Showing posts with label Brookings Institution. Show all posts
Showing posts with label Brookings Institution. Show all posts

Friday, December 18, 2015

Deeper into the abyss: Obama introduces REPAYE, yet another income-based student-loan repayment plan designed to turn students into sharecroppers

This week, the Obama administration introduced REPAYE, a new student-loan repayment plan.  Like PAYE ("Pay As You Earn"), REPAYE allows borrowers to pay back their student loans over a 20 year period and to make monthly payments no larger than 10 percent of their discretionary income.  REPAY, however, is available to borrowers who were not eligible for PAYE.

What is the significance of this new development?

It's complicated.  First of all, REPAYE is the federal government's fourth income-based repayment plan. We now have:

  • ICR Plan (Income-Contingent Repayment Plan)
  • IBR Plan (Income-Based Repayment Plan
  • PAYE (Pay  As You Earn Repayment Plan
  • REPAYE (Revised Pay As You Earn Repayment Plan)

Not all borrowers are eligible for all plans, and some plans are more favorable to debtors than others. DOE issued a 26-page set of guidelines called "Income-Driven Repayment Plans: Questions and Answers," but the guidelines are complicated.

Here is a sample passage:
The REPAYE, PAYE, and IBR plans offer an interest benefit if your monthly payment doesn't cover the full amount of interest that accrues on your loans each month. Under the three plans, the government will pay the difference between your monthly payment amount and the remaining interest that accrues on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under the plan. Under the REPAYE Plan, the government will pay half the difference on your subsidized loans after this three-year period, and will pay half the difference on your unsubsidized loans during all periods.
Millions of people are already confused by their student loans. Some don't know if they have private loans or federal loans, some don't know how many loans they have, some don't know how much they borrowed or what they now owe, and some people don't even know that they took out a student loan.

For the 20 million people who aren't able to make loan payments under a standard 10-year repayment plan, REPAYE is not going to offer much relief.  It's just another level of bureaucracy and administrative regulations.

REPAYE is a new sign of desperation. Second, REPAYE is just another sign of the federal government's desperation about the federal student loan program. As the New York Times noted a few weeks ago, 10 million people have either defaulted on their student loans or are delinquent in their payments.  About 4 million are making payments under the government's first three income-based repayment plans; and most are not making payments large enough to cover accruing interest.  And a bunch more have gotten some kind of deferment from making loan payments based on economic hardship.

The government's response to all this chaos and misery is to roll out ever more generous long-term repayment plans.  But this strategy hides the fact that millions of people on these plans will never pay back the principle on their loans and for all practical purposes are in default.

REPAYE is really just a program for turning college students into sharecroppers for the federal government.  But the real problem with REPAYE, with PAYE and with IBR and ICR are that these plans force millions of people to make payments to the federal government for a majority of their working lives in return for the privilege of attending college.  In effect, the government is turning our nation's young people into a generation of sharecroppers.

And remember, for most people, these 20- and 25-year repayment plans don't begin when students graduate from college. Often former students struggle for five years or more with their student loans before they finally sign up for a long-term repayment plan.  And that's when the long-term repayment plan starts.  Thus a person who graduated in 2010 and joins an income-based repayment plan this year, will not be free of student loan debt until 25 or 30 years after first enrolling in college.

President Obama, Arne Duncan, the Brookings Institution, and higher education leaders like Vassar's Catharine Hill hail long-term repayment plans as a solution to the growing student-loan crisis. But of course, these plans are not a solution at all. They're a strategy for turning Americans into indentured servants.

Image result for sharecroppers images
Go to college and become a sharcropper!


Image result for catharine hill vassar
Vassar's Catharine Hill: What the kiddies need is a nice long-term repayment plan!



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

Monday, May 11, 2015

Senator Elizabeth Warren and the Brookings Institution's Matthew Chingos are ignoring reality: The federal government is not making a profit off the student-loan program

Do you believe the federal government is making a profit off the student loan program? You do? Then I have some beautiful beachfront property in southwestern Oklahoma I would like to sell you. That's right--Caddo County, Oklahoma is going to be the next Hamptons! 


Caddo County, Oklahoma in springtime
Beachfront lots are still available!
Uncle Sam is not making a profit on student loans

Some people actually believe that Uncle Sam is making a bundle off the federal student loan program. Senator Elizabeth Warren is of that mind. She once said that the government's profits from the student-loan program are "obscene."


