Showing posts with label PAYE. Show all posts
Showing posts with label PAYE. Show all posts

Wednesday, June 15, 2016

PAYE and REPAYE: Long-term student loan repayment plans are a bad option for older student-loan debtors

You can be young without money, but you can't be old without it.

Tennessee Williams

President Obama's Department of Education is pushing distressed student-loan debtors into long-term income-based repayment plans. Five million people are in them now, and DOE hopes to enroll two million more by the end of next year.  Without a doubt, DOE will reach this goal. In fact, I predict at least 10 million people will be enrolled in long-term repayment plans within four years.

To advance this goal, the Obama administration launched two new income-based repayment programs: PAYE and REPAYE. These are the most generous of the government's eight income-based repayment plans. PAYE and REPAYE allow debtors to make payments equal to ten percent of their adjusted gross income for 20 years. At the end of that time, any unpaid debt is forgiven, although debtors may be forced to pay federal income tax on the forgiven portion of their loans.

As I have argued repeatedly, long-term income-based repayment plans are nothing more than a cynical scheme to hide the magnitude of the student-loan crisis.  By lowering monthly payments, the Feds hope to keep the student-loan default rate down even though most people in these programs are making payments so low that they will never pay off their student loans.

Nevertheless, I understand why debtors are signing up for these plans. If they've had their loans in deferment for any considerable length of time, their loan balances will have ballooned to double the amount they borrowed or more because of accrued interest. Once that happens, they will never be able to pay off their student loans over the conventional 10--year repayment term.  In short, people with large loan balances and low-paying jobs have no choice--they are forced to enter 20- or 25-year repayment plans in order to avoid default.  

But long-term repayment plans are a terrible option for older student-loan debtors. People in their forties, fifties and sixties need to maximize their retirement savings in order to be able to retire with dignity; and most of them of them can't do that if they are making student-loan payments equal to  10 or 15 percent of their annual income.

In fact, the evidence is mounting that the baby boomer generation is not ready for retirement; and millions are facing dire poverty if they lose their jobs. A recent article in the Star Tribune reported that two thirds of households in the 55-64 age group have savings that equal less than their annual income and one third have no savings at all.

According to the National Institute on Retirement Security, the median retirement account savings among households in the 55-64 age range is only $14,500! Due to the recent recession and stagnant wages, millions of Americans have been forced to cash out their retirement accounts just to meet daily living expenses. More than 40 percent of Americans have elected to take Social Security benefits early in recent years because they need the cash, even though early participation reduces annual benefits by 25 percent.

Obviously, the last thing financially strapped Americans need as they grow older is a 20-year obligation to contribute a percentage of their income to pay off student loans.  Although long-term repayment plans can be defended for people who enroll in them when they are young, they are a disaster for people who sign up for PAYE or REPAYE or the six other income-based repayment plans when they are in their forties or even older.

But the government  and the student-loan creditors insist on pushing student-loan debtors into these plans regardless of their age.  For example, in the Halverson case, decided in 2009, Educational Credit Management Corporation argued that Steven Halverson should enter a 25-year income-based retirement plan even though he was 65 years old, had chronic health problems, and had an income of only about $13 an hour.  (Fortunately, a Minnesota bankruptcy judge was sympathetic to Mr. Halverson's plight and discharged his student-loan debt.)

And in the Stevenson case, a Massachusetts bankruptcy judge insisted that a woman in her fifties sign up for a long-term income-based repayment plan even though she had a record of homelessness and was living on only $1,000 a month.

Perhaps most famously, ECMC hounded Janet Roth through the courts all the way to the Ninth Circuit Bankruptcy Appellate Panel, heartlessly arguing that Roth should be on an income-based repayment plan to pay off more than $90,000 in student-loan debt even though she was 68 years old, had  chronic health problems and was living entirely off her Social Security income of $780 a month.

As a matter of public policy, the federal government simply must stop pressuring student-loan debtors who are in their forties or older into long-term repayment plans because this practice is making it impossible for these people to prepare for retirement.

We should occasionally remind ourselves why the federal student-loan program was inaugerated in the first place. The program's sole purpose is to enable people to get postsecondary education that will improve their lives.  

But for millions of Americans, the federal student-loan program has driven them to the brink of indigence. And if they are forced to make loan payments until they are in their sixties, their seventies, or their eighties, we will have created a class of elderly debtors who will spend their final years in poverty and want.  

In short, no one who is 40 years old or older should be forced into a 20- or 25-year student-loan repayment plan,  No one.  Older student-loan debtors who are otherwise eligible for bankruptcy relief should be able to shed their student-loan debt in the bankruptcy courts rather than be saddled with monthly student loan payments that will extend into their retirement years.


