing apartment complexes in the flood plain not far from my house. Literally thousands of units stretch for several miles south of the LSU campus.

How are they financed? A lot of them are financed through Commercial Mortgage Backed Securities (CMBS), which are securities made up of student-housing commercial mortgages. They are very similar to the ABS (asset backed securities) that went belly up during the 2008 housing crisis as overpriced homes went into foreclosure by the thousands.

Now here is an interesting development. According to Commercial Real Estate Direct, delinquency rates for CMBS investments in student housing have "skyrocketed" by 144 percent over the past 12 months. This source reports that the delinquency rate for CMBS investments in student housing has increased nearly three-old to 9.11 percent.

Another source in the CMBS industry reported that student-housing delinquencies in CMBS 2.0 investments (CMBS entities created since the 2008 housing crisis) are 7 times the delinquency rate of the overall CMBS market.

Why the spike in delinquencies in the student housing sector? I can think of only one reason: oversupply. All over the United States, we see private, student-targeted apartment complexes springing up around college campuses.

There are simply too many apartments for the student housing market.  I see this first-hand in Baton Rouge. I'm guessing that delinquencies are ticking upward all across the country because a lot of these student-targeted apartment complexes have too many empty units.

The investors who are financing the student-housing frenzy around college campuses don't care if they are contributing to oversupply. They build the apartment complexes and then bundle them into mortgage-backed securities, which are sold to investors. It is the investors who bought the securities who will take the hit when delinquency rates go up.

 Oversupply hurts the older apartment complexes the most. Students naturally move from older units to newer units, which often have more amenities, like club houses and swimming pools  Many of the older  student-housing complexes were shoddily constructed and soon develop a tawdry appearance. As vacancy rates rise, less money is spent on maintenance and repair.

In my town, the glut in student housing around LSU is slowly creating one big slum. Massive overdevelopment of student housing has overtaxed the road system as thousands of young people travel in and out of the flood plain to get to the LSU campus or to their part-time jobs.

The city of Baton Rouge appears to be doing nothing to regulate the student-housing market or to limit the number of apartment complexes that can be squeezed into the flood plain. I suspect the real estate developers are making strategic campaign contributions to our elected officials to look the other way while the speculators trash the city.

College students are a massive population of young people with money to spend. They all have access to about $50,000 in federal student-loan money during their undergraduate years and an almost unlimited amount of new student-loan money if they go to graduate school. The students have the cash to live in near-luxury level apartments. 

But if the levees fail east of the Mississippi River, the flood plain will be inundated in about ten minutes. All this slum housing will be swept away and thousands of people will drown. But of course the levees won't fail. We can count on the Corps of Engineers to keep our college students safe.








Monday, April 1, 2019

University of Kentucky college students go on hunger strike over food insecurity. UK President Eli Capilouto makes $790,000 per year.

More than sixty students at the University of Kentucky began a hunger strike this week. Some will go cold turkey (so to speak) and take nothing but water and edibles required by medical necessity--which I presume will not include Snickers. Others will restrict themselves to one meal a day.

Why are they refusing to eat? Are they calling attention to the student loan crisis, which has destroyed the lives of millions? Are they calling for student-debt relief? Are they asking for student-loan debt forgiveness?

No, they are going on a hunger strike because they might get hungry! Well--that's not quite accurate. Actually, the strikers are protesting what they say is the university's inadequate response to students' food and housing insecurity.

These are the strikers specific demands as reported by a local newspaper:

1) They want UK to establish a Basic Needs Health Center "focused on helping students with housing and food-related challenges."

2) They want the University to establish a Basic Needs Fund, which would distribute small cash grants to students with food or housing issues.

3) Finally, the strikers want the university to hire a full-time person dedicated to helping students meet their food and housing needs.

UK's president, Eli Capilouto, roused his public relations staffers from their slumbers, and the PR team pumped out a suitably sensitive and vapid public response. Here is a sample:

"[W]hile we may disagree in some of our specific approaches [to hunger]," Capilouto purred sympathetically, "we will never disrespect the concerns that have been raised or those who have raised them."  So--no tear gas or pepper spray. That's a relief! No one wants to get tear gassed on an empty stomach.

Capilouto went on to say that UK had cut the cost of its most popular meal plan and expanded the operating hours for the university food pantry. He also said the university was raising money for an emergency fund.