And last February, Senator Warren and five other U.S. Senators wrote Secretary of Education Arne Duncan a scolding letter charging the Department of Education with making a profit off of student loans. The Senators accused the government of overcharging student borrowers and "pocketing the profits to spend on unrelated government activities."


Senator Elizabeth Warren: Government profits on student loans are "obscene"
And apparently, the policy wonks over at the Brookings Institution also think the student loan program is producing a profit for the federal government. Matthew Chingos recently published a Brookings paper proposing to significantly lower interest rates on student loans while assessing student borrowers a fee that would be placed in a "guarantee fund" to cover student loan defaults. Chingos argued that his plan would keep the government from profiting from student loans while having a contingency fund to cover the cost of defaults.

Theoretically (and only theoretically), the government is making a profit on student loans.  The government's cost for borrowing money is about 1.9 percent on ten-year Treasury Bonds . And the government is currently loaning money to undergraduate students at a 4.7 percent interest rate. If all students paid back their loans, the government would indeed make a handsome profit.

But, as everyone knows, a high percentage of students are defaulting on their loans. According to Chingos, the government estimates only 0.6 percent of students will default, but of course that is absurd. Every year, for the past 20 years, the Department of Education has been issuing reports on the percentage of students in the most recent cohort of borrowers who default within two years of beginning the repayment phase of their loan. Over that period, that number has never been lower than about 5 percent. Last year, the figure was 10 percent--16 times higher than the DOE default estimate that Chingos cited.

In a Forbes.com article, Jason Delisle and Clare McCann reported that the government estimates that about 20 percent of student-loan borrowers will eventually default on their loans--that's 30 times higher than the rate cited by Chingos.

And let's not forget A Closer Look at the Trillion, the Consumer Financial Protection Bureau's 2013 report on the federal student loan program.   CFPB reported that 6.5 million out of 50 million outstanding student loans were in default--13 percent.


Need more data? The Federal Reserve Bank of New York issued its most recent report on household debt in February 2015. The Bank found student loan delinquency rates worsened in the 4th quarter of 2014, with 11.3 percent of aggregate student-loan debt being 90 days delinquent or in default.(up from 11.1 percent in the previous quarter).

Just one more tidbit of information. The Department of Education recently admitted that more than half of the student-loan borrowers who were signed up for income-based repayment plans, the government's most generous loan-payment option, had dropped out due to failure to file their annual personal income reports on time.  That is a clear sign that many student-loan borrowers are so discouraged that they aren't bothering to file the necessary paperwork to keep their loan status in good standing.

The Chingos Report and Senator Elizabeth's Letter to Secretary Duncan Ignore Reality

I am astonished that Michael Chingos and Senator Warren would publicly state that the government is making a profit off the student-loan program when it so clearly losing money. What's going on?

Tragically, our politicians and policy analysts simply can't face the fact that the student-loan program is out of control. It is so much easier to demand a pseudo reform based on the fantasy that the government is making money off the student loan program than to face reality.

References

Chingos, Matthew M. End government profits on student loans: Shift risk and lower interest rates. Brookings Institution, April 30, 2015. Accessible at: http://www.brookings.edu/research/papers/2015/04/30-government-profit-loans-chingos

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/

Jason Delisle and Clare McCann. Who's Not Repaying Student Loans? More People Than You Think. Forbes.com, September 26, 2014. Accessible at: http://www.forbes.com/sites/jasondelisle/2014/09/26/whos-not-repaying-student-loans-more-people-than-you-think/?utm_content=buffer1e0e0&utm_medium=social&utm_source=facebook.com&utm_campaign=buffe

Federal Reserve Bank of New York. Quarterly Report on Household Debt and Credit: February 2015. Accessible at: http://www.newyorkfed.org/householdcredit/2014-q4/data/pdf/HHDC_2014Q4.pdf

Senator Elizabeth Warren, et. al to Arne Duncan, February 25, 2015. Accessible at: http://www.warren.senate.gov/files/documents/2015_25_02_Letter_to_Secretary_Duncan_re_Student_Loan_Profits.pdf

Saturday, February 7, 2015

President Obama proposes a free community college education but the Brookings Institution disapproves

Even a blind hog occasionally finds an acorn, and President Obama finally came up with a good idea for addressing the student-loan crisis--or at least the kernel of a good idea. In his State of the Union address, the President proposed offering a free community-college education to every American.