References

Bob Brenzing. AP Poll: Many take Social Security before full retirement, May 26, 2016.Fox News 17. Accessible at http://fox17online.com/2016/05/26/ap-poll-many-take-social-security-before-full-retirement/

 Michael Greenstone and Adam Looney. The Uncomfortable Truth About American Wages. Brooking Institution, October 23, 2012. Accessible at http://www.brookings.edu/research/opinions/2012/10/22-wages-greenstone-looney

Katy Read. The real story about retirement: Millions of baby boomers face financial crisis.  Star Tribune, Ocrober 21, 2015.  Accessible at http://www.startribune.com/the-real-story-about-retirement-millions-of-baby-boomers-face-financial-crisis/334718191/

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP  2013). 

Stevenson v. Educational Credit Management Corporation, 463 B.R. 586 (Bankr. D. Mass. 2011).

John F. Wasik. Social Security At 62? Let's Run the Numbers. New York Times, May 14, 2014. http://www.nytimes.com/2014/05/15/business/retirementspecial/social-security-at-62-lets-run-the-numbers.html



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!



Thursday, December 17, 2015

Interest, fees and penalties are burying millions of student-loan debtors--not the amount these poor people borrowed to go to college

Sometimes, huge problems can be analyzed best by simply boiling down the complexity of a situation into a simple phrase.  For example, "It's the economy, stupid," crafted by Democratic political strategist James Carville, summarized a central theme of Bill Clinton's 1992 presidential campaign.

Likewise, we can summarize at least one huge element of the student-loan crisis by focusing on one core fact: accrued interest, penalties and fees are burying millions of student-loan debtors, not the amount of money these poor people borrowed to attend college.

For example, I have a friend on the East Coast who borrowed a total of about $55,000 to obtain a bachelor's degree and a graduate degree; and he paid nearly $14,000 on those loans.  Unfortunately, my friend suffered a series of unfortunate life events--health issues, divorce, and job loss.  Now at age 67, he is living entirely on Social Security and a small pension. The Department of Education is garnishing his meager retirement income, and he is living on only $1200 a month.

A few weeks ago, my friend filed an adversary complaint in bankruptcy court, seeking to discharge his student-loan debt based on the Bankruptcy Code's "undue hardship" provision. Guess how much the government says he owes? $120,000--including accrued interest and $23,000 in collection costs. That's more than twice the amount my friend borrowed.

And this case is not atypical. In Halverson v. U.S. Department of Education, Stephen Halverson borrowed about $132,000 to obtain two master's degrees. Just as with my East Coast friend, life happened for Mr. Halverson: a job loss, serious health issues, a divorce, medical expenses for a child, and expenses incurred to care for an aging parent.

At times, Mr. Halverson was unable to make payments on his student loans, but he obtained a series of economic hardship deferment, and he was never in default.  Nevertheless, when Halverson was in his 60s, it was clear he could never pay back his student loan debt. By the time he filed for bankruptcy, his total deb had ballooned to almost $300,000--more than twice the amount he had borrowed. And Mr. Halverson's job at that time only paid $13.50 an hour.

Various public-policy analysts have argued that there is no student-loan crisis because most people borrow relatively modest amounts of money--typically about the amount of a car loan. But these analysts ignore two key facts:

1) Even a small student loan is a huge burden for someone who doesn't have a job or who has a low-income job.

2) People who are unable to make their monthly loan payments must obtain an economic hardship deferments or enter a long-term repayment plan in order to avoid default. And both options mean that the debtor's loan balance goes up due to accruing interest.

Thus we see people like Liz Kelly, featured in a recent New York Times article, who owes $410,000 on her student loans, far more than she borrowed to attend college and graduate school. Today, at age 48, the annual interest cost on her indebtedness is more than the entire amount she borrowed to obtain her bachelor's degree!

And I know a man in California who borrowed around $70,000 to finance his education, and paid back about $40,000. Now the Department of Education claims he owes more than $300,000, including a one-time penalty assessed in the amount of $59,000! That one penalty is more than 80 percent of the entire amount he borrowed!

Surely it should be apparent to everyone--even Secretary of Education Arne Duncan, President Obama and Congress--that adding interest, fees and penalties to people's student-loan debt only increases the likelihood of default.

The higher education industry and the Department of Education have embraced economic-hardship deferments and long-term repayment plans because both programs hide the fact that millions of people can't pay off their student loans.

