Hillary Clinton proposes a three-month moratorium on student-loan payments and massive loan refinancing: A good idea, but difficult to implement

According to the Washington Post, Hillary Clinton has proposed a three-month moratorium on student-loan payments to allow borrowers time to restructure their student loans at lower interest rates.

Let me say flat out that this is a good idea. As the press has widely reported, about 40 percent of college-loan borrowers who are in the repayment phase of their loans aren't making payments. These people are seeing their loan balances go up as interest accrues on unpaid debt, and they desperately need repayment options they can afford.

In addition, millions of people who are making their loan payments would benefit from repayment plans that would lower monthly payments and take advantage of lower interest rates.

Hillary's proposal underscores this stark fact: The federal student-loan program is in chaos. There are currently eight income-based repayment plans, and even experts are confused about how the different options work and which students are eligible for the various repayment plans. Giving students a three-month hiatus to sort all this out is an excellent idea.

But why is Hillary making this proposal now? Was she prompted by pure politics--making a play for young people's votes? Is her proposal an attempt to win over Bernie Sanders' supporters?

Obviously, Hillary's proposal was driven by political consideration. But I think there is something more going on--namely panic. I think Hillary and the Democratic establishment finally realize that millions of Americans are overwhelmed by unmanageable student-loan debt. These distressed debtors are frustrated, demoralized and angry; and they won't vote for Hillary unless they think she will provide them with tangible relief if she is elected President.

In short, the Democrats see blood in the water; they know they must do something substantive to keep young voters in the Democratic column in the November election.   And even Hillary's fiercest critics must admit that her massive student-loan refinancing proposal is substantive and significant.

Nevertheless, I don't see how Hillary's plan can be effectively implemented. The federal student loan program is like a massive battleship plunging across a raging ocean at full speed--it can't be turned around quickly.  Here are some of the problems:

First, simply determining who is eligible for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have outstanding student loans, and most of them are in the repayment phase.  Just figuring out who is eligible to stop making loan payments and who is not will be an enormous headache.

For example, a lot of borrowers took out private student loans that aren't part of the federal student loan program.  Of course, private loans won't be covered by Hillary's moratorium. But research has shown that many borrowers don't know whether their loans are federal or private, and some have both kinds of loans. If Hillary implements a moratorium, a good many borrowers will stop making payments on their private loans, which will get them in trouble with their lenders.

And 5 million borrowers are already in income-based repayment plans under very favorable terms. Can these people stop making payments for three months? If not, who is going to notify them that they are not eligible to participate in the moratorium?

Second, the Department of Education may not have the capacity to meet the bureaucratic challenge of refinancing millions of loans over a three-month period. There are 43 million people with outstanding student loans, but many borrowers signed multiple promissory notes--perhaps a dozen or more. And some of these documents date back 20, 25, and even 30 years.  

Refinancing all these loans will be a gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I seriously doubt whether DOE or the various creditors have the resources to refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy. 

Third, once college borrowers are given license to stop making payments for a brief period, it will be very difficult to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's decision to accept refugees from the Middle East. Once the stream of migrants began moving, the Europeans found themselves unable to handle the volume of refugees that crossed into the EU. And there was no effective way to regulate the flow.

Likewise, Hillary's proposal to allow millions of college borrowers to stop making loan payments while they refinance their student loans will create a massive upheaval in the federal student loan program. If her plan goes forward, I think we will see millions of people stop making loan payments, whether or not they are eligible for Hillary's moratorium. 

Finally, Hillary's student-loan refinancing plan may be nothing more than a way to shove borrowers into 20- and 25-year repayment plans.  The Obama administration has been aggressively pushing college borrowers into long-term income-based repayment plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of 2017.

Hillary's pan will accelerate the movement of student borrowers into long-term repayment plans.  If it is implemented, we will surely see 10 million people or more in IBRPs, which will effectively make them indentured servants to Uncle Sam, paying a percentage of their income to the government for a majority of their working lives just for the privilege of going to college.

