Showing posts with label Adam Looney. Show all posts
Showing posts with label Adam Looney. Show all posts

Monday, October 3, 2022

I Got a Sweet Deal! Is Biden's new income-driven repayment plan too generous?

 College debtors definitely have a friend in President Biden.  So far, his administration has approved $25 billion in loan forgiveness. In addition, it paused student borrowers' monthly payment obligations until the end of 2022.

More relief is on the way. President Biden announced loan cancelation of up to $20,000 per student borrower.  The Congressional Budget Office predicts the program will cost $400 billion.

And that ain't all. The U.S. Department is working on a more generous income-based repayment plan (IBRP), which--for some borrowers--will amount to a free college education. 

Adam Looney, writing for the Brookings Institution, analyzed Biden's new IBRP; his findings are astonishing. As Mr. Looney explains, undergraduate borrowers can enter into an IBRP that only requires them to pay 5 percent of their annual income over $33,000.         

For example, unmarried college graduates who make $50,000 a year will only be obligated to pay about $70 per month on student loans--regardless of how much they borrowed.

What if the monthly payment isn't enough to cover accruing interest? No problem! The government will forgive the unpaid interest, so loan balances don't grow.

Now that's a sweet deal!

On average, Looney concludes, student borrowers can expect to pay back only 50 cents on every dollar borrowed, and some will never make a single loan payment. 

Looney predicts the new IBRP will lead to increased borrowing. Why? "Because when . . . students are offered a substantial discount by paying with a federal loan, they will borrow billions more each year."

As Looney pointed out in his report, students can take out student loans to cover their tuition and living expenses. Students who receive checks for living expenses can deposit them in their bank accounts, knowing they may not have to pay back their student loans.

As Looney put it, "Some people will use [student] loans like an ATM, which will be costly to taxpayers and is certainly not the intended use of the loans."

Looney also predicts that Biden's incredibly generous IBRP will lead to tuition inflation. 

He thinks the new IBRP will prompt colleges to create new and expensive programs to juice their revenues. "My fear," he wrote, "with regards to overall college costs, is that institutions will have an incentive to create valueless programs and aggressively recruit students into those programs with promises they will be free under an IDRP plan. 

I'm in favor of student-loan relief. Millions of Americans are saddled with crippling debt for college degrees that did not benefit them financially.  Let's give those folks a break.

But President Biden's new IDRP program goes too far. Adam Looney is right: Biden's poorly-designed IBRP will encourage students to borrow more and more money to attend college, knowing they will not be obligated to pay back their loans.



A  student-loan bonanza is coming soon to your hometown.









Monday, November 18, 2019

Pew Foundation says one out of four student-loan borrowers default within 5 years: But we already knew that.

The Pew Foundation issued a report recently with this snoozer title: Student Loan System Presents Repayment Challenges.  Really? That's like saying that icebergs posed a challenge to the Titanic.

The Pew Foundation's most interesting finding--picked up by the media--was this: Almost one out of four student-loan debtors default on their loans within five years.  But this should not be a shocker. Looney and Yannelis reached basically the same finding five years ago in their report for the Brookings Institution. These researchers reported that the five-year default rate for the 2009 cohort of borrowers was 28 percent (p. 49, Table 8).

And the Pew study probably understates the crisis. The report itself acknowledged that for-profit colleges were underrepresented in its study (p. 5), and we know that almost half of the students who attend for-profit colleges default within five years.

Most importantly, the Pew study did not address the "challenge" faced by more than 7 million college borrowers who are in income-based, long-term repayment plans (IBRPs). IBRP participants are not paying off their student loans even though they are in approved repayment programs. Why? Because people in IBRPs aren't making monthly payments large enough to pay down loan accruing interest, and this interest is capitalized and rolled into their loans' principal.

As much as it pains me to say this, Education Secretary Betsy DeVos gave a clearer picture of the student-loan crisis than the Pew Foundation.  A year ago, DeVos publicly acknowledged that only one out of four student borrowers are paying down principal and interest on their loans and that 43 percent of student loans are "in distress."

For me, the most disappointing thing about the Pew report was its tepid, turgid, and tedious recommendations for addressing the student-loan crisis, which I will quote:
  • Identify at-risk borrowers before they are in distress . . .
  • Provide [loan] servicers with resources and comprehensive guidance . . .
  • Eliminate barriers to enrollment in affordable repayment plans, such as program complexity . . .
Thanks, Pew Foundation. That was really, really helpful.

Note that the Pew Foundation said nothing about bankruptcy relief for distressed college borrowers, tax penalties for borrowers who complete their IBRPs, or the government's shameful practice of garnishing elderly defaulters' Social Security checks. Moreover, Pew said nothing about the Education Department's almost criminal administration of the Public Service Loan Forgiveness program.  And we didn't read anything about the out-of-control cost of higher education.

Let's face it.  College leaders, the federal government, and so-called policy organizations like the Pew Foundation refuse to acknowledge that the federal student-loan program is destroying the lives of millions of Americans. Instead, they are content to tinker with a system that is designed to shovel money to our bloated and corrupt universities.

America's colleges are addicted to federal money. Like a drug addict hooked on Oxycontin, they must get their regular fixes of federal cash.  After all, they've got to fund the princely salaries of college administrators and lazy, torpid professors.

Like first-class passengers on the Titanic who were sipping champagne when their ship hit an iceberg, the higher education industry thinks the flow of student-loan money will go on forever.  But a crash is coming.

Unfortunately, the people who created the student-loan crisis will be the ones floating away in the lifeboats--living off their cushy pensions and obscene retirement packages. The people who were exploited by the federal student-loan program, like the third-class passengers on the Titanic, will go down with the ship.

Lifeboats reserved for college presidents and DOE senior administrators


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 the majority of their working lives.

Moreover, most people in those plans will never pay back the principal 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 principal 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.






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, August 27, 2018

Ben Miller, where the hell ya been? Center for American Progress finally wakes up to the magnitude of student-loan crisis

Ben Miller, senior director of the Center for American Progress, reminds me of a fuddy duddy who falls asleep at a wild party in a friend's apartment.  Just as the party starts to get interesting, he nods off on a pile of party goers' coats.