Does anyone think, for example, that Liz Kelly, who was unable to pay back the $25,000 she borrowed to get an undergraduate degree, will ever pay back the $410,000 she currently owes.? Does anyone think my East Coast friend, who is living on about $1,200 a month, will ever pay back $120,000?

Like a seething volcano about to erupt, pressure is building on the federal student loan program. Currently, about 41 million Americans owe a total of $1.3 trillion in outstanding student loans. Let's face it: at least half that amount will never be paid back.



References

Kevin Carey. (2015, November 29). Lend With a Smile, Collect With a Fist. New York Times, Sunday Business Section, 1. Accessible at: http://www.nytimes.com/2015/11/29/upshot/student-debt-in-america-lend-with-a-smile-collect-with-a-fist.html?_r=0


Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Wednesday, June 11, 2014

Like a Secret Drunk Who Hides A Bottle of Bourbon in His Office Drawer, The Higher Education Industry is Addicted to Student Loans But Won't Admit It

Almost everyone agrees that Alcoholics Anonymous has the best treatment program for alcoholics. AA's simple 12-step program is followed by alcoholics all over the United States, and AA's method for treating alcoholics has been adapted for other addictions as well--including the addiction to drugs.

Perhaps the higher education industry should adopt an AA-style 12-step program to treat its addiction to the federal student loan program.  After all, higher education's dependence on federal student aid money really is an addiction. For-profit colleges in particular could not survive a week without regular infusions of federal cash.

Drinking problem? What drinking problem?
photo credit: twentytwowords.com
But the Obama administration and Arne Duncan's Department of Education treat the student-loan mess as if it were just an irritating  problem and not a full-blown crisis.  It's like Aunt Sally's tolerance for Uncle Ed's drinking binges--she just smiles while reassuring herself that Ed maybe drinks just a wee bit too much.

And President Obama's announcement to expand the Pay As You Earn program shows us that he is in denial about the magnitude of the student-loan crisis.  His administration's decision to expand the program, like its decision to continue strengthening the regulation of the for-profit industry, shows that President Obama and Arne Duncan know that the student-loan mess is serious.  But they want to address the problem like Aunt Sally deals with Uncle Ed's drinking--they just want to water down the whiskey.

Let's face it, in spite of the New York Times' sycophantic praise, Pay As You Earn is nothing more than a plan to stretch students' 10-year student-loan repayment obligations to 20 years.  Yes, this will reduce borrowers' monthly payments, which will give college-loan debtors some short-term relief; but borrowers will be paying on their loans for a majority of their working lives. Is that a real solution?

Second, although I haven't seen any financial analysis to back me up on this observation, I suspect a lot of people who elect the government's income-based repayment options for paying back their loans  won't be making payments large enough to reduce the principal on their debt.  When their loan obligations are discharged after 20 years, millions of people will still owe as much as they borrowed. How can that be a good thing?

So let's look at that 12-step plan.

Step number one is to admit that you have a problem and are powerless to control it.  The Feds could follow that first step by releasing the real student-loan default rate--not that phony three-year rate it releases every October.  According to DOE's latest report, about 15 percent of  recent debtors defaulted within three years of beginning their loan repayment phase; for students who attended for-profit colleges, the rate is 21 percent.

Those numbers are bad but they dramatically understate the true default rate.  Many for-profits, community colleges and some traditional four-year schools have hired so-called "default prevention" firms to contact distressed student borrowers and encourage them to sign up for economic hardship deferments.  Students who obtain these deferments--which are quite easy to get--are not counted as defaulters even though they are not making loan payments.

Just facing up to the reality of how many millions of people are not paying back their loans would be an admission that the student-loan program is out of control.  That's step number 1 of the AA's 12-step plan.

Another important step in AA's 12-step program is to make amends to the people you have injured. I believe that is step number 9.

And of course the Obama administration, Congress and the nation's colleges and universities haven't made amends to the people who have been hurt by the student-loan program.  And until they make amends they haven't done what is necessary to break the higher education industry's dependence on federal student aid money.

What should be done?  As I have tirelessly advocated, Congress needs to amend the Bankruptcy Code to allow insolvent student-loan debtors to discharge their  student loans in bankruptcy so long as they file in good faith.

Second, the federal government should stop garnishing the Social Security checks of elderly student-loan debtors who defaulted on their loans.

And third, the for-profit college industry needs to be shut down.

Of course none of these things are going to happen.  Our government will continue to hide the true magnitude of the student-loan default rate, and it will continue to let millions of people suffer who have no reasonable hope of ever paying off their student loans.