As I have said repeatedly, IBRPs are a bad idea and nothing more than a way to keep a lid on the student-loan crisis. It would be very disappointing if Hillary implemented a student-loan refinancing plan that has the primary effect of lengthening the loan repayment period for millions of Americans.

Conclusion: In spite of its drawbacks, Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to Hillary's refinancing idea, I hope she goes forward with it if she becomes President. Almost anything is better than the present state of affairs.  Lowering interest rates will give millions of borrowers some relief from their debt. And even if her plan forces more borrowers into IBRPs, that option is better than having them continue to shoulder monthly payments that are so large as to be unmanageable.

Besides, Hillary's scheme, if implemented, will expose the utter chaos of the federal student loan program, which the federal government has hidden from the American people. Once the public realizes how many millions of people are suffering from their participation in the federal student loan program, maybe we will see real reform--which is nothing more and nothing less than reasonable access to the bankruptcy courts. 

References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/

Henry Fernandez of Fox Business News says 40% of students aren't paying back their student loans. Is Fernandez correct? Does it matter?

Henry Fernandez of Fox Business News published a story last week reporting that 40 percent of college borrowers aren't paying back their student loans.  Here's what he said:

There's new concern over student loans as more than 40% of people who borrow from the government are not making their payments. That's nine million of the 22 million people with student loans who may never be able to pay their loans.

Is Hernandez correct?

Is Hernandez's analysis correct? And if so, does it matter?

Although the Fernandez did not cite a source for  his 40 percent statement, I think he's right. Looking at data from multiple sources, here's how I get to a 40 percent nonpayment rate.

First of all, 43 million people have outstanding student loans. As the New York Times accurately observed last year, 10 million student borrowers have either defaulted on their loans or are delinquent.  It is true that some people with delinquent loans will eventually bring their loans current, but a lot of them won't because unpaid interest will accrue during the delinquency period, making the loans grow larger and more difficult to repay.  Theoretically, defaulters can also bring their loans current, but the penalties assessed against defaulting borrowers are unbelievably onerous; and once defaulters have penalties attached to their loan balances they are doomed.

Then we have 4.6 million people who have entered income-based repayment plans (IBRPs) that extend loan repayment periods out to 20 or even 25 years. Most of these borrowers are making payments so low that interest will continue to accrue, which means a very high percentage of borrowers in IBRPs will never pay off their loan principal.  And this number grew by 140 percent in just due two years! I think it is safe to predict that within a year, at least 5 million people will be in IBRPs of some sort. So let's add 5 million to the 10 million people whose loans are delinquent or in default.

Finally, there are about 9 million people who are in economic-hardship deferment programs or loan forbearance programs of some kind that excuse them from making loan payments.  Again, interest is accruing on these loans.

When we consider this data together, we can understand why more than half of college-loan borrowers are seeing their loan balances go up within two years of beginning the repayment stage (as reported by the Brookings Institution). This is a clear sign that a lot of borrowers are either not making any payments or are making payments so low that they are not paying down their loan balances.

Based on the analysis I just outlined, it is clear that Mr. Hernandez is right and that at least 40 percent of student borrowers are not repaying their loans, and most never will.

Does it matter?

From the perspective of society as a whole, does it matter whether students pay back their college loans? Yes it does. Steve Hayward, a professor at Pepperdine University, who was interviewed for Fernandez's story, said that colleges are delivering an inferior product, "and I think there is a bubble coming." In fact, Hayward went further and said if colleges were publicly traded, he would short them.

Hayward has it right.  Let's look at Apollo Education Group, the owner of the University of Phoenix. Apollo once traded at $80 a share and now trades for about $8.  If you had shorted Apollo, you would have made some money.

Basically, I think what Hayward was suggesting is this: The government cannot go on forever loaning billions of dollars a year to college students when a high percentage of college borrowers are receiving inferior educational experiences and aren't paying back their loans.

In fact, higher education is in a bubble right now. Hundreds of private liberal arts colleges and for-profit colleges are struggling to survive and could not survive 30 days without federal student aid money. They are like drug addicts who must have federal dollars flooding into their coffers just to survive from month to month.