"These next steps are a beginning, not an end," Capilouto assured the strikers. "This is a journey we are on--as a campus community and as compassionate, caring citizens in a larger world."  Don't you love that journey bullshit?

And then President Capilouto concluded his feeble statement with a flourish: "After all, we share the same goal--a commitment to making progress  in ways that ensure the health and wellness of our students as we prepare them for lives of meaning and purpose."

Wow! I give President Capilouto and his PR hacks an A minus for producing a hunger-strike response that is as flavorless and boring as the ramen noodles his students are eating.  (I deducted a few points from his grade because he didn't include the words "transparent" and "inclusive.")

I don't mean to make light of food insecurity on college campuses. In spite of the fact that students borrow on average about $37,000 to get their college degrees, they sometimes fall short on grocery money. But isn't  that what the UK food pantry is for?

Let's take a closer look at what the UK hunger strikers are demanding: "A Basic Needs Center focused on helping students with housing and "food-related challenges." But UK has a student-housing staff and people in charge of the campus dining halls. That's not enough?

And the strikers want small financials grants--apparently to meet food and housing emergencies. But isn't that what the federal student loan program is designed for? And part-time jobs, for that matter.

But the strikers' last demand is truly ludicrous. The strikers, delusional perhaps due to lack of protein, want UK to hire ANOTHER ADMINISTRATOR who will be dedicated to "addressing students' food and housing needs."

I'm sure UK will be happy to comply. Heck, it might hire a half dozen new administrators to staff a Basic Needs Center.  Sure it will cost money, but UK can always raise its tuition; and students will simply take out bigger student loans to absorb the cost.

Why do you suppose the UK protesters didn't call a hunger strike to protest the student-loan crisis and the outrageous cost of going to college? You know why. UK would probably turn the fire hoses on them.

And here's a footnote. President Capilouto--Mr. Sensitive--makes $790,000 a year. That will buy a lot of ramen noodles.

President Capilouto--Mr. Sensitive--makes $790,000 per year.


Saturday, March 23, 2019

Don't want no stinkin' Louisiana driver's license: Andrea Ballinger, LSU administrator with six-figure salary, quits her job rather than get Louisiana driver's license

Louisiana law requires unclassified state employees who earn salaries over $100,000 per year to obtain Louisiana drivers licenses and register their cars in Louisiana.

A few days ago, four LSU administrators, all making six figures, quit their jobs rather than comply with the law. All four claim Illinois as their primary residence, and three of them worked for LSU at least part of the time from Illinois.

Who are these jokers?

Andrea Ballinger, LSU's Chief Technology Officer, makes $268,000 a year. She left Illinois State University in 2017, where she made $193,424.  Apparently, LSU was so desperate to hire Ballinger that it gave her a $20,000 moving stipend.

Matthew Helm, LSU's assistant vice president in information technology services, draws a salary of $202,085.

Susan Flanagin, director in information technology services, makes $149,000.

Thomas Glenn, LSU's director of information technology services, gets paid $144,000 a year.

If I were making more than a quarter of a million dollars to work at a Louisiana university, I would damn well get a Louisiana driver's license and put a Louisiana license plate on my humble Subaru.

So why would these knuckleheads quit their jobs rather than register their cars in Louisiana?  Their lame explanation: Getting Louisiana driver's licenses and registering their cars in Louisiana would violate Illinois law!

I doubt we will ever know the full story, but here is my guess: All four of these characters have some sort of financial tie to Illinois that would be jeopardized if they established legal residence in Louisiana. If so, those ties must be substantial for them to give up their high-paying gigs at LSU.

Apparently, all four former LSU employees are leaving the Pelican State and heading back to the Land of Lincoln. I say good riddance!

Andrea Ballinger, LSU's former chief technology officer


Thursday, March 21, 2019

Take out student loans, get a college degree, and then go to work for a rental car agency: Is this the American Dream?

Enterprise Rent-A-Car is the number one employer of college graduates in the United States. According to Chronicle of Higher Education, Enterprise expects to hire 8,500 college graduates in 2019. In fact, three of the top ten companies for hiring college graduates are car rental companies: Enterprise, Hertz, and Avis.