But the Brookings Institution apparently doesn't like that idea.  Stuart M. Butler authored a piece for Brookings on President Obama's plan and offered these criticisms.
Stuart M. Butler
Senior Fellow, Brookings Institution
First, Mr. Butler argued, "the plan is badly targeted." Providing free community-college education "would mean middle-income and even upper-income, students would get hefty subsidies, even though many do not need the help."

Of course this is true, but public K-12 education is also free to rich and poor alike; and I don't hear anyone complaining. And to suggest that rich kids would pass up elite institutions like Harvard to get a free education at a local community college is absurd.

Second, Mr. Butler argues that community college "is usually a dead end." Here, Mr. Butler stands on firmer ground. It is true that only a small percentage of community-college students obtain two-year degrees; and very few transfer into four-year colleges  and eventually get bachelor's degrees.

Mr. Butler suggests that the federal government should "help states and school districts provide a fuller range of opportunities at the high school and college levels, such as professional credentials, apprenticeships and high-school career academies." Yes, of course; but President Obama's plan doesn't preclude other avenues for providing post-secondary education. In fact, I understood the President's free community-college proposal to incorporate more than just traditional academic programs.

Finally, Mr. Butler offers his flimsiest objection to President Obama's plan--that it might cause high-performing high-school students to "settle" for a free community-college education rather than apply to more elite institutions. Right--like a high school kid with a realistic chance of getting into the University of St. Andrews in Scotland, where Mr. Butler studied, would turn St. Andrews down to get free schooling at Alamo Community College in San Antonio.

So what does Mr. Butler suggest?  He wants bigger Pell Grants that could be used at any institution, presumably meaning the expensive elite colleges where the Brookings Institution's policy wonks went to school, as well as the for-profit colleges that are ripping off low-income young Americans.

And Mr. Butler also wants President Obama to give "more enthusiastic backing to new, low-cost competitors to traditional colleges and universities." Duh, Mr. Butler. Community colleges are low-cost competitors to traditional colleges and universities.

Mr. Butler finished his Brookings puff piece with a flourish. "President Obama would be much wiser," Mr. Butler concluded, "to use his political capital to spur competition and real cost reduction in higher education rather than subsidizing community college education."  Whatever that means.

In my view, President Obama articulated the germ of a good idea--two free years of postsecondary education at the nation's community colleges to anyone who is qualified to enroll.  Of course, the community colleges need to do a much better job of matriculating their students; and the transfer of students from two-year institutions to four-year institutions needs to be made surer and more smooth.

The president calculated that his plan to offer a free community-college education would only cost the federal government about $6 billion a year--about one fifth of what the federal student-aid program is currently pumping into the for-profit college industry. If the federal government would stop propping up the for-profits and support community colleges, the public would actually save money--a lot of money.

On the other hand, if President Obama wants to offer free community-college education as a new feature to our present rickety student-aid program, then his proposal is merely a diversion from the hard task of reform . Unfortunately, I think the president wants to add a $6 billion free community-college plan to an out-of-control federal student aid program that already costs more than $100 billion a year..

References

Stuart M. Butler. Obama's SOTU Free College Plan is Bad for Poor Americans. Brookings Institution, January 20, 2015. Accessible at: http://www.brookings.edu/research/opinions/2015/01/20-obama-free-community-college-bad-idea-sotu-butler

Susan Dynarski and Daniel Kreisman. Loans for Equal Opportunity: Making Borrowing Work for Today's Students. Hamilton Project, Brookings Institution, October 2013. Accessible at: http://www.brookings.edu/~/media/research/files/papers/2013/10/21%20student%20loans%20dynarski/thp_dynarskidiscpaper_final.pdf


  


Monday, January 26, 2015

More evidence that the New York Times is totally clueless about the Student-Loan Crisis

Today's New York Times contained a full-page advertisement  (on page A22) with this message: "What our reporters are reading can be just as insightful as what they're writing." The advertisement contains a large color photo of Times writer David Carr wearing those round, horn-rimmed spectacles that people wear in Woody Allen movies--spectacles that convey sensitivity and deep intelligence.

Of course, the Times ad is true: What Times reporters read can be insightful. The problem is that the Times reporters are not reading enough and they are reading the wrong things.

And here's a case in point.  On the front page of today's Times is an article about the economic downturn Alaska is experiencing as a result of the recent drop in oil prices.  The article's author, Kirk Johnson, reports that "historians and economists say" that Alaska's economic crisis is unprecedented "in modern times."