But the government cannot keep loaning more than $150 billion a year in student-loan money if 40 percent of the borrowers don't pay back their loans.

The Obama administration and the entire bloated college industry are relying on a single strategy to keep the gravy train rolling: long-term income-based repayment plans.  If they can force the kiddies into 20-year or 25-year repayment plans with lower monthly payments than the standard 10-year repayment period, they think the party will go on forever and the bubble will never burst.

But the party won't go on forever, and the bubble is about to burst. Within five years, we will see dozens of colleges close their doors because more and more students will simply refuse to pay outrageous tuition prices for degree programs that don't lead to good jobs. And we will see nonpayment rates go higher than they are now, and they already pretty damn high.

In fact, the student-loan bubble is already causing more suffering than the home-mortgage bubble. According to the text at the end of the movie The Big Short, about six million people lost their homes during the home-mortgage crisis of 2008  But those people could file for bankruptcy and get a fresh start. More than 20 million people are burdened by unmanageable student-loan debt, and most of them cannot get relief in the bankruptcy courts..

References

Henry Fernandez. 40% of Students Aren't Paying Back the Government. Foxbusiness.com, April 8, 2016. Accessible at http://www.foxbusiness.com/features/2016/04/08/40-students-arent-paying-back-government.html

Catharine Hill, president of Vassar College, shovels horse manure in the New York Times about rising college costs

Catharine Hill dumped a load of horse manure on the op ed pages of the New York Times today, which is a good place to put it. In an essay expressing opposition to free college tuition, she made three bogus points:

1) College costs have gone up because state governments provide less funding to higher education than they once did.
2) Although the cost of going to college has gotten more expensive, it is still a good investment because college graduates make more on average than people who don't have college degrees.
3) The way to address the rising tide of student-loan indebtedness is better counseling and long-term repayment plans.

Let's look at Hill's three points.

First, declining state support for higher education has little to do with Vassar, which is a private institution. It costs a quarter million dollars to attend Vassar for four years, and that cost can't be explained by declining financial support from state governments.

Second, yes it is true that people who graduate from college earn more money on average than people who don't. But that doesn't justify skyrocketing college costs. Many college graduates attended relatively inexpensive state colleges. For those people, their increased earning potential justified the expense of going to college. But people who get liberal arts degrees from elite private colleges like Vassar often take on unmanageable student-loan debt. Many of them would have been better off going to an institution like Sam Houston State University in Huntsville, Texas, than borrowing money to listen to postmodern screeching by Vassar professors.

Finally, Hill's suggestion for handling the student-loan crisis is pure horse manure, and it isn't even fresh.  Hill recommends"better counseling," longer repayment periods and income-based repayment plans as the way to help students manage their crushing student-debt loads. Of course,this is exactly what the Obama administration is saying, along with higher education's professional organizations and sycophantic policy think tanks like the Brookings Institution.

Come on, Catharine. Come clean. Why don't you tell us the real reason you are opposed to free college tuition? You are opposed to it because the feds can't possibly provide free tuition for students to attend overpriced joints like Vassar. And a comprehensive  federal program offering free tuition would mean less money for elite colleges. You would prefer the status quo, whereby the exclusive colleges get the benefit of Pell grants and federal student loans--federal money you cannot operate without.

In fact, you reveal your true motivations in the last few paragraphs of your essay. "Without federal loan programs, many students could attend only schools that their families could afford from their current income or savings."  That's right, Catharine. You want students to attend colleges they can't afford. Otherwise, they might have to enroll at the University of Connecticut or Florida State. The horror! The horror!

Frankly, I would have expected more from Catharine Hill. After all she is an economist. Surely she knows that most of the people who sign up for 25-year repayment plans will never pay off their student-loan balances because their income-based loan payments won't be large enough to cover accruing interest. Surely she understands that making people pay for their college education over a majority of their working lives does not make economic sense.