 Meanwhile, the party spins out of control: fights break out, spontaneous trysts are consummated in closets and spare bedrooms, furniture is broken, lamps are shattered. When the fuddy duddy awakes, the apartment is in shambles and the police are cuffing drunken revelers and hauling them off to jail.

"Did I miss something?", the fuddy duddy asks as he rubs the sleep from his eyes.

Miller wrote an op ed essay for the New York Times on August 8 titled "The Student Debt Problem is Worse Than We Imagined?" Ya think? Where the hell have you been, Mr. Miller?  You're like the guy who went out to buy popcorn just before the steamy scene in Last Tango in Paris.

So here is what Mr. Miller said in his op essay: student loan default rates are much higher than the Department of Education reports. I hate to break it to you, Ben; but people have known that for years. Everybody knows the for-profit colleges have been hiding their default rates by pushing their former students into deferment programs to disguise the fact the suckers weren't paying on their loans.

In fact, the problem is probably worse that Miller described it in the Times. Looney and Yannelis reported in 2015 that the five-year default rate for the 2009 cohort of student borrowers was 28 percent (Table 8).  And the five year default rate for the 2009 cohort of for-profit students was 47 percent--almost double what Miller reported for the 2012 cohort--only 25 percent.

Admittedly, Miller is looking at the 2012 cohort of debtors, while Looney and Yannelis analyzed the 2009 cohort. But surely no on believes the student-loan problem got better in recent years. Everyone knows the crisis is getting worse.

Miller's analysis briefly mentions the federal push to put student borrowers in deferment plans,  but that problem is more serious than Miller intimates. In fact 6 million student borrowers are in income-based repayment plans (IBRPs) and are making payments so small their loan balances are getting larger and larger with each passing month due to accruing interest.  For all practical purposes, the IBRP participants are also in default.

But Mr. Miller can be forgiven for waking up late to smell the coffee. Perhaps Miller, like the New York Times that published his essay, was so distracted by Stormy Daniels and the Russians that he was late to notice that American higher education is going down the toilet.  And surely, we can all agree that the person pressing down on the toilet-bowl handle  is Betsy DeVos.

What happened while Center for American Progress was snoozing?



References

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Ben Miller. The Student Debt Problem is Worse Than We Imagined. New York Times, August 8, 2018.

Tuesday, May 8, 2018

Baby Boomers are stealing from the Millennials: Stocks and bonds for grandma and grandpa; perpetual debt for their grandchildren

Baby Boomers are stealing from the Millennials. People in their 60s and 70s are retiring comfortably in sunny Florida or taking luxury river cruises down the Danube. Meanwhile, their grandchildren are struggling with massive student-loan debt they will never pay off.

As John Rubino put it, "we baby boomers have rigged the system in our favor at the expense of pretty much everyone else," forcing younger generations to take out student loans to get their college degrees. "[S]tudent loans--barely necessary when most boomers graduated 40 years ago--have become a life-defining problem for our kids and grandkids."

Rubino is right. The people who run this country--judges, legislators, college presidents, and the captains of industry--got their college degrees for a modest sum; and most graduated with little or no student debt. But their grandchildren will take out massive student loans to get their postsecondary credentials, and many will remain indebted for decades.

According to a Brookings Institution report, most student borrowers with large loan balances are not defaulting on their loans; they just aren't paying them back. Millions have their loans in deferment, allowing them to skip their loan payments without being put into default.  Six million are now enrolled in some type of income-based repayment plan (IBR) that allows them to make smaller loan payments but keeps them indebted for 20 or 25 years.

Millions more are simply defaulting on their loans--which means their credit is shot and their loan balances have shot upward due to default penalties and accrued interest on their unpaid debt. According to the New York Times, college borrowers defaulted at the rate of 3,000 a day in 2016.

Rubino sees only one solution to this mess:"massive devaluation" of our currency to allow student debtors to pay off their loans with cheaper money. But that won't work unless Millennials' salaries rise high enough so that current debt loads are no longer burdensome. And there is no sign this is happening.

Total outstanding student-loan indebtedness is now about $1.5 trillion, or $1.6 trillion if you include private student-loan debt. About half of this amount will never be paid back. We really only have two options. We can forgive billions of dollars in uncollectable student-loan debt or we can continue to allow millions of Americans to slip out of the middle class--dragged down by their student loans and unable to buy homes or save for their retirement.



References

Adam Looney & Constantine Yannelis. Most students with large loan balances aren't defaulting. They just aren't reducing their debt. Brookings Institution, February 16, 2018.

Josh Mitchell. The Rise of the Jumbo Student Loan. Wall Street Journal, February 16, 2018.

John Rubino. Loan Shark Nation: Forcing Our Kids To Choose Between Student Loans And Everything Else.

The Wrong Move on Student LoansNew York Times, April 6, 2017.

Tuesday, January 16, 2018

Student Loan Default Crisis grows worser and worser: Brooking Institution says minorities and for-profit students are hardest hit

First of all, I realize that the word "worser" is not standard English. Nevertheless, "worser" appears in Hamlet (act 3,scene 4). If it is good enough for Shakespeare, it is good enough for me.

Now to the topic at hand. Judith Scott-Clayton recently published a report for the Brookings Institution on the student-loan default crisis. Twelve-year default rates are going up--with minority students and for-profit-college attenders experiencing the highest default rates.

For the 2004 cohort of borrowers who attended a for-profit college, the 12-year default rate was 46.5 percent (darn near half). For African American borrowers from the same cohort, 37.5 percent defaulted within 12 years. The black default rate was three times higher than the white default rate (12.4 percent) and six times higher than the rate for Asians (only 6.2 percent).

Scott-Clayton's report makes clear that the crisis in student-loan defaults among African Americans is acute. Based on the current trajectory, she projects 70 percent of black borrowers will default on their student loans by the end of 20 years.

Scott-Clayton points out that African American default rates are high even for black students who graduate from college. The default rate for African American graduates is five times higher than the default rate among white graduates.  In fact, she points out, the default rate for black college graduates is higher than the default rate for white college dropouts.

African Americans also borrow more money than white students. For the 2004 entry cohort, black students borrowed twice as much as white students for their undergraduate education.