That is simply not accurate. I lived in Alaska in the mid-1980s when oil prices turned down. Alaska's economy went into a tail spin, with a huge number of property foreclosures and several bank failures. I recall standing on a street corner in downtown Anchorage and viewing three financial institutions with plastic sheeting spread across their names because they had collapsed and been closed by federal financial regulators.

So what is happening in Alaska right is not unprecedented in modern times; and if "historians and commentators" told Times reporter Johnson that, they are certainly incompetent.

But that Times inaccuracy is a small matter.  More important is a pollyannaish article in last Sunday's Times about the student debt crisis. Times reporter Kevin Carey wrote favorably and uncritically about federal legislation that allows students to extend their student-loan payments out over 25 years. Apparently, Carey took a positive perspective on this development  because long-term repayment programs will reduce student-loan borrowers' monthly payments to a more manageable level.

 Carey ended his article by remarking that the federal government will probably replace the states as  the "primary financier" of American higher education. "Given how much unnecessary financial hardship has been imposed on students," Carey wrote, "this is a welcome trend." And Carey ends on this wholly unwarranted optimistic note: "The sense of pervasive student loan anxiety that characterizes much of the contemporary higher education conversation could become a relic of an older time."

What baloney! Essentially Carey has portrayed the federal push to get college student-loan borrowers  to sign up for long-term repayment plans as an entirely wholesome development.  And that simply is not correct.

First of all, the prospect of former students taking 20 to 25 years to pay off their student loans should be unsettling to everyone in the American higher education community, no matter how reasonable borrowers' monthly payments are. Surely when Congress adopted the first student-loan legislation back in the 1960s, its members never dreamed that 25-year repayment plans might someday become the norm.

In essence, as I have said before, long-term income-based repayment plans are turning Americans into sharecroppers, paying a portion of their earnings to the government for the majority of their working lives for the privilege of attending college. Who could be happy about such a prospect?

Second, as currently structured, long-term repayment plans operate as a perverse incentive for colleges to keep raising their tuition. Why should colleges try to keep their costs down when students can simply borrow more money to pay for tuition hikes and then pay it back in modest monthly payments over 25 years?

Third, long-term repayment plans remove incentives on students to minimize their borrowing. What difference does it make to students whether they borrow $30,000 to attend college (the current average) or $50,000 when the amount of their monthly loan payments will be based on their income and not the amount they borrowed?

Why has the Obama administration's push for long-term repayment plans been received so favorably around the country? I will tell you why. The only voices that are heard concerning the student-loan crisis are the voices of the insiders: colleges and universities, intellectually bankrupt think tanks like the Brookings Institution,and higher education's shamelessly self-interested constituency organizations like the College Board and the American Council on Education.

The people who are being injured by the federal student loan program have no voice; they are suffering in silence while working at low-income service jobs and fending of the federal government's hired loan collection agencies--which are making tons of money chasing down student-loan defaulters.

The Brookings Institution, in one of its typically vapid policy papers, argued for having people's student-loan payments taken out of their pay checks so that they would simply become another income deduction, like health insurance and Social Security.

And friends, that day will some day come. And when that happens, it will be apparent to everyone that the federal student loan program, which was intended to help worthy young Americans get a college education regardless of their income status, has become a massive fraud perpetuated on the American people by the higher education industry and the federal government.

If we continue in the direction we are going--and we are actually accelerating our headlong drive toward catastrophe--American higher education will be destroyed. But our policy makers, our legislators, and our college and university presidents don't care. By the time this time bomb explodes--and explode it will--all the people who engineered this disaster will be retired, writing their memoirs and drinking bourbon beside the golf courses of their gated entry retirement communities. The fact that these empty-headed bozos destroyed our nation's once premier system of colleges and universities will bother them not at all.

References

Kevin Carey. Helping to Lift the Burden of Student Debt. New York Times, Sunday Business Section p. 1.

Kirk Johnson. As Oil Falls, Alaska's New Chief Faces a Novel Goa: Frugality. New York Times, January 26, p. 1.




Wednesday, June 18, 2014

If You Have a Student Loan, You Should Read Susan Dynarski's Proposal for Having Student Loan Payments Automatically Deducted From Debtors' Pay Checks

Susan Dynarski
If you took out a federal student loan to attend college, you should read Susan Dynarski's op ed essay in last Sunday's New York Times entitled "Finding Shock Absorbers for Student Debt."  Ms. Dynarski explains why two proposals for assisting overburdened student-loan debtors will not be very effective.  And she makes her own proposal for deducting borrowers' monthly student-loan payments directly from borrowers' pay checks.