But Catharine doesn't care. She just wants to keep the federal money rolling in so that places like Vassar, Yale, and Dartmouth can pay the professors and administrators more than they are worth to teach arrogant students who think they are smarter than the faculty and are probably correct.

And once a year, these condescending institutions have a dress-up day when the faculty wear medieval clothing and hand out bits of paper they insist on calling diplomas to the dunderheads who went hopelessly into debt for the privilege of wearing a t-shirt emblazoned with the name of some fancy college like Vassar.

Horse manure from Catharine Hill, president of Vassar

References

Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23. Accessible at: http://www.nytimes.com/2015/11/30/opinion/free-tuition-is-not-the-answer.html?_r=0

Income-Based Repayment Plans are a fraud on college students: Reflections on Paul Campos' analysis of IBRs

Don't Go To Law School (Unless), Paul Campos' excellent book on the economics of legal education, was published in 2012, and I am embarrassed to say I did not read it until this week. Campos delivered a devastating critique of American law schools, which have charged insanely high tuition for turning out more lawyers than the nation needs. No one should make a decision to go to law school without reading Campos' book, along with the recent report on law-school admissions standards put out by the public interest group Law School Transparency.

Even people who don't plan to go to law school should read Campos' book, because his indictment of legal education also applies to higher education in general. All over the United States, colleges have jacked up their tuition, forcing their students to borrow more and more money. It is now apparent that millions of students are saddled with unmanageable student-loan debt.

To keep the gravy train rolling, higher education's insiders now back long-term income-based repayment plans (IBRs) that lower borrowers' monthly loan payments but extend the repayment time to as long as 25 years. Policy think tanks like the Brookings Institution, the Obama administration, and the New York Times have all backed IBRs.

Let's look at what Paul Campos had to say about IBRs in Don't Go To Law School (Unless).  (Campos also criticizes public service loan forgiveness plans (PSLFs), but I will not comment on PSLFs in this essay).

"The truth is," Campos wrote, "that people who are likely to end up in IBR . . . if they go to law school should not go at all" (48).  People who participate in these long-term repayment plans will generally be making payments so low that they don't cover accumulated interest, which means that many debtors will never pay off their loans. Moreover, Campos notes, under current IRS regulations, any debt that is forgiven at the end of a long-term repayment plan is considered taxable income.

Campos trenchantly pointed out that IBRs are simply a way to prop up the law schools' broken business model:

When law schools push the supposed benefits of IBR . . . to prospective students, what they're really doing is advertising that they're operating under a business model that doesn't work unless it is subsidized heavily at both ends by the American taxpayer. Law school is subsidized on the front end by federal educational loans, which allow students to borrow money they won't be able to pay back, and by IBR  . . on the back end, which allows graduates to have the "privilege" of being in debt servitude to the U.S. government for ten or, more likely, twenty-five years, with the added bonus of being hit by a huge tax bill at the end of it all. (51)

Indeed, Camps suggests that law schools that push the benefits of IBRs are engaging in unethical behavior. "Given that the American taxpayer will be left holding the bag for all the unpaid debt accrued by law graduates in these programs, there's a good argument to be made that law schools who promote IBR are participating in a fraud on the public" (50) (my emphasis).

Every criticism Campos raised about IBRs as a means of financing legal education applies to higher education in general. Twenty-five year repayment plans (or even the less onerous 20-year repayment plan developed by the Obama administration) force students to pay a percentage of their income to the federal government for the majority of their working lives.

These long-term repayment plans demonstrate the intellectual vacuity of our higher education community. In their desperate effort to maintain the status quo, colleges and universities are throwing their students under the bus.  Rather than change their business model, they raise their tuition rates every year and soothingly assure their students not to worry---they will have 25 years instead of 10 to pay off their student loans.

American universities are using IBRs to throw their students under the bus.

References

Paul Campos. Don't Go To Law School (Unless) (published by the author, 2012).

23 million people are being "eaten alive" by Federal Student Loan Program: Even the New York Times is Getting Worried

Today, the New York Times editorialized once again on the student loan crisis. The Times criticized the student-loan servicing companies for doing a poor job of counseling distressed student-loan debtors. As a result of poor guidance, the Times charged, many debtors don't know that they are eligible for income-based repayment plans that could lower their monthly loan payments.