For Enterprise, CHE reported, "a college degree matters mostly because it suggests that a candidate has acquired the right mix of skills to succeed in an entry-level job--and to move up the ladder from there." However, CHE explains, Enterprise does not care much about where its new hires went to college, what they studied, or their grades. Enterprise just wants people who obtained a degree.

Over the course of my working life, I've interacted with hundreds of car-rental agents. In my opinion, these agents don't need college degrees to rent cars. The idea of someone taking out student loans and spending four or five years in college just to get a trainee's position at Enterprise, Hertz, or Avis is absurd.

In my opinion, Enterprise's hiring policy is an example of credential creep. Companies don't require new hires to have college degrees because colleges teach useful job skills; for the most part they don't.

Rather a college degree is just a credentialing signal; it tells employers that an individual has the stamina to endure boredom, lackluster instructors, and mindless bureaucracy for four or five years--attributes that fit them perfectly for a trainee's job at Enterprise.

In fact, a high percentage of college graduates are now taking jobs that don't require a college degree. According to a report by the Federal Reserve Bank of New York, issued less than two years ago, 43.5 percent of college graduates are in jobs that typically don't require a college education.

And yet millions of young Americans are willing to take out student loans to go to college--on average, about $37,000.

So if you are a college student, you should ask yourself this question: Are you willing to borrow $37,000 in order to get a college degree and then go to work for a company that doesn't care where you went to school, what you majored in, or what your grades were?

If you answered yes, you are qualified to be a car-rental agent.

Photo credit: Thrillist.com

Tuesday, March 19, 2019

USA Today reports that millennials are having trouble buying cars and homes due to burdensome student loans---that ain't the half of it

According to a story published yesteerday in USA Today, fewer millennials are able to buy cars and homes because they are burdened with high levels of student debt.

This problem is well documented. The Federal Reserve Bank of New York reported that declining home ownership is partly due to student debt, and the American Enterprise Institute published a paper last December showing that student loans partly explain declining birth rates in the United States.

The USA Today story began by spotlighting Amanda Hill, a 27-year-old college graduate who amassed $90,000 in student-loan debt to get a bachelor's degree from Hampton University in Virginia. Ms. Hill said she is reluctant to take on any more debt because she owes so much on her student loans. Instead of buying a new car--the first major purchase for most college graduates--Ms. Hill bought a used Saturn for $500.

As USA Today reporter Susan Tompor reported, many millennials are constrained by their student loans from buying big-ticket consumer items. "Plain and simple," Tompor wrote, "many young consumers just aren't ready to consume."

But the plight of millennials is much worse than USA Today portrayed it. Not only are many young Americans unable to buy consumer goods because of their student loans, millions will never pay off their debt.

Let's look more closely at Amanda Hill's situation. She enrolled in an income-based repayment plan that set her monthly loan payments at only $200 a month. USA Today didn't report whether Hill is in a 20-year or a 25-year repayment plan, but it doesn't really matter.  If interest accrues at 5 percent (the current rate for federal student loans), Hill will have to pay $4,500 a year just to cover accruing interest.

But Hill is only paying $200 a month--or $2,400 a year. Thus, with each passing month, Hill's debt is growing larger. In three years or so, Hill will owe $100,000 even if she makes every payment on time.

USA Today did not disclose Hill's college major, her current salary, or her job title; but clearly she must be working in a low-paying job to be making payments of only $200 a month on a $90,000 debt.

Hill might find a better job that will allow her to make larger monthly loan payments. But that will have to happen soon if Hill is going to be in a position to make payments large enough to cover accruing interest and pay down some of the principal on her debt.

The chances are very good that Amanda Hill will make regularly monthly payments for 20 or 25 years under an income-based repayment plan and owe far more than she does now when her payment obligations come to an end. Her remaining debt will be forgiven, but she will get a huge tax bill because the IRS considers forgiven debt to be taxable income.

In short, Amanda Hill's problems are a lot more serious than an inability to buy a new car. She very well may be looking at a lifetime of indebtedness. That's a high price to pay for a bachelor's degree from Hampton University.


Sunday, March 17, 2019

Rich parents paying bribes to get their kids into elite colleges: Why risk jail for kids to get a mediocre education?

I live in Louisiana, where the most heinous thing a person can do is buy Chinese crawfish.