The Scott-Clayton report is alarming, but a 2015 Brookings report (which Scott-Clayton referenced) is even more alarming. Looney and Yannelis, authors of the 2015 report, found that 47 percent of the people in the 2009 cohort of borrowers who took out loans to attend for-profit colleges defaulted within 5 years. For the cohort as a whole, the default rate was 28 percent.

Basically, however, the Scott-Clayton report and the Looney-Yannelis report told us what we already knew.  Student borrowers who attend for-profit colleges have shocking student-loan default rates; and African American students have much higher default rates than white students.

Scott-Clayton concluded her report with some tepid suggestions, which I will quote:
[T]he results suggest that diffuse concern with rising levels of average debt is misplaced. Rather, the results provide support for robust efforts to regulate the for-profit sector, to improve degree attainment and promote income-contingent loan repayment options for all students, and to more fully address the particular challenges faced by college students of color.
Frankly, I disagree with Scott-Clayton's bland recommendations. First, of all, we should be very concerned about the rising level of student debt across all sectors of higher education--not just the for-profit sector.  Millions of student borrowers are suffering, and some of those sufferers are white graduates of Ivy League colleges.

Secondly, although it is easy to call for more "robust" regulation of the for-profits, Betsy DeVos is headed in the opposite direction. DeVos is doing all she can to prop up the corrupt for-profit college industry and to lift all regulatory constraints against the for-profit institutions.  In my view, the best way to deal with the for-profit colleges is to cut off their federal funding and shut them down.

And I stridently disagree with Scott-Clayton's blithe call to promote income-contingent repayment plans. Most of the people in those plans are not making monthly payments large enough to service accruing interest.  At the end of their 20- or 25-year repayment plans, many will owe more than they borrowed.

Moreover, although people who complete long-term repayment plans will have any remaining debt forgiven, the amount of the forgiven debt will be taxable to them.

I suspect the Brookings Institution is advancing a hidden agenda with its reports on the student-loan crisis. Brookings wants the public to focus on minority students and the for-profit colleges while ignoring the fact that debt levels are rising across all sectors of higher education and injuring millions of student borrowers--not just students of color.

Let's face facts. The for-profit colleges are not the only institutions ripping off their students. The Ivy League schools are exploiting students as well. And with each passing day, the crisis gets worser and worser.




References

Adam Looney and Constantine Yannelis. A crisis in student loans? How changes in the characteristics of borrowers and the institutions they attended contribute to rising loan defaults. Brookings Papers on Economic Activity, 2015.

Judith Scott-Clayton. The looming student loan default crisis is worse than we thought. Brooking Institution, January 11, 2018.



Tuesday, June 6, 2017

Department of Education is slow to forgive loans of student borrowers defrauded by Corinthian Colleges: State Attorneys General urge DOE to move more quickly

Yesterday, nineteen state attorneys general and the Director of the Hawaii Office of Consumer Protection delivered a letter to Betsy DeVos, U.S. Education Secretary, urging the Department of Education to quickly process fraud claims brought by former students of Corinthian Colleges.

The state AGs asked DeVos to approve "swift automatic group discharge" to students in Corinthian cohorts where fraud has been found. Alternatively, the AGs asked DeVos to process individual fraud claims faster.

Corinthian Colleges closed and filed for bankruptcy in 2015, leaving behind more than 350,000 former students who took out loans to pay Corinthian's tuition. Many of these student borrowers were induced to attend Corinthian through fraud, and the nineteen AGs claim there are defrauded Corinthian students in all 50 states.

So far, DOE has discharged 27,000 borrowers from their federal loan debt, but that number is a small fraction of the former students who are entitled to debt relief. Thousands have filed "borrower defense" claims, asking DOE for loan forgiveness, but DOE is not processing these claims quickly. Meanwhile, many Corinthians students are still paying on their loans or defaulted and are subject to having their wages garnished and their credit ruined.

According to the state AGs, DOE notified 23,000 Corinthian student borrowers in January that their loan forgiveness applications had been approved and that "forgiveness should be completed within the next 60-120 days." It's been nearly 180 days since that announcement, and these loans have still not been discharged.

What's going on?

I think the Department of Education is simply overwhelmed by the meltdown of the student loan program. Almost half the people in a recent cohort of students who attended for-profit colleges defaulted within five years. According to a recent article in the Wall Street Journal, half the students who attended more than 1,000 colleges and schools have not paid down one dime of their student loans seven years after their repayment obligations began.

In addition, the first beneficiaries of the Public Service Loan Forgiveness Program will be eligible for debt relief before the end of this year, and DOE has no idea how many people are eligible to have their loans discharged under that program.

Personally, I think Secretary DeVos should adopt the AGs' suggestion and grant swift automatic group discharges to all Corinthian students who were in DOE's "Designated Fraud Cohorts." Or better yet, I think DOE should forgive the loans of all 350,000 former students.

Admittedly, there are probably some people who completed a Corinthian program and actually got a good job, but I'll bet there aren't many. Undoubtedly, the default rate for Corinthian students is extraordinarily high largely due to the fact that Corinthian's students did not get well-paying jobs at the conclusion of their studies.

I recognize there are risks associated with a mass loan forgiveness program. If all 300,000 of Corinthian's former students are granted a discharge, then ITT Tech's former students will ask for blanket loan forgiveness. ITT Tech also closed and filed for bankruptcy, and it has 200,000 former students.

It is shocking to contemplate, but millions of Americans will never pay back their student loans. In addition to the for-profit college students, there are the law graduates who accumulated mountains of debt and can't find law jobs. And then there are the poor saps who got liberal arts degrees from expensive liberal arts colleges; many of them will never pay back their loans.

The 19 state AGs are right to urge Secretary DeVos to grant automatic group discharges for thousands of former Corinthian students. But Corinthian Colleges is the tip of the iceberg. Millions of student borrowers will never pay back their loans, and the ultimate loss to taxpayers will be in the billions.



References

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.

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

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).


Andrew Kreighbaum. State AGs Want Action on Student Loan Discharge. Inside Higher Ed, June 6, 2017.

Lisa Madigan, Illinois Attorney General. Letter to Betsy DeVos, US. Secretary of Education, June 5, 2017.