Writing in response to a recent report by the Consumer Financial Protection Bureau, the Times said this:

The Bureau's report--drawn from 30,000 public comments filed with the agency from May to July--suggests that some [student-loan] servicers are actually pushing struggling borrowers toward default by giving them misinformation, by making it difficult for them to refinance at lower interest rates and by withholding valuable information about affordable payment plans that are in the struggling borrower's best interest.

The Times is right to say that the government's loan processors are doing a crummy job of counseling student-loan debtors. Nevertheless, it fails to grasp the fact that income-based repayment plans--which the Obama administration and the Times both favor--are not a solution to the student-loan crisis.

These plans can last as long as 25 years, and most people who select this option will be making payments so small that their loan balances will actually go up because loan payments are not large enough to cover accruing interest. In fact, the Times editorial acknowledged this fact.

As the Times pointed out, 10 million people have either defaulted on their student loans or are in delinquency. But this figure understates the size of the crisis. In addition to the 10 million cited by the Times, 3.9 million are in income-based repayment plans, and another 9 million people are not paying down their loans because they obtained deferments or forbearances that excuse them from making loan payments.

In short, 23 million people are weighed down by student loans they can't pay back.

The Times said the Feds have come up with a plan "that they believe will prevent borrowers from being eaten alive."  But what is that plan? Basically, the federal government wants the loan servicers to make stronger pitches for long-term income-based repayment options.

This is a cowardly response to the student-loan crisis. The Times and the Feds think this enormous problem can be swept under the rug by enticing millions of people to make student-loan payments over 20 or 25 years instead of 10.

But that won't work. The Department of Education admitted a few months ago that more than half of the people who are enrolled in income-based repayment plans failed to file their annual income statements,which is a condition of participation.  People simply don't want to report their income to the Department of Education on an annual basis in return for the privilege of paying on their student loans for a majority of their working lives.

Department of Education insiders know that the federal student-loan program is heading toward disaster, but they are not trying to fix it. They are simply hoping to postpone the crisis until after the next presidential election.

Hey, is that Arne Duncan?

References

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26.

By the thousands, student-loan borrowers are dropping out of income-based repayment plans

Thousands of student-loan borrowers are dropping out of income-based repayment plans, the U.S. Department of Education admitted recently. As reported by the Chronicle of Higher Education, almost 700,000 borrowers dropped out of the plans during the course of  just one year--57 percent of the total number of people who signed up for them.

Why did they drop out? DOE says they lost eligibility because they didn't file their annual income documentation--data the government needs to set borrowers' individual monthly payments.

What happened to those dropouts?  DOE says some of them signed up for economic-hardship deferments, some went back into standard 10-year repayment plans, and some slipped into delinquency.

This must be an astonishing turn of events for the Obama administration, which has aggressively promoted income-based repayment plans as a way to keep student-loan default rates down and give student borrowers some relief from high monthly loan payments. Most people who make monthly payments based on their income have lower payments than people who pay off their loans under the federal government's standard 10-year repayment plan.

There's a catch of course. Income-based repayment plans stretch borrowers' monthly payments out over 20 or even 25 years. Moreover, if borrowers' monthly payments are set too low, the payments will  not cover accruing interest, in which case student-loan debtors will see their loan balances go up rather than down, even if they faithfully make all their monthly payments.

Nevertheless, for student-loan borrowers who are unemployed. marginally employed, or simply borrowed too much money, income-based repayment plans are a lifeline because they can dramatically lower the amount of a student-loan borrower's monthly payments.

So what is the Obama administration doing to turn this situation around? According to the Chronicle,  the Department of Education will soon take over the process of notifying borrowers of their annual income-reporting obligations.  DOE is even consulting with "social and behavioral scientists" in order to craft more effective notices. Lots of luck, guys.