Reducing Interest Rates on College Loans Won't Give Borrowers Much Relief

Recently, Senator Elizabeth Warren introduced legislation to significantly lower  interest rates on student loans, legislation that President Obama supported. Warren's bill would have covered the cost of lower interest rates by raising taxes on the wealthy. Not surprisingly, Republicans opposed the bill, and it did not get enough votes to move forward.

Ms. Dynarski points out that even a large cut to student-loan interest rates won't have much impact on individual students' monthly loan payments.  Borrowers with $30,000 in student loans (which is the average amount that college graduates owe when they finish their studies) would only see a $44 reduction in their monthly loan payments  if the interest rate on their loans was reduced from 6.5 percent to 3.5 percent--which  is a big reduction.

Thus the recent hype about Senator Elizabeth's failed attempt to pass legislation to reduce interest rate on student loans is a tempest in a teapot.  Even if Senator Warren's bill had bee adopted into law, it would not have given the mass of student-loan debtors much relief.

President Obama's Pay As You Earn Plan Is Too Cumbersome to Give Borrowers Much Relief

Dynarski also pointed out that the President Obama's Pay As You Earn program, whereby students make student-loan payments based on a percentage of their income, is so cumbersome that a high percentage of borrowers haven't applied for it even though they are behind on their loans or in default. One problem with Pay As You Earn is that the program does not respond quickly enough to borrowers who lose their jobs. A student-loan borrower's monthly loan payments are based on the borrower's previous year's income, so a borrower who is thrown out of work in mid-year would have to wait many months before seeing a reduction in the size of  monthly loan payments.

Dynarksi and the Brookings Institution Propose Automatic Student-Loan Payroll Deductions

Dynarksi proposes an automatic income-based loan repayment program, whereby employers would simply deduct the appropriate college-loan payment from borrowers' paychecks just like they make deductions for federal income tax, Social Security contributions and health insurance.  The borrower's monthly payment would fluctuate as income goes or up or down; and a borrower who is unemployed would pay nothing during the period of unemployment.

Dynarski's plan is a little more complicated than I've explained but not much.  The proposal is set out in detail in a paper released recently by the Brookings Institution, which recommended that an automatic income-based repayment program be the default option for students who take out federal student loans.

Dynarksi's automatic income-based loan repayment plan has many attractive features. First of all, if fully implemented, it would completely eliminate all student-loan defaults.  Any student-loan borrower who is employed would see a payroll deduction for student loans on every paycheck.

Second, an automatic paycheck deduction plan would virtually eliminate the need for loan collection agencies.  The IRS (or perhaps the Department of Education) would in essence by a giant federal student-loan collection agency.

Long-Term Automatic Payroll Deductions for College-Loan Borrowers Is a Sharecropper Plan

What's the downside?

As I've said before, income-based student-loan repayment plans  do nothing to stop the spiraling cost of higher education. Putting millions of students on income-based repayment plans might actually reduce the incentive for colleges an universities to get their costs under control.

Second, and far more ominously, in my opinion, putting students on long-term income-based repayment plans, whereby college-loan payments are automatically deducted from borrowers' paychecks over a period of 20 or 25 years, essentially transforms all young people who borrow money to attend college into a class of sharecroppers who fork over a percentage of their income over the majority of their working lives simply for the privilege of getting a college education.

And this is why I don't like the Dynarski/Brookings Institution proposal.  But my best guess is that something like what Dynarksi and the Brookings Institution have proposed will eventually become the default option for most people who pursue postsecondary education.


References

Susan Dynarski. Finding Shock Absorbers for Student Debt. New York Times, June 15, 2014, Sunday Review Section, p. 8.


Tuesday, October 22, 2013

The Brookings Institution Makes A Proposal for Student Loan Reform: Let's Turn College Graduates Into Sharecroppers

The Hamilton Project, a public policy initiative sponsored by the Brookings Institution, issued a report this month that offers some promising ideas for reforming the federal student loan program. At the same time, not all of the ideas are good.

The Hamilton Project Proposal in a Nutshell

In a nutshell, the Hamilton Project proposes a simple income-based repayment plan for student borrowers that will replace the hodgepodge of repayment options now in place. Students will make loan payments based on a percentage of their income for a maximum of 25 years. Any unpaid balance owing at the end of this 25 year period will be forgiven with no tax consequences for the debtor.