So I shouldn't have been shocked by the reaction of my Louisiana friends to the college-admission scandal that is roiling the national media. Several Louisianians expressed surprise that it is illegal to bribe your way into an elite college.  After all, my friends pointed out, it is well known that wealthy people get their kids into Baton Rouge's exclusive private high schools by making big donations.

What's the difference, one chum asked me, between bribing a soccer coach to get admitted to Yale and making a $5,000 donation to Catholic High School to make sure one's child gets admitted?

Not much, I admit.

Nevertheless, why pay bribes to get your kid into an elite college? After all, it is not the end of the world if your child does not get into Yale, USC, or Georgetown. There are a lot of prestigious universities in this country, and a well-qualified high-school graduate has a shot at getting into one of them.

Moreover, today's elite colleges are not what they used to be. Grade inflation, identity politics, and an atmosphere of political correctness have watered down the curriculum at colleges that once maintained rigorous academic standards.  According to a Boston Globe article published 18 years ago, 91 percent of Harvard's students graduated summa, magna or cum laude in 2001. 

How could that be? According to the Globe writer, "It takes just a B-minus average in the major subject to earn cum laude -- no sweat at a school where 51 percent of the grades last year were A's and A- minuses."

Maybe Harvard tightened standards since that article was written in 2001. Or maybe not. According to a Harvard Crimson article published in 2017, "more than half of surveyed [Harvard]seniors reported a GPA of 3.7 or greater, which is higher than an average grade of A- for every course."

So what's my point? I suppose it is this. America's elite colleges are nothing special, and families shouldn't turn them selves inside out to get their children into these overpriced diploma factories. They shouldn't go into ruinous debt to pay tuition bills at these hot-air palaces, and they certainly shouldn't pay a bribe to get their kids into Yale.

I did not get my undergraduate degree from a prestigious university. I did, however, get a doctorate from Harvard Graduate School of Education; and it was nothing special.

I realized before I graduated that I had made a major mistake when I enrolled at Harvard. I feel very sorry for parents who took out Parent PLUS loans or co-signed their children's student loans in order to pay tuition at some overpriced, high-prestige university.

As for the parents who face criminal charges in the college-admission scandal, I do not think they should go to jail. Rather, their children should be forced to attend the colleges they bribed their way into, and parents should pay the full tuition cost. Four years later, when the parents see how their kids turned out after graduating from one of these elite schools, that will be punishment enough.

Felicity Huffman (photo credit: David McNew/ AFP/ Getty Images)



Wednesday, March 13, 2019

It's Magic! Betsy DeVos' Department of Education allows Grand Canyon University to call itself non-profit while its parent company reports profit margin of 27 percent

David Halperin, the nation's best investigative reporter on the for-profit college industry, wrote an article recently on Grand Canyon University, which has been advertising itself lately as a non-profit university.

Well, sorta. As Halperin explained, Betsy DeVos' Department of Education "has blessed a series of troubling deals that allow a [not-]for profit college to be 'serviced by connected for-profit companies."

To what purpose?As Halperin reported:
The non-profit school benefits from the elimination of the for-profit stigma, reduced regulations, elimination of taxation, and eligibility for more state and charitable grants. Meanwhile, the for-profit, and its owners and executives, get to siphon off a lot of the revenue, much of it from taxpayer-funded grants and loans.
Thus in the fairyland world that Betsy DeVos has created, Brian Mueller wears two hats. He is president of Grand Canyon, a non-profit entity. He is also CEO of the university's parent for-profit corporation, Grand Canyon Education.  GCE trades on NASDAQ at $115 a share and reported a profit margin of 27 percent at the end of 2018.

Mueller conducted an earnings call to his investors recently in which he complained about non-profit colleges warning potential students not to enroll at a for-profit college. Through DeVos' mumbo jumbo, Grand Canyon can now call itself a nonprofit college, which has boosted its enrollment.

As Mueller boasted: "They see our ad & call Grand Canyon and within 72 hours everything is done. Applications filled out. Transcripts evaluated. Financial aid is done. They go to our website, they see who Grand Canyon is and say, 'this sounds good,' and they start."

As Halperin accurately observed, "the Donald Trump-Betsy DeVos Department of Education . . . has done everything possible to eliminate rules that protect students and taxpayers from predatory college abuses."

In fact, according to a Century Foundation report, which analyzed colleges with large online enrollments, Grand Canyon only spends 17 percent of its tuition money on educating students (as summarized by Halperin). Some non-profit!