Personally, I was astonished to learn that so many people are falling out of income-based repayment plans--the most generous student-loan repayment programs that the federal government offers.. This development is simply another indication that the federal student-loan program is out of control.

Let's review the evidence one more time:

• The two-year student-loan default rate (the percentage of students from the most recent cohort who default on their loans within two years of beginning repayment) doubled in just seven years, according to DOE's own data. In 2007, DOE reported a two-year default rate of 4.7 percent. In 2013, the two-year default rate was 10 percent.

• Almost 9 million people in the repayment phase of their loans have economic-hardship deferments and are not making payments on their student loans. Meanwhile, their loan balances are increasing due to accruing interest.

• About 1.5 million people have signed up for income-based repayment plans, but more than half of them have already dropped out due to the fact that they didn't file their obligatory annual income reports.

We can tinker with the student-loan program in many ways as the Department of Education and the policy tanks are now doing. But the fact remains that millions of student-loan debtors are under water financially and have basically dropped out of the economy. This reality is illustrated by the fact that more that half of the people in the generous income-based repayment programs are not bothering to file their annual income reports.

The only way out of this morass is to admit how bad the crisis is, which will require DOE to tell the truth about the student-loan default rate. Then we need to crack down on higher-education institutions that are exploiting college students. Finally, we must open up the bankruptcy process to allow honest but unfortunate student-loan debtors to discharge their student loans in bankruptcy.

Bleep it, Dude. Let's go bowling. 

References

Robert Cloud & Richard Fossey, Facing the Student-Debt Crisis: Restoring the Integrity of the Federal Student Loan Program. Journal of College & University Law, 40, 467-498.

Kelly Field. Thousands Fall Out of Income-Based Repayment Plans. Chronicle of Higher Education, April 2, 2015.

The Department of Education Dishes Out More Baloney About Student Loan Default Rates

During World War I, it was said the British Army kept three different casualty lists: one list to deceive the public, a second list to deceive the  War Office, and a third list to deceive itself.

Something like that is going on with the Department of Education's latest report on student-loan default rates. According to DOE's latest report, which was released today,the three-year default rate actually dropped a full percentage point from 14.7 percent to 13.7 percent.

However, as Inside Higher Ed reported, DOE tweaked this year's report, adjusting rates for some institutions that were on the verge of losing their student aid due to high default rates. Students at these institutions were not counted as defaulters if they defaulted on one loan but had not defaulted on another. According to Inside Higher Ed, the adjustment will be applied retroactively to college's three-year default rates for the past two years.

Thus, as a Chronicle of Higher Education article noted,  it's "unclear whether [the adjustments for certain schools] or other factors affected the reported percentages."

The bottom line is this: As of today, we don't know whether student-loan default rates really went down or whether DOE's "adjustments" account for the decline.

Arne is full of it!

But it really doesn't matter.  As everyone in the higher education community knows, many colleges with high default rates have hired  "default management" firms to contact former students who are in danger of default and urge them to apply for economic hardship deferments.  Borrowers who get these deferments--and they are ridiculously easy to get--don't pay on their student loans but they aren't counted as defaulters.

Moreover, Arne Duncan's Department of Education has been pushing students to sign up for income-based repayment plans (IBRPs) that will lower students' monthly payments but will extend their repayment period from 10 years to 20 or even 25 years.  As I've said before, many people who obtained IBRPs are making monthly payments so small that the payments do not cover accruing interest. Thus, these people are actually seeing their loan balances get larger even though they are making payments and aren't counted as defaulters.

In short, we don't know what the true student-loan default rate is if it is defined as people who are not paying down their loan balances. But it is a lot higher than the 13.7 percent rate that DOE reported today.

Why is DOE tinkering with the numbers? One reason may be the high student-loan default rates among the HBCUs.  Last year, 14 HBCUs had three-year default rates of 30 percent--high enough to jeopardize their participation in the federal student loan program. This year, Arne Duncan announced that no HBCUs had default rates that would put them at risk of losing federal aid money.

Abrakadabra!  Arne Duncan tinkers a little with definitions and the student-loan default crisis is solved.

