Friday, March 17, 2023

Three quarters of a million student borrowers have filed "borrower defense" claims against colleges: They want their student loans canceled

 Dahn Shaulis posted a provocative commentary yesterday on Higher Education Inquirer. He reported on the recent settlement of Sweet v. Cardona, a class-action lawsuit accusing the U.S. Department of Education of mishandling borrower defense claims. 

In essence, the plaintiffs claimed they took out federal student loans to attend schools that misrepresented their offerings or violated various state laws.  As Shaulis pointed out, nearly all the schools affected by the lawsuit are for-profit colleges.

Under the settlement terms, DOE will cancel federal student-loan debt owed by 200,000 borrowers. The cost: about $6 billion. This is in addition to the $ 7.9 billion in loan relief to 690,000 students under the terms of earlier borrower-defense settlements.

Fourteen billion dollars in canceled loans owed by 890,000 students: that's a lot of misconduct. Which schools have been named by students filing borrower defense claims?

DOE attached an appendix to its announcement of the Sweet litigation listing more than 150 schools. The list of accused malefactors--almost all for-profit institutions--includes a for-profit law school and a for-profit Caribbean medical school.

As we might expect, the word has gotten out among student borrowers that President Biden's DOE is much more receptive to borrower defense claims than President Trump's callous crew.  As Mr. Shaulis reported, there are now 750,000 pending borrower defense claims, and they keep rolling in at the rate of 16,000 a month.

I'm all in favor of DOE's generosity toward students who took out federal loans to attend for-profit institutions and didn't get their money's worth. I have no sympathy for the for-profit colleges, many of which are owned by private equity funds that don't give a flip about the quality of education their institutions deliver.

Nevertheless, it is not feasible for DOE to continue entering into large borrower-defense settlements unless it cracks down on the chief offender--the for-profit college industry.

Basically, DOE is behaving like a wealthy parent who repeatedly pays the damages for a profligate son's mayhem without demanding that the kid stop misbehaving.  

Wednesday, March 15, 2023

Biden Administration's Proposed Income-Driven Repayment Plan for Student Debtors is a Disaster

 Everything Everywhere, All at Once. That's a good description of the Department of Education's handling of the federal student-loan program. From every perspective and by any measure, the program is a disaster.

Even before COVID, the program was in crisis. Education Secretary Betsy DeVos admitted in a 2018 speech that only one out of four borrowers were paying down the principal and interest on their loans. And she reported that about 20 percent of borrowers were either delinquent on their loans or in default.

But why dwell on evil tidings?  Shortly after Betsy resigned from the Trump administration, her speech was removed from the web. 

Then came the COVID pandemic, and the feds paused all student-loan debt collection. Thus, 43 million college borrowers stopped making monthly loan payments without penalty and without accruing interest. This pause has now lasted three years.

According to the Committee for a Responsible Federal Budget, the cost of the loan repayment pause was $155 billion as of December of last year. And that cost continues going up as each day goes by.

To add fuel to the flames--the Biden Administration is rolling out a modified income-based repayment plan, which is about as close as one can get to free money.

Under the new plan, undergraduate borrowers will only pay 5 percent of their discretionary annual income on their student loans, which is generously defined as the amount over 225 percent of the federal poverty-level guidelines.

For example, college graduates in three-member households will only pay 5 percent of their annual income over $55,935. Thus, grads making $50,000 a year will make monthly payments of zero, regardless of how much they borrowed!

Our scatter-brained Department of Education estimates this plan will cost the taxpayers $138 billion over ten years--chicken feed!

However, the Penn Wharton Budget Model projects the cost to be more than double DOE's estimate--$333 billion to $361 billion.

Why are the estimates so different? Because Penn Wharton reasonably predicts that more borrowers will sign up for this new easy-peasy repayment plan. 

Currently, about a third of eligible student debtors participate in an income-based repayment plan.  Penn Wharton estimates that 70 to 75 percent of student borrowers will sign up for the new program because most borrowers will only be required to make token payments (or no payments) on their student loans. 

Penn Wharton also predicts that students will take out bigger loans when they realize the new income-based repayment plan is breathtakingly generous.  If that happens, the cost of the program will be even higher.

In short, the Department of Education's new income-based repayment plan is nutso.  It will encourage students to take out ever-larger student loans, which, in turn, will prompt colleges and universities to keep raising the cost of tuition.

DOE's revised income-based repayment plan is nutso.