Sunday, January 29, 2017

Alan and Catherine Murray are Poster Children for the Student Loan Crisis: Income-Driven Repayment Plans for Distressed Student-Loan Debtors are Insane

In a recent post, I wrote about Alan and Catherine Murray, who won a partial discharge of their student-loan debt in a bankruptcy case decided in December 2016.  Educational Credit Management (ECMC), the creditor in their case, is appealing the decision. We should all hope ECMC loses the appeal, because the Murrays are the poster children for the student-loan crisis.

Alan and Catherine Murray: Poster Children for the Student-Loan Crisis

Alan and Catherine Murray, a married couple in their late forties, took out 31 federal student loans to get bachelor's degrees and master's degrees in the early 1990s. In all, they borrowed about $77,000, not an unreasonable amount, given the fact that they used the loans to get a total of four degrees.

In 1996, the Murrays consolidated all those loans, a sensible thing to do; and they began making payments on the consolidated loans at 9 percent interest.  Over the years they made payments totally $58,000--or 70 percent of what they borrowed.

Nevertheless, during some periods, the Murrays obtained economic hardship deferments on their loans, which allowed them to skip some payments. Interest continued to accrue, however; and by 2014, when the Murrays filed for bankruptcy, their $77,000 debt had ballooned to $311,000!

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

 Educational Credit Management Corporation (ECMC), the Murrays' student-loan creditor, appealed Judge Somers' ruling. The Murrays should have been placed in an income-driven repayment plan (IDR), ECMC argued, which would have required them to pay about $1,000 a month for a period of 20 years.

Obviously, ECMC's argument is insane. As Judge Somers pointed out, interest was accruing on the Murrays' debt at the rate of almost $2,000 a month. Thus ECMC's proposed payment schedule would have resulted in the Murrays' debt growing by a thousand dollars a month even if they faithfully made their loan payments. By the end of their 20-year payment term, their total debt would have grown to at least two thirds of a million dollars.

The Murrays' case is not atypical: Billions of dollars in student loans are negatively amortizing

You might think the Murray case is an anomaly, but it is not. Millions of people took out student loans, made payments in good faith, and wound up owing two, three, or even four times what they borrowed. In other words, millions of student loans are negatively amortizing--they are growing larger, not smaller, during the repayment period.

For example, Brenda Butler, whose bankruptcy case was decided last year, borrowed $14,000 to get a bachelor's degree in English from Chapman University, which she obtained in 1995. Like the Murrays, she made good faith efforts to pay off her loans, but she was unemployed from time to time and could not always make her loan payments.

By the time Butler filed for bankruptcy in 2014, her debt had doubled to $32,000, even though she had made payments totally $15,000--a little more than the amount she borrowed.

Unfortunately for Ms. Butler, her bankruptcy judge was not as compassionate as the Murrays' judge. The judge ruled that Butler should stay on a 25-year repayment plant, which would terminate in 2037, 42 years after she graduated from Chapman University.

Here is sad reality. Millions of people are seeing their total student-loan indebtedness go up--not down--after they begin repayment. According to the Brookings Institution,  more than half of the 2012 cohort of student-loan borrowers saw their total indebtedness go up two years after beginning the repayment phase.  Among students who attended for-profit colleges, three out of four saw their loan balances grow larger two years into repayment.

An analysis by Inside Higher Ed concluded that less that half of college borrowers (47 percent) had made any progress on paying off their student loans 5 years into repayment. In the for-profit sector, only about a third (35 percent) had paid anything down on their student loans  over a 5-year period.

And the Wall Street Journal reported recently that half the students at more than a thousand colleges and schools had not reduced their loan balances by one dime seven years after their repayment obligations began.

The Federal Student Loan Program is a Train Wreck

Awhile back, Senator Elizabeth Warren accused the federal government of making "obscene" profits on student loans because the interest rates were higher than the government's cost of borrowing money. Warren's charge might have been true if people were paying back their loans, but they are not.

Eight million people are in default and millions more are seeing their student-loan balances grow larger with each passing month.  The Murrays are the poster children for this tragedy because they handled their loans in good faith and still wound up owing four times what they borrowed.

In short, the federal student loan program is a train wreck. Judge Somers' solution for the Murrays was to wipe out the accrued interest on their debt and to simply require them to pay back the principle. This is the only sensible way to deal with the massive problem of negative amortization.



References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Paul Fain. Feds' data error inflated loan repayment rates on the College Scoreboard. Inside Higher Ed, January 16, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall Street Journal, January 18, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).

Ruth Tam. Warren: Profits from student loans are 'obscene.' Washington Post, July 17, 2013.



Tuesday, July 19, 2016

Susan Dynarski's Fix for the Student Loan Crisis: Simplistic, Dangerous, and Ineffective

Susan Dynarski published an essay recently in the Business section of the Sunday Times with the provocative title of "America Can Fix Its Student Loan Crisis. Ask Australia." Her prescription is simplistic, dangerous, and ineffective.

Essentially, Dynarski recommends putting American student borrowers into income-based, long-term repayment plans. She doesn't say how long, but she wrote approvingly of the English system--which, she attests, gives students 30 years to pay off their loans.

She also recommends putting student borrowers into a payroll withholding system whereby
debtors have their monthly loan payments deducted from their paychecks based on a percentage of their income.  When borrowers' incomes go up, their payments would be larger; if their incomes go down, their payments would be reduced as well.

Dynarski's proposal is very close to what the Obama administration is already doing--pushing millions of student borrowers into income-based repayment plans that stretch out over 20 or 25 years.

Dynarski says long-term student-loan repayment plans make sense because college graduates benefit from their college experience over their entire lives. "A core principle of finance is that the length of debt payments should align with the life of the asset," she writes didactically. "We pay for cars over five years and homes over 30 years because homes last a lot longer than cars." Likewise, Dynarski reasons, "[a]n education pays off over a lifetime, so it makes sense that student loans should be paid off over a long term."

Dynarski urges the United States to follow the example of those savvy Europeans, who give students longer to pay off their student loans than we do here in the U.S. "All the international student loan experts I have spoken with are shocked by how little time American students are given to pay off their student loans," she informs us. Shocked!

Simplistic

Dynarski's simplistic proposal is based on erroneous premises.  First of all, contrary to Dynarski's view, many student borrowers do not have college experiences that benefit them over a lifetime. Students who borrow to attend for-profit colleges and have substandard experiences don't receive a lifetime of benefits. Perhaps that is why almost half of a recent cohort of students  who attended for-profit colleges defaulted within five years. People who drop out of college before graduating don't receive a lifetime of benefits either, although they may acquire a lifetime of debt.