As Robert Cloud and I have argued in a forthcoming law review article, one of the three most important things that needs to be done to solve the student-loan crisis is to accurately report the true default rate.  And these are the other two things we must do: 1) provide easier access to bankruptcy for overburdened student-loan debtors, and 2) implement stronger regulations for the for-profit college industry.

But these things are not being done, and the student-loan crisis grows worse with each passing day. Like the British Army during the First World War, DOE doesn't want to know what the true student-loan default rate is and it doesn't want anyone else to know either.

References

Stratford, Michael. Education Dept. tweaks default rate to help colleges avoid penalties. Inside Higher Education, September 24, 2014.

Thomason, Andy. Student-Loan Defaults Decline in Latest Data, Education Dept. Says. Chronicle of Higher Education, September 24, 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.

Obama advances a good idea: Tax exemptions for student-loan borrowers whose student loans are forgiven

President Obama has proposed legislation that will give tax exemptions to student-loan borrowers who complete income-based repayment programs and whose loan balances are forgiven at the end of the repayment period. This is a good idea.

As is well known, the Obama administration is encouraging more student-loan borrowers to switch from standard 10-year repayment plans to income-based repayment plans (IBRPs)  that will stretch the repayment period out to 20 or 25 years. The advantage of these plans is that monthly loan payments are based on a percentage of the borrowers' income, which means most monthly payments will go down. People who are unemployed will not be required to make any monthly payments.


All well and good except that student-loan balances will actually grow for borrowers who are not making loan payments or are making payments that are not large enough to cover accruing interest on their loans.  Thus, many student-loan borrowers who elect IBRPs will find they still have a loan balance at the end of their 20- to 25-year repayment periods.

The New York Times carried a story recently that illustrates this point. A woman who borrowed around $300,000 to attend veterinary school obtained a job in her field but the job did not pay enough to allow her to pay off her loan in 10 years and still maintain a reasonable standard of living.   The veterinarian elected a long-term repayment plan, which lowered her monthly payments to a percentage of her income; but these payments did not cover accruing interest on her loans. The New York Times, figuring her likely income trajectory, estimated she would owe a total of  $600,000 on her student loans at the end of her 25-year repayment period--double the amount she originally borrowed!

Under the terms of the veterinarian's IBRP, the federal government will forgive this loan --all $600,000 of it; but under current IRS regulations, the forgiven amount is taxable income to her.  Thus, at the end of her 25-year repayment period, she faces a sizable tax bill.

President Obama's proposal would exempt her from this tax, which is a good thing.

Nevertheless, I don't agree with the Obama administration's push to get more student-loan borrowers to sign up for IBRPs. Nor do I agree with proposals to make long-term income-based repayment plans the default option for students who borrow money to attend college, which several commentators have suggested.

Look where we are headed--toward a higher education landscape in which millions of people will be paying on their student loans for the majority of their working lives.  And for many of these people, their loan payments will not be large enough to cover the accumulating interest, which means the federal government will be forgiving massive amounts of student-loan indebtedness.

And of course IBRPS do nothing to reign in the ever-growing cost of attending college.

Forcing people to pay a portion of their income to the government for a quarter of a century is imposing too high a price for the privilege of attending college. As I have said before, we need to allow distressed student-loan debtors reasonable access to bankruptcy.

References

Michael Stratford. Tax Breaks for Students. Inside Higher Education, March 4, 2014. Available at: http://www.insidehighered.com/news/2014/03/04/obama-budget-calls-changes-education-tax-benefits

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

President Obama's "Pay as You Earn" program to stretch out student loan repayment over 20 Years: Scarlett O'Hara would approve

 I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.

Scarlett O'Hara, Gone With the Wind

President Obama has shown a commendable concern about the rising cost of attending college and the rising student-loan default rate.  Unfortunately, the President's proposed solutions don't go to the root of the problem.

Yesterday's New York Times reported that the U.S. Department of Education is going to contact student-loan debtors who are in danger of default and urge them to consider a variety of repayment options--including "Pay as You Earn."