I once thought that DeVos was simply incompetent and making decisions that benefited for-profit colleges out of ignorance. But DeVos knows exactly what she is doing, and she must know that the for-profit college industry as a whole is committing economic rape on unsophisticated young people, including first-generation college goers.

In a November speech, DeVos admitted that the student-loan program is in crisis. This is what she said:
  • The federal government holds $1.5 trillion in outstanding student loans, one third of all federal assets.
  • Only one in four federal student-loan borrowers are paying down the principal and interest on their debt.
  • Twenty percent of all federal student loans are delinquent or in default. That's seven times the delinquency rate on credit card debt.
Of course, the for-profits aren't responsible for all the carnage in the student-loan program, but they are responsible for a lot of it. Adam Looney and Constantine Yannelis, writing for the  Brookings Institute, reported awhile back that the 5-year default rate for one cohort of students who attended for-profit colleges was 47 percent! Several for-profits have been shut down in a shower of fraud allegations.

But even for DeVos, this latest scheme, which allows a college to call itself non-profit while its for-profit parent reports a profit margin of 27 percent, is outrageous.


President of Grand Canyon University and CEO of Grand Canyon Education.










Monday, March 11, 2019

What the hell? Financing a Harley at 22 percent interest!

Steve Rhode, the Get Out of Debt Guy, answers questions from his blog-site readers about consumer complaints. A few days ago, a woman named Mary wrote Steve about a Harley Davidson motorcycle her husband bought and financed at an interest rate of 22 percent.

Mary asked Steve if it was legal to apply an entire monthly loan payment to interest just because the payment was a few days late. She also asked if her husband could simply return the motorbike.


First of all, he pointed out, most loan payments typically go primarily to interest in the early months of the repayment period. "This is especially true," Mr. Rhode added, "if the outstanding balance includes late fees that get added to the account balance.

Taking the Harley back to the dealer, Mr. Rhode advised, is usually a bad option because a voluntary repossession will lead Mary and her husband with a big bill. The couple could sell the bike but they would need to sell it for at least enough to cover what they owe or come with the difference between the sales price and what they owe. Otherwise, they could not get the title to transfer.

Rhode then went on to estimate what the Harley is going to cost Mary and her husband if they continue with their repayment plan. Assuming, they financed the bike with a 72-month note, monthly payments would be $628 a month for 72 months. When they paid off the note after six years, they would have made payments totally $45,000 to pay off a $25,000 purchase.

Since Mary and her husband seem willing to just to give the bike back to Harley, they obviously realize they made a bad deal. They would have been better off to have saved enough money for a hefty down payment so they could have taken out a smaller loan. And assuming they had good credit, they could have financed the bike with a credit card at a lower rate of interest.

Some people reading Mary's story might conclude that she and her husband made a bad decision and have no one to blame but themselves. But I disagree. In a fairer and more just economy, laws and regulations would have prohibited this very bad transaction.

People forget that not too long ago, states had usury laws that placed strict limits on the interest that could be charged for a consumer transaction. In the state where I practiced law, a statute limited the interest rate to 10.5 percent--less than half the rate that Mary and her husband were charged.

But the banks figured out how to base their operations in states that permitted very high interest rates. Remember sending those credit card payments to South Dakota or Delaware? Then, in 1978, the Supreme Court allowed out-of-state credit card companies to charge interest rates that were higher than the interest rate allowed in their customers' own states. (Pat Curry explains this in a 2010 essay.)

Even student-loan debtors can fall into the trap of paying high interest rates. I've read a couple of recent bankruptcy court decisions in which people refinanced their student loans at 9 percent--a hefty rate indeed when we consider that the interest rate on a 10-year treasury bond is less than 2.7 percent right now.

Tragically, millions of Americans are financing consumer transactions to purchase stuff they don't need or is virtually worthless. This is also true for people who take out student loans to attend for-profit colleges that are not providing students with fair value--or any value at all in many cases.

As the 2020 political season heats up, voters need to ask presidential candidates if they endorse legislation that would effectively regulate consumer transactions and the student-loan industry. If a candidate has nothing to say about the massive exploitation of ordinary Americans by the banks, the student-loan racket, and the consumer-finance industry, voters need to find someone else to vote for.


Photo credit: Harley Davidson