And many people who borrow money to obtain liberal arts degrees are not receiving much benefit. I for one received almost no benefit from the sociology degree I obtained from Oklahoma State University many years ago. But at least I didn't borrow money to pay for it.

People who borrow $100,000 or more to get degrees in sociology, history, women's studies, religious studies, etc. generally are paying far more than their degrees are worth.  In fact, 45 percent of recent graduates take jobs that don't even require a college degree.  And in the workplace as a whole, about a third of college graduates are in jobs that don't require a college education.

Moreover, Dynarski's comparison between American college financing and Europe is not very useful. As she herself points out, higher education in many European countries is free, and most European countries have a bigger social safety net for their citizens than the U.S. does. It is one thing to pay on student loans for 20 years if health care is free and an old-age pension is assured. It is quite another thing for people to pay on their student loans over a majority of their working lives while saving for retirement and paying for health insurance.

Ineffective

If we think about Dynarski's proposal for just a few moments, we can see how ineffective it is for solving the student loan crisis. American higher education is the most expensive in the world, and stretching out students' loan repayments for 25 or 30 years will do nothing to get those costs under control. In fact, the reason so many higher education insiders favor long-term income-based repayment plans is because it enables them to continue jacking up tuition prices.

And Dynarski's plan takes no account of accruing interest.  Borrowers who make small monthly loan payments due to their low salaries won't be paying off interest as it accrues. Most Americans who enter these plans will never pay off their loan balances even if they faithfully make their monthly loan payments for 300 consecutive months.  Isn't it also a core principle of finance that people should actually pay off their loans?

Dangerous

Finally, Dynarkski's proposal is simply dangerous to the long-term well being of Americans who go to college.  Basically, she is proposing a special tax that everyone who borrows to attend college must pay over the majority of their working lives. Student loan payments will just be another deduction from people's paychecks--like federal income tax withholding and Social Security contributions.

Essentially, Dynarski is proposing a modern-day sharecropper system very much like the one that prevailed in the American South prior to World War II. The sharecropper system of the 1930s required tenant farmers to pay a portion of their crops to Southern plantation owners; the modern system forces college students to pay a portion of their future wages to the government over a majority of their working lives.

Both sharecropper systems are unjust: and Dynarski, by pitching the new sharecropper system in the Business section of the  New York Times, has become an apologist for exploitation.



References

Mathew Boesler. More College Grads Finding Work, But Not in the Best Jobs. Bloomberg.com, April 7, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-04-07/more-college-grads-finding-work-but-not-in-the-best-jobs

Susan Dynarski. American Can Fix Its Student Loan Crisis. Ask Australia. New York Times, July 10, 2016. Business  Section, p. 6.

The Labor Market for Recent College Graduates. Federal Reserve Bank of New York, 2016. Accessible at https://www.newyorkfed.org/research/college-labor-market/index.html

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults


Saturday, June 18, 2016

Student-Loan Default Rates Go Down As Enrollment in Income-Driven Repayment Plans Goes Up:" It Hurts So Much To Face Reality"

Earlier in the week, the Department of Education issued a press release that contains good news about the student loan program. Or does it?

DOE reported that enrollment is increasing in the Department's various income-driven repayment plans (IDRs), including PAYE, REPAYS and six other income-based student loan repayment programs.  About 5 million are now enrolled in IDRs, up 117 percent from March of 2014.

At the same time, student-loan hardship deferments, loan delinquencies, and new defaults are going down.  According to DOE:
As of March 31, 2016, about 350,000 [Direct Loan] recipients were deferring their payments due to unemployment or economic hardship, a 28.6 percent decrease from the prior year. In that same time period, there was a 36.6 percent decrease in the number of FFEL recipients in a deferment status due to unemployment or economic hardship.
DOE also reported that delinquency rates are down 10.6 percent from last year, and student-loan default rates are also down.

Is this good news? Yes and no.

Obviously, a trend toward fewer economic-hardship deferments, fewer student-loan defaults, and fewer lower delinquencies is a good thing. It is especially heartening to see a decline in the number of people who have loans in deferment, because these people see their loan balances go up due to accruing interest during the time they aren't making loan payments.

But this good news comes at a cost. DOE's report is a clear indication that more and more people are signing up for long-term income-based repayment plans that stretch out their repayment period for as long as 20 to 25 years.  According to DOE, five million people are in IDRs now, and DOE hopes to enroll 2 million more by the end of 2017. Clearly, long-term repayment plans has become DOE's number one strategy for dealing with rising student-debt loads.

What's wrong with IDRs? Four things.

Growing Loan Balances. First, as I have said many times, most people in IDRs are making payments based on a percentage of their income, not the amount of their debt; and most people's payments are not large enough to cover accruing interest on their loan balances. Thus, for almost everyone in a 20- or a 25-year repayment plan, loan balances are going up, not down.

This was starkly illustrated by a recent Brookings Institution report. According to a paper published for Brookings by Looney and Yannelis, a majority of borrowers (57 percent) saw their loan balances go up two years after beginning the repayment period on their loans. For students who borrowed to attend for-profit instiutions, almost three out of four (74 percent) saw their loan balances grow two years after entering the repayment phase

Reduced Incentives for Colleges to Rein in Tuition Costs.  As more and more borrowers elect to join IDRs, the colleges know that tuition prices becomes less important to students.Whether students borrow $25,000 to attend college or $50,000, their payment will be the same.

In fact, some IDRs actually may act as an inverse incentive for students to obtain more postsecondary education than they need.  I have several doctoral students who are collecting multiple graduate degrees. I suspect they are enrolled in the 10-year public-service loan forgiveness plan, the government's most generous IDR. Since monthly loan payments are based on income and not the amount borrowed, I think some people have figured out that it makes economic sense to prolong their studies.