DOE's "Pay as You Earn" program allows student-loan borrowers to make loan payments based on a percentage of their income over a period of 20 years. At the end of the repayment period, the remaining balance on the loan will be forgiven.

Scarlett O'Hara would approve. As she famously said in Gone With the Wind, "I won't think about that right now. . . I'll think about that tomorrow." Pay as You Earn simply "kicks the can down the

I'll think about student loans tomorrow

road," so to speak, postponing the day when the government must face the fact that the federal student loan program is a disaster.

Education Secretary Arne Duncan thinks extended repayment programs will help prevent student-loan defaults, and he may be right. Admittedly, allowing student-loan debtors to make income-based payments over 20 years instead of fixed payments over 10 years will allow borrowers to make smaller monthly loan payments. But here are the problems with the program.

Most Pay as You Earn debtors will never pay off the principal of their loans. By design, the program allows people to make loan payments based solely on their income, and for many debtors--probably most of them--those payments will not be enough to pay down the principal of their promissory notes.  Under the plan, people who are unemployed or who have very low incomes may pay nothing on their loans for several years. Meanwhile interest will continue to accrue, making their debts grow larger.

Right now, 1.6 million student-loan debtors are participating in some kind of income-based repayment plan. I think it is safe to predict that at least a million of those people will still owe on their loans when their 20-year or 25-year repayment plan comes to an end.

In essence, Pay as You Earn debtors are indentured servants to the government. Second, requiring people  who attended college to pay a portion of their income for 20 or 25 years turns those people into 21st century indentured servants. They will be sending a portion of their income to the federal government for a majority of their working lives. Who thinks that is a good idea?

Income-Based Repayment Plans eliminate people's incentive to borrow as little money as possible to attend college.  Obviously, if students' college-loan payments are going to be based on a percentage of income regardless of the amount borrowed, then it makes sense for students to borrow as much money as possible.

Not only will the program eliminate the incentive to minimize student borrowing, it will also reduce the incentive for colleges to keep their costs down.  Who cares how much college costs, if student-loan payments are going to be based solely on an ex-student's income?

Pay as You Earn  will likely  increase red tape and bureaucracy.  Pay as You Earn and other federal income-based repayment programs will likely create a giant bureaucracy that will require the
government to adjust people's loan payments on an annual basis based on changes in income, periods of unemployment, and other factors.

The federal student loan program is already nearly incomprehensible to many student-loan debtors. I fear this program will balloon into the educational equivalent of Obamacare and Social Security and will require mountains of paperwork and bureaucratic red tape to administer.  Is this the future we want for our college graduates?

Conclusion: It's time to face the music.   It is time for the Obama administration, government policy makers and the nation's universities to face the music.  The federal student loan program is a catastrophe.  Like a drug addict, our universities have become hooked on federal student-loan money, which they rely on to survive. Thus, we cannot eliminate the program overnight; or our loan-dependent universities will go into toxic shock.

But we can gradually begin dialing this program down.  First, let's kick the for-profits out of the federal student loan program. That would shrink the cost of the program by about 25 percent and reduce the number of loan defaulters dramatically.  Of course, most for-profit colleges would be forced to close. But that's OK; the United States can get along just fine without the University of Phoenix.

Second, as I've said repeatedly, we have to allow truly distressed student-loan debtors to discharge their loans in  bankruptcy, so they can get a fresh economic start.

Third, we need to encourage more low-cost community colleges to do what some have already done--get out of the student loan program altogether. Wouldn't it be a good thing to offer low-income students low-cost options for attending college--options that would not require them to assume crushing debt just to get an education?

But so far, the higher education industry and the federal government want to prop up the status quo.
No one wants to confront the enormity of the problems that were created by the federal student loan program.  Like Scarlett O'Hara, we've decided not to think about that right now.  We'll think about that tomorrow.

References

Tamar Lewin. U.S. to Contact Borrowers With New Options for Repaying Student Loans. New York Times, September 25, 2013, p. A20.