Loan payments would be paid through a payroll deduction similar to Social Security deductions and debtors would be free to make larger loan payments than the minimum if they want to pay off their loans early. The proposal calls for the government to manage the repayment program instead of contracting out this work to private loan servicers.

In addition, the Hamilton Project recommends the elimination of interest subsidies for low-income borrowers while they are in school. The authors point out that these subsidies do nothing to increase the number of low-income students who enroll for college since the subsidy doesn't really benefit them until they enter the loan-repayment phase.  In the authors' opinion, money spent on subsidizing interest rates should be directed toward grants.


Long-Term Student-Loan Repayment Plans Will Create a New Class of Sharecroppers
Sharecropper cabin, 1936
Photo by Carl Mydans


Finally, the Hamilton Project proposes important reforms for the private student-loan industry.  Most significantly, the Project recommends the repeal of a 2005 Bankruptcy Code provision that makes it almost impossible for borrowers to discharge private student loans in bankruptcy.  The Project recommends that private student loans be treated like any other unsecured debt in bankruptcy.

The Hamilton Project's Proposal Contains Some Good Ideas

I like some of the Hamilton Project's proposals.  First of all, I heartily endorse the Hamilton Project's proposal for providing better bankruptcy protection for people who took out private loans from the banks. Congress made a mistake when it amended the Bankruptcy Code in 2005 to make it almost impossible for debtors to discharge their private student loans in bankruptcy. As I have said before, repealing the 2005 provision would probably have the salutary effect of driving the banks out of the private student- loan business.

I also like the Hamilton Project's proposal for simplifying the process for student debtors to participate in an income-based repayment plan and for having the government handle loan repayments through payroll deductions rather than having private student-loan servicers manage the repayment process.  Some of the private loan servicers are harassing delinquent student-loan debtors, and I would like to see their operations shut down.

Flaws in the Hamilton Project's Proposal

But  the Hamilton Project's proposal has some flaws.  First and most importantly, the plan calls for student-loan repayment obligations to stretch out for as long as a quarter of a century. In essence then, student-loan debtors will become sharecroppers for the government, paying a portion of their wages over most of their working lives in return for the privilege of going to college. I am opposed to lengthy income-based repayment plans as a matter of principle.

And, as I have said before, income-based repayment plans reduce students' incentives to borrow as little as possible and they reduce the colleges' incentives to keep their costs down.

The Hamilton Proposal is Based on a False Assumption

The Hamilton Proposal is based on the premise that most students don't borrow that much money, and thus they should have no trouble paying off their loans under an income-based repayment plan in just a few years. It points out that almost 70 percent of student-loan debtors borrow less than $10,000.

But as the Hamilton Project acknowledged in footnote 7 of its report, by the time people go into default, they owe considerably more than they borrowed due to penalties and accruing interest. If interest rates accrue for low-income borrowers while they are in school or if low-income borrowers' income-based payments are too low to cover accruing interest, then the amount of their debt will become larger--probably much larger--than they originally borrowed.

Conclusion: Some of the Hamilton Project's Proposals Have Promise, But We Should Avoid Putting Student Loan Debtors in Long-Term Repayment Plans

Some of he Hamilton Project's proposals have promise.  Restoring bankruptcy protection for private student-loan borrowers and eliminating the private student-loan repayment servicers are good ideas.

But the people who have been hurt the most by the federal student loan program are young people who attended for-profit colleges. As the Hamilton Project pointed out, people under 21 years of age have the highest loan default rates of any age group, and we know from many sources that people who attended for-profit colleges have the highest student-loan default rates.

The Hamilton Project's proposal is likely to put a lot of young, low-income people into long-term repayment plans they will never pay off.  And many of these long-term debtors--perhaps most of them-will be people who attended expensive for-profit colleges.

We simply must shut down the for-profit colleges.  Otherwise, the Hamilton Project's proposal for putting student-loan debtors in 25-year repayment plans will likely created a 21st century version of indentured servants--people who attended for-profit colleges that were too expensive and who will spend the majority of their working lives paying for college experiences that did not enable them to earn a salary large enough to quickly pay off their student loans.

References

Susan Dynarski and Daniel Kreisman. Loans for Equal Opportunity: Making Borrowing Work for Today's Students. Hamilton Project, Brookings Institution, October 2013. Accessible at: http://www.brookings.edu/~/media/research/files/papers/2013/10/21%20student%20loans%20dynarski/thp_dynarskidiscpaper_final.pdf