And just like Uncle Ed, who drinks in secret, our nation's colleges and universities will continue abusing students by forcing them to borrow more and more money.  Eventually, Uncle Ed will kill himself from excessive drinking. And eventually, higher education's addiction to federal student aid will destroy the integrity of our nation's colleges and universities, which were once the envy of the world.

No one knows just how Uncle Ed will die--liver disease or a fatal car accident.  And no one knows just how low American higher education will go in terms of its degradation.  But the future is bleak for both of them.

References

Student Borrowers and the Economy. New York Times, June 11, 2014, p. A20.




Sunday, June 8, 2014

Workin' for the Man: President Obama's Disasterous Plan to Expand Income-Based Repayment Programs for Student Loan Debtors

Tomorrow, President Obama is expected to announce an expansion of his "Pay as You Earn" income-based repayment program for student loan debtors. This program,  which Obama initiated by executive action in 2011, allows student-loan debtors to pay roughly 10 percent of their income on their loans for a period of 20 years.  (The exact formula is a bit more complicated that.)  At the end of the 20-year repayment period, any unpaid loan balance will be forgiven.


Passing the student-loan mess on to the next president
Pay as You Earn is popular with student debtors because it is more generous than the other income-based repayment (IBRP) options. One major program requires debtors to pay 15 percent of their income over a period of 25 years.

But a lot of student debtors don't qualify for Pay As You Earn under present regulations. According to the New York Times, Obama plans to extend eligibility to an additional 5 million student-loan borrowers, including those who took out loans before October 2007. 

Is Pay As You Earn a good thing for the nation's distressed student-loan debtors. Yes it is--at least in the short term. For people struggling to pay mountains of debt under the standard 10-year repayment plan, Pas As You Earn will lower monthly payments substantially.  People who are currently paying 15 percent of their income under a 25-year IBRP will be delighted to switch to Obama's more generous Pay As-You Earn program.  People who are unemployed or underemployed will be particularly grateful, because if their income falls below the official poverty level, they won't have to make any monthly payments at all.

Is there a down side to Pay As You Earn? You bet.

First of all, all the income-base repayment plans remove all incentives for student borrowers to limit the amount of money they borrow. If their loan payments are based on their income and not the amount they borrow, then there is no reason not to borrow as much money as you can.

Second, Pay As You Earn and other IBRPs do nothing to slow the burgeoning cost of going to college.  Colleges have no incentive to keep their costs down, because they know students will simply borrow more money to cover tuition hikes.  What do colleges care if their graduates are making student-loan payments for 20 years?

Third--and most significantly, these long-term repayment plans are going to fundamentally change the way Americans view postsecondary education and the world of work. There was a time when low-income individuals worked their way through college, graduated with no debt, and entered the workforce determined to buy homes, start families, and begin the confident climb up the economic ladder.

Now, 18- and 19-year olds are going to begin college knowing that they will pay for their postsecondary education by donating some percentage of their income to the federal government over the majority of their working lives.  In essence, they will become indentured servants for the government--sharecroppers if you will.

I think this arrangement will foster cynicism among the young, because they will realize on some level that they have been forced into unreasonable levels of indebtedness because colleges refuse to control their costs. They will see university presidents like NYU's John Sexton make outrageous amounts of money while they sign up for long-term college-loan repayment plans that they will not pay off until they are in their 40s and 50s.

And, since they won't have to pay anything under Pay As You Earn if they are unemployed or live below the poverty level, I think many of them will postpone going to work. Many will figure that it makes sense to travel or take low-wage jobs in exotic locales rather than seek more remunerative employment. And the incentive to work "off the books" will increase, because people in IBRPS who enter the cash economy will not only avoid paying taxes and making Social Security contributions, they will avoid making student-loan payments as well.

Moreover, once these college-going young people figure out that their payments will be based on their incomes and not the amount they borrow, they will borrow as much as they can.

I appreciate the President's efforts to provide overburdened college-loan debtors some immediate relief by offering plans to lower monthly loan payments while extending the loan repayment period. Unfortunately, in the long run, the results will be catastrophic.

In reality, President Obama is simply passing the student-loan mess on to the next president to deal with.  Millions of people may see their student-loan payments go down in the short-term, but they will be significantly extending the length of their loan repayment period. Most Pay-As-You-Earn participants --I predict--won't be making loan payments large enough to cover accruing interest  or pay down the principal on their notes--which means they won't really be paying their loans back at all. 

And meantime--total student-loan indebtedness--now more than $1 trillion dollars--will continue to grow and grow.


References

Jackie Calmes. Obama Plans Steps to Ease Student Debt. New York Times, June 8, 2014, p. 17.