Psychological Costs of Long-Term Repayment Plans. Third, there are psychological costs when people sign up for repayment plans that can stretch over a quarter of a century, a cost that some bankruptcy courts have noted. And these psychological costs are undoubtedly higher for people who sign up for IDRs in mid-life. Brenda Butler, for example, who lost her adversary proceeding in January of this year, signed up for a 25-year income-based repayment plan when she was in her early 40s, after struggling to pay back her student loans for 20 years. As the court noted in Butler's case, her loan obligations will cease in 2037--42 years after she graduated from college. That's got to be depressing.

A Drag on Consumer Spending. Finally, people who are making loan payments for 20 years have less disposable income to buy a home or a car, to marry, to have children, and to save for their retirement.  In fact, in the Abney case decided in late 2015, a bankruptcy court in Missouri rejected DOE's argument that a 44-year old truck driver should enter a long-term repayment plan to service loans he took out years ago for a college education he never completed.

As the court pointed out, Mr. Abney was a truck driver who was not likely to see his income increase markedly. Forcing him into a long-term repayment plan would diminish his ability to save for retirement or even to buy a car.

"It Hurts So Much To Face Reality"

As Robert Duvall sang in the movie Tender Mercies (the best contemporary western movie of all time), "it hurts so much to face reality."

Without a doubt, DOE is refusing to face reality by huckstering college-loan debtors into long-term student-loan repayment plans. DOE has adopted this strategy to keep student-loan defaults down, but IDRs do not relieve the burden of indebtendess for millions of student borrowers. Lowering monthly loan payments by stretching out the repayent period makes rising tuition more palatable, but it does nothing to check the rising cost of a college education--which has spun out of control.

In short, IDRs are creating a modern class of sharecroppers, whereby millions of people pay a percentage of their incomes over the majority of their working lives for the privilege of getting a crummy education from a college or university that has no incentive to keep tuition costs within the bounds of reason.

Image result for tender mercies movie
"It hurts so much to face reality."

References

Abney v. U.S. Department of Education540 B.R. 681 (W.D. Mo. 2015).

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

U.S. Department of Education, Education Department Announces New Data Showing FAFSA Completion by District, State. Press release, June 16, 2016. Accessible at http://www.ed.gov/news/press-releases/education-department-announces-new-data-showing-fafsa-completion-district-state

Tuesday, March 1, 2016

The Student-Loan Bubble: Will the rising level of student-loan indebtedness lead to a national economic catastrophe?


This is the way the world ends
Not with a bang but a whimper.


T.S. Eliot                       
The Hollow Men            

In recent years, I have heard speculation that the federal student-loan program is similar to the real estate bubble that developed in the early years of this century and which ultimately led to the national financial meltdown of 2008.  Does the student loan program have the potential for running our economy into the ditch?

I once discounted this notion. After all, the home-mortgage crisis involved a lot more money than the federal student-loan program.  It is true that Americans now owe about $1.3 trillion in student loans, which is not chicken feed. But compared to the national debt--about $19 trillion--the student-loan program doesn't seem like a big deal. After all, the government's quantitative easing program involved the creation of $1 trillion a year when it was in full swing.

But I'm beginning to think differently about the student-loan crisis based on these considerations:

Enormous growth in student-loan debt. First of all, total student-loan indebtedness has grown enormously over the past 10 years. According to a recent report by the Federal Reserve Bank of New York, total outstanding indebtedness grew from  around $400 billion in 2007 to more than $1.2 trillion in 2015. In other words, total indebtedness tripled in less than 10 years.

Indeed, as has been widely reported, student loans now comprise the second largest category of consumer debt, surpassed only by home mortgages.  Student -loan indebtedness is now larger than both automobile loans and credit card debt.

More student-loan debtors.  Second, the total amount of student-loan borrowers keeps growing--43 million people now have outstanding student loans. That's almost 18 percent of the nation's adult population.

High loan default rates. Third, student-loan default rates are distressingly high. Although the U.S. Department of Education reported recently that three-year default rates are dropping, the drop is deceptive. Three-year default rates are dropping because the Department of Education and the college industry are encouraging students to obtain economic-hardship deferments or other form of forbearance that excuse former students from making monthly loan payments. But the fact remains that a high percentage of borrowers in the repayment phase of their loans aren't making payments,

In fact, as the Brookings Institute reported, 5-year default rates are 28 percent.  In the for-profit sector, the five-year default rates is an eye-popping 47 percent! Given the catastrophic consequences of default, it is astonishing that almost half the people who attend for-profit colleges eventually default on their loans.

Discounted tuition rates. Finally, private colleges are discounting their tuition rates more and more, an indication that American families simply refuse to pay the sticker price for a college education.  According to an article in Inside Higher Ed, private colleges are now discounting tuition for freshman students by an average of 48 percent!

Obviously, the federal government can't go on forever lending ever larger quantities of money and expecting students to passively take out larger and larger loans for the privilege of going to college.

So yes, there is a student-loan bubble; and the bubble is going to burst. When? I don't know, but I think we will see growing turmoil in the for-profit-college industry and the private-college sector. Within five years, we will see a significant number of non-elite private colleges bite the dust. And we will see increasing pressure on the for-profit colleges.

But when the bubble bursts, I don't think we will witness a spectacular meltdown in the economy that we saw in 2008. To borrow a phrase from T. S. Eliot, the federal student loan program is not going to explode with a bang, but with a whimper.  And the people who will be whimpering most are the millions of people--probably 20 million--who simply cannot pay back their student loans and who cannot discharge them in bankruptcy.

In my opinion, everyone in the higher education industry should be praying for more compassionate bankruptcy judges who are willing to discharge billions of dollars in student-loan debt and give millions of distressed borrowers a fresh start. If distressed student-loan borrowers don't obtain some form of tangible relief, we are going to see a shrinking middle class and a class of lifetime student-loan debtors who have been pushed to the sidelines of the national economy by student loan debt from which they cannot shake free.  In other words, as I have said before, we are hurdling hell-bent toward a sharecropper economy.

References

Jesse Bricker, Meta Brown, Simona Hannon, and Karen Pence. How Much Debt Is Out There? FEDS Notes, August 7, 2015. Accessible at http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/how-much-student-debt-is-out-there-20150807.html

Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Karyne Williams. Federal Reserve Bank of New York Takes On Student Debt Crisis in New Blog Series. Generation Progress, February 27, 2015. Accessible at http://genprogress.org/voices/2015/02/27/35083/federal-reserve-bank-of-new-york-takes-on-student-debt-crisis-in-new-blog-series/





Friday, January 15, 2016

"Oh what a tangled web we weave": The Department of Education's three-year student-loan default rates are deceptive

Oh, what a tangled web we weave
When first we practice to deceive!

Walter Scott            

Last September, the Department of Education announced three-year default rates for the most recent cohort of student-loan borrowers.  According to DOE, three-year default rates went down dramatically over a two-year period.   The overall student-loan default rate for the FY 2012 cohort of borrowers was 11.8 percent, significantly lower than the FY 2010 cohort default rate, which was 14.7 percent.

Indeed, the for-profit sector saw a spectacular drop in three-year student-loan default rates--from 21.8 percent for the FY 2010 cohort down to 15.8 percent--a 25 percent drop. Amazing!

But of course DOE's three-year default rates are meaningless, particularly for the for-profit schools. The for-profits have kept their three-year student-loan default rates down by aggressively encouraging their former students to obtain economic-hardship deferments, which keep borrowers off the default roles even though they are not making loan payments.

When we look at the 5-year default rate across all sectors, the default rate is twice as high as the three-year rate. Twenty-eight percent of student borrowers defaulted on their loans within five years of beginning repayment, compared to DOE's 11.8 percent three-year rate. In other words, more than one out of four postsecondary students default on their student loans within five years.

In fact, the student-loan default rate and nonpayment rate for the for-profit sector are truly alarming. Forty-seven percent of for-profit students default on their loans within five years.

Although the for-profit sector has the highest default rates, many public colleges also have shocking numbers.  Kevin Carey of the New York Times examined the percentage of students who had paid nothing on the principal of their loans after five years and discovered that the nonpayment rate at several public universities is 20 percent or more: University of Houston, University of Cincinnati, and the University of Louisville among them. At the University of Memphis, Carey reported, 35 percent of former students in a recent cohort had not paid back a dime on their loans five years after entering repayment.

Historically black colleges and universities (HBCUs) have very high student-loan nonrepayment rates. "Of the 25 private colleges with the worst nonrepayment rates, 22 are historically black," Carey wrote. Lane College, a HBCU located in Tennessee, had a five-year student nonrepayment rate of 78.2 percent.

No one who contemplates these numbers can reach any other conclusion other than this: the federal student-loan program is a catastrophe. And, although millions of people have improved their lives by borrowing money to obtain postsecondary education, millions more have been ruined.

Who has been hurt the most by the federal student loan program?

  • Students who attended for-profit institutions, where almost half of former students default on their student loans;
  • Students who attended HBCUS, which have very high student-loan default rates;
  • People who borrowed money to get law degrees or MBA degrees from second- and third-tier institutions;
  • People who obtained liberal arts degrees from high-priced private institutions and who acquired no skills that will enable them to get a decent job;
  • People who started postsecondary programs and didn't finish them.

The media has reported widely that Americans are carrying $1.3 trillion in outstanding student-loan debt. But this underestimates the reality. This number does not include accumulated interest, loans from private banks, and credit-card debt that students run up while they are in college. Accumulated indebtedness associated with postsecondary education  is at least $1.5 trillion.

That's $1.5 trillion dollars in debt carried by just16 percent of the American adult population--the 16 percent least able to bear the burden. And because the consequences of default are so draconian, this significant percentage of Americans is greatly suffering.

And what is the higher education community's solution to this calamity? Long-term income-based repayment plans that will keep borrowers indebted for the majority of their working lives!

If the federal government had devised a plan to intentionally destroy higher education, shrink the middle class and cripple our economy, it could not have invented a better plan than this.

References

Kevin Carey. Student Debt Is Worse Than You Think. New York Times, October 7, 2015. Accessible at: http://www.nytimes.com/2015/10/08/upshot/student-debt-is-worse-than-you-think.html?_r=1

Adam Looney & Constantine Yannelis. A crisis in student loans? How changes in the
characteristics of borrowers and in the institutions they attended contributed to rising
loan defaults. Brookings Institution, September 15, 2015. Accessible at: http://www.brookings.edu/~/media/projects/bpea/fall-2015_embargoed/conferencedraft_looneyyannelis_studentloandefaults.pdf



Tuesday, September 29, 2015

NY Times Urges "Speedy Help for Victims of College Fraud," but the Times Does Not Go Nearly Far Enough

Let's give the New York Times credit: it is on the right side of the argument regarding the federal student loan program. The Times editorializes repeatedly about the plight of people who cannot pay back their college loans. The newspaper has published several fine news articles about individuals who are overwhelmed by student-loan debt. And again and again, the Times editorial writers demand action by the federal government to bring relief to desperate student-loan borrowers.

Unfortunately, the Times does not grasp this simple fact: True relief for student-loan debtors will require radical action, far more radical than the Times is willing to contemplate.

Last Sunday, a Times editorial addressed the issue of fraud in the for-profit college sector. As the Times pointed out, "The federal government's decades-long failure to curb predatory behavior in the for-profit college industry has left untold numbers of Americans with crushing debt while providing useless degrees--or no degrees at all--in return."

The Times then went on to praise the Obama administration for creating new oversight rules for the  for-profit college industry. And the Times expressed approval of the Department of Education's decision to forgive the student-loan indebtedness of some individuals who attended Corinthian Colleges (about 3,000 people so far).

But, as the Times pointed out, DOE has yet to grant relief  to any of the 4,000 people who claim they were defrauded by Corinthian and have asked to have their student-loans forgiven.

The Times expressed the fear that DOE's "legendary bureaucracy will drag its feet and make it difficult for deserving plaintiffs to get relief." And the Times ended its rather tepid editorial by stating vaguely that "the department needs to do a much better job of reaching out to people who have potential [fraud] claims."

The Times editorial is on the right track; obviously DOE needs to speed up the process of reviewing fraud claims by students who attended for-profit colleges. But I don't think the Times recognizes the enormity of the student-loan problem in the for-profit college sector.

A recent study by the Brookings Institution reported that there are almost 1.2 million people who attended the University of Phoenix who have more than $35 billion in outstanding student loans.  According to the Brookings study, 45 percent of a recent cohort of former University of Phoenix students defaulted on their loans within five years.

More alarmingly, for the for-profit sector as a whole, nearly three quarters of students who attended for-profit schools  (74 percent) owed more than they originally borrowed two years after beginning repayment (for the 2009 cohort).  And nearly half the students who attended for-profit schools (47 percent) defaulted within five years of beginning repayment.

And Brookings default data did not take into account the fact that many former students have obtained economic-hardship deferments and are not making their student-loan payments. Those people are not counted as defaulters even though they are not paying down their loans.

For-profit colleges are encouraging their former students to  sign up for economic-hardship deferments as a strategy for keeping their institutional default rates down. Tragically, most of the people who obtain economic-hardship deferments receive only phantom relief because the interest continues to accrue on their unpaid debt. When those economic-hardship deferments come to an end, the people who held them will find that the principal of their loans went up during the deferment period.

IN SHORT, IT IS INDISPUTABLE THAT HALF OF THE PEOPLE WHO TOOK OUT STUDENT LOANS TO ATTEND FOR-PROFIT COLLEGES WILL DEFAULT AT SOME POINT IN THE LOAN REPAYMENT PERIOD. In other words, about half of the federal student-aid money flowing into for-profit colleges will never  be paid back.

If the Times grasped the magnitude of the student-loan crisis in the for-profit college sector it would surely recommend more aggressive action by the Feds.  What is needed is not a more streamlined fraud review process (as the Times recommended), but something close to blanket amnesty for at least half of the people who borrowed money to attend for-profit colleges.

Put another way, DOE needs to craft a secular version of Pope Francis's "Year of Mercy," whereby millions of people who attended for-profit colleges can have their loans forgiven with little or no red tape.

Obviously some case-by-case review needs to occur to make sure student loans aren't forgiven for students who got good value from attending for-profit colleges and can afford to pay back their loans. But--based on the default rates--a majority of the people who attended for-profit colleges should have their loans forgiven.

What is the best process for sorting through this mess? Bankruptcy. Student-loan defaulters who attended for-profit institutions should have their loans forgiven by bankruptcy courts without the necessity of adversary hearings. If a bankruptcy court concludes that a student-loan debtor is insolvent, that person's loans should be forgiven unless the government can show fraud or bad faith.

But the burden should be on the government to show that an insolvent student-loan debtor who attended a for-profit college is not entitled to bankruptcy relief--not on the debtor.

Obviously, I have painted an ugly picture: massive student-loan forgiveness and default on billions and billions of dollars in student-loan debt. But most of the defaulters who attended for-profit colleges will never pay their loans back,  whether or not their loans are forgiven.

It is time to wipe the slate clean. The for-profit college industry should be shut down and the people who were injured by it deserve a fresh start.  We can take action now or we can take action later. But eventually, the federal government will have to face facts: the for-profit colleges are a rogue industry and have ruined the economic prospects of millions of people.

References

Kelly Field, "U.S. Has Forgiven Loans of More Than 3,000 Ex-Corinthian Students, Chronicle of Higher Education, September 3, 2015. Accessible at: http://chronicle.com/article/US-Has-Forgiven-Loans-of/232855/?cid=pm&utm_source=pm&utm_medium=en

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Tamar Lewin, "Government to Forgive Student Loans at Corinthian Colleges," New York Times, June 8, 2015. Accessible at: http://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-college-students.html?_r=0

Speedy Help for Victims of College Fraud. New York Times, September 27, 2015, Times Review Section, p. 10.



Monday, September 21, 2015

The deluge is upon us: University of Phoenix students owe the taxpayers $35 billion; and 45 percent default within five years

Earlier this month, the Brookings Institution published a report on student-loan default rates; and some of its findings are truly shocking.  The report ranked institutions based on their students' total accumulated outstanding loans. University of Phoenix, a for-profit college company, ranked number 1; almost 1.2 million University of Phoenix students have racked up more than $35 billion in outstanding student-loan obligations.

And ponder this: 45 percent of the students in the University of Phoenix's 2009 cohort defaulted on their student loans within five years  
(Looney & Yannelis, 2015, table 5).

Image result for "university of phoenix" images

Brookings' researchers also reported that about three quarters of students (74 percent) who attended for-profit schools owed more than they originally borrowed two years after beginning repayment (for the 2009 cohort).  And nearly half of students who attended for-profit schools (47 percent) defaulted within five years of beginning repayment.

These are astonishing figures. And when we consider that a lot of former students who attended for-profit schools are enrolled in economic-hardship deferment programs and are not making loan payments, this sobering fact seems indisputable: more than half of the people who borrow money to attend for-profit colleges eventually default on their loans.

The Brookings Institution argues that the nation's high student-loan default rate can mostly be attributed to students who are "non-traditional borrowers," which it defines as students who attended for-profit colleges or two-year schools. Among all students who began repayment on their loans in 2011 and defaulted by 2013, 70 percent were nontraditional borrowers.

Loaning money for students to attend for-profit schools is irresponsible.

Based on these numbers, even a child can conclude that the federal government should not be loaning money to students who enroll in for-profit programs because taxpayers are going to get less than half of it back.  And--what is far worse--a lot of minority students and students from disadvantaged backgrounds will have student-loan debt hanging around their necks for the rest of their lives.  For these students, attending a for-profit school did not improve their lives; attending a for-profit school made their lives worse. 

Arne Duncan's Department of Education knows that the for-profit college sector is out of control, and it is made some efforts to provide student-loan debtors a little relief. For example, DOE granted loan forgiveness to about 3,000 students who attended one of Corinthian Colleges' campuses after Corinthian went bankrupt earlier this year. But there are more than 300,000 former Corinthian students.

Reasonable bankruptcy relief is the only humane remedy for non-profit students who default on their loans.

I do not think Congress or the Department of Education will ever shut off the federal-loan spigot to the for-profit colleges. This industry has protected itself with lobbyists, attorneys, and strategic campaign contributions.  Year after year, misguided students will continue to enroll at for-profit schools, and at least half will eventually default.

But  in the name of common decency, can't we at least give student-loan defaulters, who are suffering by the millions, some effective relief?  Do we have to make it so difficult for student-loan defaulters to file for bankruptcy and get a fresh start? Do we really want to force them into 25-year repayment plans, basically turning them into economic serfs for the balance of their working lives?

References

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults