Showing posts with label Parent Plus loans. Show all posts
Showing posts with label Parent Plus loans. Show all posts

Tuesday, August 10, 2021

The Feds messed up the federal student loan program: And everything they do to fix it just makes things worse

 Many years ago, when I was a fledgling attorney, my senior partner gave me some advice I never forgot. 

He told me that a competent attorney won't make many errors, but all lawyers will make a mistake at some point in their careers.

When you realize you made an error, he advised me, admit it to yourself and immediately begin trying to repair the damage. 

Why? Because the longer you ignore a blunder, the worse the consequences will be. 

I have tried to follow my senior partner's advice throughout my career--first as a lawyer and then as a professor--and I have learned that this advice is always the right thing to do.

But Congress is not following my law partner's advice. Since it created the student loan program more than 50 years ago, it's made several colossal mistakes, but it muddles on--like a drunk driver who causes a multi-car pileup and then leaves the scene of the accident.

For example, Congress screwed up when it allowed for-profit colleges to participate in the student-loan program.  The evidence of corruption, price gouging, and fraud in that sector is well documented.

But the for-profits are sort of like a deadbeat relative who asks you if he can crash on your couch. Once you let him in and give him a house key, you can't get the sonofabitch out.

Congress also made a mistake when it amended the Bankruptcy Code to make it almost impossible for distressed college borrowers to discharge their student loans in bankruptcy. We now have thousands of people who owe three or four times what they borrowed, but they can't free themselves from that debt in bankruptcy court.

And here's another screwup--the Public Service Loan Forgiveness program (PSLF). PSLF was intended to relieve the student-loan burden for people wanting to take public service jobs:--firefighters, school teachers, nurses, etc.

But that program is so botched up that 98 percent of the people who thought they were in the PSLF program were denied relief. As Steve Rhode said in a recent podcast--PSLF is a "dumpster fire."

And then there are the various income-based repayment plans (IBRPs) that the brainy policy wonks said would relieve the debt burden on people who had taken out so many loans that they could not pay off the debt under ta standard 10-year repayment program.

How's that working out? We now have more than 8 million people in IBRPs that can last for a quarter of a century. And how many of these people have had their deads cleared? According to the National Consumer Law Center--only 32!

And the IRBP participants are making monthly payments that are not large enough to cover accruing interest. Virtually all these people will owe much more than they borrowed when they finish their 25-year repayment plans.

Do you want to talk about the Parent PLUS program, which preys on low-income families and has a ten percent default rate?

Let's face it, the federal student loan program and its toxic offshoots is a calamity--the mother of all calamities. Its impact on the economy and individual lives makes the 2009 home-mortgage scandal look like a Sunday school class.

And now, what has our government done? It has extended the pause on student loan payments until the end of January 2022. That's right, millions of student loan debtors are excused from making their monthly payments for almost two years!

Did that move solve anything? No, it did not. By extending the loan-payment pause, the Department of Education merely postponed the day it will have to admit that the student-loan program is a trillion-dollar screwup.


It is always best to admit your mistakes and do your best to repair the damage.


Saturday, July 31, 2021

Newsweek reports: Parent Plus Loans 'Are Fraught with Peril'

 Years ago, I was strolling along a lakeside hiking trail in a Dallas-area park. As I was walking across a wooden bridge, I looked down to see a ball of wriggling snakes below me.

It was a big cluster--about the size of a beachball. It was a scary sight, and I didn't stick around long enough to determine whether the snakes were poisonous. I just hurried on my way.

The Department of Education's Parent PLUS program is like a big ball of snakes. The program has become so predatory, so large, and so politically charged that we don't want to even try to untangle it.  We just want to hurry along without thinking about it.

Parent PLUS is a federal program that lends money to parents to help them pay for their children's education. Although Congress supposedly intended the program to help affluent families, six out of ten parent borrowers are from low-income households.  And, as Matt Krupnick reported for Newsweek, at 140 schools, 80 percent of parent borrowers are in low-income homes.

Parent PLUS default rates are high. According to a Newsweek analysis, nearly ten percent of parents at 1000 colleges defaulted or were seriously late with payments within just two years of their child left college. At some schools, Parent PLUS default rates ran as high as 30 and even 40 percent.

And borrowing costs are high: "6.28 percent for the 2021-2022 academic year plus an upfront fee of 4.22 percent" (as reported by Newsweek).

In 2019-2020, parents took out Parent PLUS loans on behalf of three-quarters of a million students, and the loan amounts averaged about $16,000. 

But the average Parent PLUS loan at some colleges is much larger. At Spelman College, an HBCU in Atlanta, the median Parent PLUS loan was $85,000 for parents whose children graduated or left school between 2017 and 2019.

Other schools with high Parent PLUS loan amounts include New York University (almost $67,000) and Loyola Marymount in Los Angeles ($60,000). The median loan amount is also high at several art and music schools: Berklee College of Music in Boston, Pratt Institute in Brooklyn, and Savannah College of Art and Design in Georgia.

Newsweek, the Wall Street Journal, and other news media have shown that some colleges are taking advantage of their students' parents by encouraging them to take out loans in addition to the federal loans and Pell grants that students receive on their own.

This is predatory behavior. And parents who take out Parent PLUS loans will find it is almost impossible to discharge these loans in bankruptcy.

Congress needs to shut down the Parent PLUS program. Or at the very least, Congress should amend the Bankruptcy Code to allow financially distressed parents to discharge these loans in bankruptcy.

But Congress will probably take no action. It sees the Parent PLUS program as a big ball of snakes, and no politician has the guts to close down this pernicious scam against low-income parents.

The Parent PLUS program is a ball of snakes.





Saturday, June 26, 2021

Will a degree from a fancy, private college improve the quality of your life? Maybe, but maybe not.

 I occasionally see television and print advertisements for weight-loss programs. Invariably, these ads show a slim, young, attractive woman with perfect teeth or a handsome young man with great hair and six-pack abs. We are encouraged to believe that these beautiful people were once fat.

But we know better. We know that no matter what diet plan we go on, we will never be as beautiful as the people in the weight-loss ads.  We'll buy the product and still have crooked teeth and a little flab around our bellies.

America's private colleges are like the weight-loss companies. Enroll at our prestigious institution, study on our cool campus, interact with our brilliant but kindly professors, and you'll be on the road to a fabulously better life.

For example, here is some puffery from Quinnipiac University's website:

From your first day, Quinnipiac’s expansive resources and passionate professors will help you flourish and build a foundation for success. You’ll create your first memories as a Bobcat on this campus, and find supportive resources throughout your journey.

How much will this journey cost you? Only about $70,000 a year in room, board, fees, and tuition.   That's more than a quarter of a million dollars for a bachelor's degree.

But, hey, you'll probably get a scholarship of some kind, and you can take out student loans. And if you need more cash to finance your studies, your parents can take out a Parent Plus loan.

Just remember, no matter where you go to college, you will still be you. And there are probably many people willing to help you reach your dreams who will charge you a lot less than a quarter of a million dollars.


Were these people ever fat?


 

Saturday, June 19, 2021

Student-loan payment relief during COVID crisis ends soon: Will student debtors start making payments again?

 About 40 million student borrowers got some relief last year when the Department of Education allowed student debtors to temporarily skip their loan payments due to the COVID crisis.

Even better, DOE did not charge interest on student loans during the forbearance period. 

But DOE's relief program ends on September 30, and the feds expect all borrowers to resume their loan payments in October. Will borrowers begin writing those monthly checks?

Maybe not. Navient reported in April of last year that 40 percent of federal student-loan borrowers requesting COVID repayment relief held loans that previously had been delinquent or in forbearance.  In other words, millions of student debtors were not making payments on their loans even before the COVID crisis.

Student loans are kind of like overdue library books. They are easy to forget about.

The Department of Education's website lists a host of options for borrowers as the COVID-forbearance plan winds down. If you are a distressed student debtor, you should take a look at that site.

But here's my advice. If you are financially unable to repay your student loans under DOE's standard 10-year repayment program, sign up for the most generous income-based repayment plan  (IBRP) you can find. IBRPs are a terrible option because your loan payments will not be large enough to cover accruing interest. Thus, your loan balance will keep growing in the years to come, even if you make regular monthly payments.  

But your monthly loan payments will be lower under an IBRP and allow you to tread water until some sort of comprehensive relief program is put in place.

As I have said a thousand times, Congress needs to revise the Bankruptcy Code to allow overburdened college borrowers to discharge their student loans in a bankruptcy court. But that may never happen.

Some politicians are calling for wholesale student-loan relief. Just wipe out $1.7 trillion in student debt, they say. But that may never happen either. 

The student-loan catastrophe is enormous and getting bigger with each passing day. If you haven't taken out federal student loans yet, choose a college program that will lead to a job and do everything you can to avoid taking on onerous levels of student debt.  

If you already have a mountain of student-loan debt, get into an IBRP and wait for Congress to clean up the mess. But don't hold your breath.

And one more piece of advice. Don't ask your parents to take out a Parent PLUS loan, and don't take out loans from a private lender.  











Thursday, January 28, 2021

The Parent Plus Program was a policy blunder that hurts low-income and African American families: Shut It down

Our government's Parent PLUS Program is an insidious scheme to lure low-income parents into taking out student loans so their kids can go to colleges they can't afford.

 Insider Higher Ed's Kery Murakami tells the story of Ewan Johnson, whose mother owes $150,000 in Parent PLUS loans--money she borrowed so her son could get a degree from Temple University in strategic communications and political science.

As Johnson related, he comes from "a low economic background." Will his mother will ever pay off her Parent PLUS loans? I doubt it.

Johnson's mother is one of 3.6 million parents who collectively owe more than $96 billion in Parent PLUS loans. For the most part, parents aren't taking out these loans so their kids can attend elite
private schools like Harvard. 
"Rather," as Wall Street Journal reporters Andrea Fuller and Josh Mitchell observed, "they include art schools, historically Black colleges and private colleges where parents are borrowing nearly six-figure amounts to fulfill their children's college dreams . . "

Indeed, African American parents are hurt the most by the Parent PLUS Program. The WSJ reported that 20 percent of African American parents who took out Parent PLUS loans in 2003-2004 defaulted on their loans by 2015.  

Default rates for some colleges are exceptionally high. A New America study found that 30 percent of Parent PLUS borrowers at 15 institutions default within two years!

Should all this debt--nearly $100 billion--be forgiven? President Biden proposes to knock $10,000 off of every federal student loan, but it is unclear with his plan includes people with Parent PLUS loans. 

Policymakers worry that forgiving all Parent PLUS debt will unfairly benefit wealthy families who have the resources to pay back their loans.  Sandy Baum, a student-loan expert, said that forgiving all Parent PLUS debt would be "outrageous."

Hardly anyone suggests that we just eliminate this dodgy government boondoggle that exploits low-income and minority families.  

So why don't we just make one straightforward reform? Let's allow parents who wrecked their financial futures so their kids could attend the wrong college to discharge their Parent PLUS loans in bankruptcy




Monday, December 14, 2020

Small private colleges are going down: Don't get trapped under the rubble

 Inside Higher Education carried a story today about major cuts being made at three higher education institutions. Marquette University, a Jesuit institution, is laying off 225 faculty and staff members. The University of Evansville, a Methodist college, is eliminating 17 majors and three departments. The College of Saint. Rose, a Catholic school, is cutting 16 majors and six master's degrees.

These three colleges are not alone. All over the United States, small, private colleges are suffering from declining enrollments and declining revenues.  Many of them will close over the next couple of years.

The colleges blame demographic trends.  There are simply fewer traditional college-age people in the American population.  Consequently, fewer students are going to college.

The coronavirus pandemic didn't help matters. The COVID outbreak caused a lot of young people to postpone their college plans. And it imposed high costs on institutions that were left with empty dorm rooms this fall.

An overall decline in religion has sapped the vitality of schools that were founded by various churches.  The University of Evansville, for example, is affiliated with the United Methodist Church, but how many young people choose a college because it has ties with a religious denomination?

The small private schools have been fighting desperately to reverse their enrollment crops. They've rolled out new programs, spiffed up their study-abroad offerings, hired public relations firms, and slashed tuition. But for many--these survival strategies won't be enough. 

If you are a young person in the process of deciding where to go to college, here is my advice. Do not go to a small, private school with enrollment below 1,000 students.  The smaller colleges are the most vulnerable. 

You do not want to enroll at a college that closes before you obtain your degree or shortly after graduating.  You don't want to take out student loans to pay tuition at a school that is slashing programs and laying off faculty.  You certainly don't want your parents to take out a Parent Plus Loan so you can study at some obscure little school in the Midwest that won't prepare you for a good job.

In short, private liberal arts education is on the verge of collapse. Don't get trapped under the falling rubble.






Saturday, December 5, 2020

Parent Plus Loans at Historically Black Colleges: Should Parents Jeopardize Their Financial Future so their Children Can Go to an HBCU?

Andrea Fuller and Josh Mitchell of the Wall Street Journal have done some excellent reporting over the years on the student-loan crisis. Fuller and Miller recently published a WSJ article about poor and middle-class parents who take on substantial debt to help pay their children's college expenses. Most of these parents signed up for Parent Plus loans offered by the U.S. Department of Education.

You might think that parents whose children are enrolled at elite private colleges would be the ones with the biggest Parent Plus loans, but you would be wrong. According to Fuller and Mitchell,

The schools with the largest parent debt burdens aren't world-famous Ivy League schools . . . Rather, they include art schools, historically Black colleges and small private colleges where parents are borrowing nearly six-figure amounts to fulfill their children's college dreams . . . .

According to the article, the college where parents borrowed the most money for their children's schooling was Spelman College in Georgia, a historically Black institution.  Among parents who took out federal loans for their kids, the average amount was $112,127.  Among low-income families, the average amount was more than $83,000.

Keep in mind that the money parents borrow through the Parent Plus program is in addition to the student loans that their children took out themselves. 

Fuller and Mitchell's article contains a handy feature that allows readers to type in the name of an American college and learn the average amount of parent debt at that institution. I ran the numbers for some prominent HBCUs, and parent debt at several of these institutions is quite high.

Median By School

All Recipients

Low-Income Recipients

Spelman College, GA

$112,127

$83,894

Morehouse College, GA

$79,000

$48,862

Howard University, DC

$66,728

$52,145

Hampton University, VA

$73,244

$47,974

Clark Atlanta University, GA

$66,359

$40,095

Johnson C. Smith University

$28,586

$20,166

These numbers are disturbing. Perhaps even more disturbing is the fact that the Wall Street Journal's school-reporting mechanism had no figures at all for several HBCUs.  For example, the feature reported no data for Jarvis Christian College in northeastern Texas; Huston-Tillotson University in Austin, Texas; and Miles College in Alabama. All three colleges are HBCUs.

As reported by the Wall Street Journal, 20 percent of African American parents who took out  Parent Plus loans in 2003-2004 defaulted on those loans by 2015. In other words, Black parents who take out Parent Plus loans to help their kids pay for college are running a one-in-five chance of being financially ruined.

All progressive-minded people support the historically Black colleges and universities and believe they should be adequately funded. But we should also think about the students who attend HBCUs and their parents as well. 

Perhaps the best thing we could do to protect African American parents from risking their own financial security would be to eliminate the Parent Plus loan program altogether.



Tuesday, November 24, 2020

Parent Plus Loans: A despicable government program cruelly drives mom and pop into poverty so their kids can go to college

If you are not outraged by the federal government's Parent Plus student-loan program, you have a heart of stone.

According to The Hechinger Report, 3.5 million parents have taken out federal student loans to help their kids pay for college. Collectively, these parents owe almost $100 billion in outstanding debt, and about 12 percent have gone into default.

In other words, if you take out a Parent Plus loan to help finance your child's college education, you are running about a 1 in 8 chance of having your life ruined by debt you can't repay—pretty grim statistics.

Nevertheless, colleges and universities still offer Parent Plus loans as part of their individual student aid packages, and parents continue to take them out. Often parents do not realize that these loans are almost impossible to discharge in bankruptcy.  Even if mom and pop lose their jobs or are hit with significant hospital bills, they are still obligated to send Uncle Sam a monthly check.

The Hechinger Report tells the story of Jay and Tina Rife, who borrowed $40,000 so their son and daughter could attend public universities in Indiana. The loan balance has grown over 20 years, and they now owe $100,000. Their Parent Plus loan payment is bigger than their mortgage payment.

The Rifes' daughter, Stacy, is 41 years old and has her own student-loan payments. Meanwhile, Stacy's mother goes without health insurance so that she and her husband can make their Parent Plus payments.

The Hechinger Report quoted Amy Laitinen, a policy expert at New America, regarding Parent Plus loans.  "I don't think these loans should be presented with the financial aid offer at all," Laitinen said. "I think it speaks more to the school's desire to bring in the student than to what's best for the family . . . .To present [a Parent Plus Loan] as if it's really a way for paying for college when there's no way for those parents to pay it back is shameful and harmful."

Exactly. 

There is only one way to deal with this reprehensible government program, and it's a two-part response.  The Parent Plus program should be shut down immediately, and every parent who has been trapped by this despicable sham should be able to shed their Parent Plus debt in bankruptcy. 





Wednesday, May 22, 2019

How Can I Get Out of the Student Loan I Cosigned for My Son? Advice from Steve Rhode, the Get Out of Debt Guy

If you are thinking about taking out a Parent PLUS loan to finance your child's college education or co-signing a relative's loan, you should read Steve Rhode's essay, first published at Get Out of Debt Guy, a consumer counseling web site.

Question:
Dear Steve,
It took my son 6 years to get a BA degree. By the 5th year, I ran out of money so I co-signed a private loan for him. For the past 4-5 years, I pay on this loan diligently every month because he refuses to the pay the loan or give me anything towards the payment and I don’t want to jeopardize my credit.
The original loan amt was 34K it is now only down to 29K because the interest rate keeps going up ..now it is at 7.75%. Additionally, he refuses to re-finance the loan
How can I get out from under the responsibility of his debt without jeopardizing my credit?
Sue
Answer:
Dear Sue,
Your son is being kind of a jerk. You helped him finish school and he can at least make some payment, even if he can’t pay it all each month.
Unfortunately, when you cosigned the loan you agreed to be 100% responsible for the loan. There is nothing good in cosigning if you are the one signing. My universal law of cosigning is don’t do it.
If you don’t want to ding your credit then you either need to pay the loan off in full or keep making at least the minimum monthly payment.
If you wanted to remove your liability for the debt you can do that but it will have a credit impact. Some of those options include filing bankruptcy or paying less than you owe on the balance as a settlement. However, you will need to go delinquent to settle it and the balance forgiven may be reported as a bad debt and be taxable.
The only way to make this situation different without harming your credit or costing you a big chunk of change would be to go back in time to the minute before you cosigned for him.

*******
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. 

Sunday, July 15, 2018

Student loan rates are going up--compounding misery for suffering college borrowers

James Carville, who was once President Bill Clinton's political strategist, famously remarked: "It's the economy, stupid!"

But Carville's one-liner needs updating. For student-loan debtors, "It's the interest, stupid!"

And student-loan interest rates are going up. For undergraduate student loans, the rate has risen to 5.05 percent, a 13 percent increase over current rates.

For graduate students, the rate rose to 6.60 percent, up from the last year's rate of 6.0 percent.

And rates for Parent PLUS loans are going up as well. As of July 1, the interest rate on Parent PLUS loans is 7.6 percent.

A Forbes article suggests the increase is no big deal. An undergraduate who takes out $10,000 in federal loans this year will only pay $349 more over ten years than under last year's interest rate. That's less than three bucks a month.

But let's think again. Interest rates on student loans are pretty damn high; why should they go higher? Students taking out federal loans to finance their college education pay a higher interest rate than they would for a car loan or even a house loan. And remember, the current interest rate on a 10-year government bond is only 2.85 percent. So how does the federal government get away with loaning money to students' parents at an interest rate of 7.6 percent?

Here's the real problem with interest rates on student loans: the interest compounds on outstanding loans until the loans are paid off. For some student debtors, interest on their student loans compounds while they are in school, which means they will owe more money than they borrowed by the time they graduate.

Even more concerning, millions of borrowers don't find good jobs after they graduate and are unable to immediately start making their monthly loan payments. This forces them to apply for economic hardship deferments, which are notoriously easy to get. But borrowers whose loans stay in deferment for two, three, four years or more will see their loan balances go up markedly.

And the story is the same for people who enroll in 20- or 25-year income-contingent repayment plans (ICRPs). Almost all these folks are making monthly payments so low they are not paying down accrued interest. Consequentially, their loans are negatively amortizing, which means ICRP participants are seeing their loan balances get larger with each passing month, even though they are making regular monthly payments.

Remember Mark Meru, the dentist who borrowed $600,000 to go to dentistry school and now owes a million dollars? He's in an income-based repayment plan that set his monthly payment at less than $1,600.   But interest is accruing at the rate of almost $4,000 a month. By the time he finishes his 25-year repayment plan, Dr. Meru will owe $2 million!

Albert Einstein observed that compound interest is the eighth wonder of the world. People who understand that earn it; and people who don't understand, pay it.

Apparently, millions of college-educated Americans don't understand compound interest. Otherwise, they never would have allowed themselves to get into debt so deep due to student loans that they will never pay off.

"It's the interest, knuckleheads!"


References

Zack Friedman. Student Loan Rates Will Rise 13% This Summer. Forbes.com, May 22, 2018.

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

Thursday, July 12, 2018

Parents join their children in Student-Loan Siberia, taking out bigger and bigger Parent PLUS loans to finance their children's bad college choices

Remember the movie Fiddler on the Roof? Perhaps the most poignant scene is the one in which Tevye waits with his daughter Hodel for the train that will take Hodel to Siberia. As you recall, Hodel married Perchik, a Russian revolutionary, without her father's permission. Perchik then got himself arrested and exiled to the Siberian wilderness.

Did Hodel say: "Good luck, honey!" "Don't forget to write!"  Or, "I told you not to become a revolutionary, but you didn't listen!"

No, she didn't. Instead, Hodel hopped a train and joined Perchik in Siberia.

Something similar is happening with Parent PLUS loans. Students are taking out more and more federal loans to finance their college studies, and many are taking out the maximum amount they are allowed to borrow for their undergraduate education--$31,000. In fact, 40 percent of undergraduate borrowers have loans totally $31,000 before they begin their senior year.

What to do? Many are turning to their parents to fill the gap. In 2015-2016, Parent PLUS loans averaged $33,291, up 14 percent in just four years. In fact, two thirds of parents who took out Parent PLUS loans in 2015-2016 did so to finance their children's undergraduate education.

As Mark Kantrowitz explained in a New York Times interview, "Parents are a pressure-relief valve for when students hit the Stafford loan limits."

I suppose that's one way of putting it. But really, the rise in Parent PLUS loans means some parents are bearing bigger student-debt loads than their children. And remember--Parent PLUS loans are as difficult to discharge in bankruptcy as student loans. No student loan can be discharged unless the debtor can show "undue hardship," a very tough standard to meet.

Some parents who take out Parent PLUS loans will find them very difficult to repay. In fact, the lending standards for issuing these loans are very low.  Parent debtors who lose their jobs, develop serious illnesses, or have various kinds of family emergencies may find it almost impossible to make payments on their Parent PLUS loans.  And bankruptcy will probably not be an option.

And let's face facts. If students cannot finance their college choices without pushing their parents into debt, they chose the wrong college.

So Mom and Dad, think of Hodel before you take out Parent PLUS loans to finance your children's college education. If your children cannot pay back their own student loans, they may be forced into long-term income-based repayment plans that last 20 or even 25 years. In which case, your children will be entering Student-Loan Siberia--saddled by debt for most of their working lives.

And, Mom and Dad, if you take out Parent PLUS loans, you may wind up like Hodel--headed for Student-Loan Siberia as well. If that happens it will be because your darling child made a bad choice about where to go to college and you foolishly agreed to help foot the bill.

Goodbye, Dad. Perchik made a dumb decision and I'm going to join him in Siberia.

References

Tara Siegel Bernard and Karl Russell. The New Toll of Student Debt in 3 Charts. New York Times, July 11, 2018.


Sunday, April 30, 2017

Parents Plus Loans can be a nightmare: "Teach your children well . . ."

Teach your children well,

Their father's hell did slowly go by.



Teach the Children Well

Lyrics by Graham Nash

More than three million parents have taken out student loans for their children's college education. Eleven percent are in default, and another 180,000 are delinquent in their payments.

Congress created the Parent Plus program in 1980, which allows parents to obtain student loans to supplement the loans their children take out to finance their college studies. As Josh Mitchell reported in the Wall Street Journal last week, outstanding indebtedness on Parent Plus loans now tops $77 billion. 

The government issues Parent Plus loans with little regard to whether the parents can pay them back. Many parents who take out Parent Plus loans have subprime credit scores, which means they run a high risk of default. As Mitchell pointed out,  the Parent Plus default rate is higher than the home mortgage default rate during the 2008 housing crisis.

Without question, Parent Plus loans are being issued recklessly. "This credit is being extended on terms that specifically, willfully ignore their ability to repay," a spokesperson for Harvard Law School's Legal Services Center charged. "You can't avoid that we're targeting high-cost, high-dollar-amount loans to people who we know can't afford them."

To its credit, the Obama administration recognized that lending standards for Parent Plus loans were too lax. In 2011, the Department of Education introduced modest underwriting rules to prevent parents with low credit ratings from taking out Parent Plus loans.

But the higher education industry protested, arguing that tighter underwriting standards for Parent Plus loans would reduce college access for low-income and minority students. In response to this pressure, the Department of Education withdrew the new rules.

Obviously, people who are taking out student loans for their children are older; two thirds of Parent Plus borrowers are between the ages of 50 and 64. Many of them have student loans of their own. Some parents took out Parent Plus loans expecting their children to get good jobs and take over the loan payments.  But sometimes that doesn't happen, and the parents find themselves responsible for paying off loans they can't afford to repay.

Parents who default on Parent Plus loans risk having their income-tax refunds seized and their Social Security checks garnished. And bankruptcy is rarely an option. Parents who default on their children's student loans will find it difficult to discharge those loans in bankruptcy even if they are unemployed or in ill health.

In an NPR podcast, Michelle Singletary, a finance columnist, pointed out that many parents take out Parent Plus loans to help their children attend expensive colleges their families can't afford. It is difficult, Singletary acknowledged, for parents to tell their children that a particular elite college is simply out of financial reach.

The child might say, "But this is my dream college." If that happens, Singletary advised, the parent must have the wisdom and fortitude to say, "Honey, you need to find another dream."

Or, as songwriter Graham Nash might put it, "Teach your children well" regarding their college choices because if you borrow money for your child to go to college and can't pay it back, you will enter financial hell, a hell that will go by slowly.



References

Tom Ashbrook. Parents On the Hook for Student Loans. NPR Onpoint (podcast), April 26, 2017.

Josh Mitchell. The U.S. Makes It Easy for Parents to Get College Loans--Repaying Them Is Another StoryWall Street Journal, April 24, 2017. 

Note: Quotations in this essay come from the sources cited in the reference list.

Friday, August 12, 2016

Parents who take out PLUS student loans to pay for their children's college education: Don't be such a fool

I'm sorry, so sorry
That I was such a fool

I'm Sorry (1960)
Sung by Brenda Lee
Lyrics by Dub Allbritten & Ronnie Self

Most country and western songs are about regret: I'm sorry I cheated on my wife; I regret mouthing off to a biker in the honky-tonk, I wish I hadn't shot a man in Reno.

I don't know of any C & W song about student loans, but there should be. A recent survey reported that about 50 percent of student-loan debtors regretted how much they borrowed to go to college. More than a third said they would not have gone to college had they realized what it would cost them.

But the people who are really, really sorry are the parents who took out loans to pay for their children's college education.  If they co-sign a private loan for a child, they are on the hook for it even if their child dies.  And parents will find it is virtually impossible to discharge a co-signed student loan in bankruptcy, whether it is a private loan or a a federally subsidized loan.

In fact, I say this unequivocally: Parents should never borrow money to pay for their child's college education.

Yet our federal government peddles Parent Plus loans--student loans taken out by parents--as a good way to help finance a child's college costs. DOE recently posted a blog telling parents that "PLUS loans are an excellent option if you need money to pay your child's educational expenses," although it cautions that parents need to make sure they understand the loan terms before they take out a PLUS loan.

And what are those terms? DOE's blog posting says that the current interest rate is 6.31 percent and that monthly repayment begins immediately. Monthly PLUS loan payments are not postponed while the child is still in college.

DOE then summarizes various PLUS loan repayment plans, including an income-contingent plan (ICR) that allows parents to pay 20 percent of their discretionary income for 25 years.

Of course it is madness for parents to pay a fifth of their discretionary income for 25 years in order for their child to go to college. There are lots of college options that don't require that kind of sacrifice.

DOE assures parents that any unpaid balance on their PLUS loan will be forgiven after 25 years. But note that DOE doesn't tell parents that they could have a big tax bill for the amount of the loan that is forgiven.

And DOE didn't warn parents that they will find it almost impossible to discharge a PLUS loan in bankruptcy should they run into financial trouble due illness, job loss, or some other financial calamity.

DOE ends its deceptive blog on this cheery note. "Yes, there's lots to consider when it comes to taking out a Direct PLUS loan, but there are many benefits to getting one if you need help paying your child's education."

In fact, there's nothing to consider. If your children can't finance their college education without you going into debt, then they need to develop another plan.

My guess is that a lot of parents take out PLUS loans to help their kids go to some fancy East Coast private school, which is foolish.  If your children cannot afford to go to Harvard or Dartmouth or Amherst without putting you into debt, then they need to enroll at a nearby public university and take a part-time job at McDonald's.

Trust me. You and your children will be better off if you avoid all college options that force Mom and Pop to go into debt. Johnny Cash was sorry he shot that guy in Reno, but he was not any sorrier than you will be if you take out a loan to send your child to college.

Johnny Cash: He shot a man in Reno, but he's really, really sorry.
References

Jessica Dickler. Buyer's College buyer's remorse is real. CNBC News, April 7, 2016. Accessible at http://www.cnbc.com/2016/04/07/college-buyers-remorse-is-real.html

Jessica Dickler. College costs are out of control. CNBc News, July 16, 2016. Accessible at http://www.cnbc.com/2016/07/12/college-costs-are-out-of-control.html

Citizens Bank. Millennial College Graduates with Student Loans Now Spending Nearly One-Fifth of Their Annual Salaries on Student Loan Repayments. April 7, 2016. Accessible at http://investor.citizensbank.com/about-us/newsroom/latest-news/2016/2016-04-07-140336028.aspx

Lisa Rhodes. PLUS Loan Basics for Parents. Homeroom, August 8, 2016. Posted on the Official Blog Of the U.S. Department of Education. Available at http://blog.ed.gov/

Tuesday, September 30, 2014

Almost by itself, the Student Loan Program is Destroying the American Middle Class: The sad story of Steve and Darnelle Mason

Several newspapers carried a story about Steve and Darnelle Mason, a married couple who co-signed student loans for their daughter Lisa to attend college.  Lisa borrowed a lot of money--$100,000, but it was probably a good investment because she graduated with a nursing degree that led to a job as a critical-care nurse.
Lisa Mason
Photo credit: Steve Mason &
USA Today

Unfortunately, Lisa died at age 27 of liver failure, leaving three young children.  Had Lisa borrowed the money from the federal student loan program, the debt would have been forgiven with her death.

But Lisa borrowed the money from private banks, and loan-service companies that took over her loans didn't forgive the debt. As co-signers on Lisa's loans, Lisa's parents are liable for the full amount.  And with penalties and accrued interest, that debt has  ballooned to $200,000.

This sad story, which has gained national attention, demonstrates the risk parents take when they co-sign student loans for their children's college education, particularly when they co-sign a loan from a private bank. They are on the hook for the full amount. And unlike the federal student loan program, most banks do not have income-based repayment options. Nor do they grant economic hardship deferments.

Jeffrey Dorfman (2014) recently wrote a story for Forbes arguing that there is no student loan crisis. Dorfman would probably say people like Steve and Darnelle Mason are a rare exception, As Dorfman, pointed out, most people borrow fare less money to attend college than Lisa Mason did, often less than a typical car loan.

It is true of course that the Mason's story is exceptional. Most 27 year-old people don't die. But a lot of them are unable to manage their student loans, and parents who co-sign those loans are on the hook to pay them back.  Parents can lose their retirement savings, the equity in their homes, literally everything they've worked for over a lifetime if they co-sign their child's student loan and the student can't pay it back.

What a lot of parents don't realize is that student loans are very hard to discharge in bankruptcy. In 2005, the banks were able to get Congress to amend the Bankruptcy Code to make private student loans nondischargeable unless the debtor could show "undue hardship."  And  the courts have interpreted "undue hardship" very harshly.  Just a few months ago, a 63-year old man's petition to discharge almost a quarter million dollars in student loans for his children was denied, even though the man was unemployed and about to lose his home in foreclosure (Murphy v. Educational Credit Management Corporation, 2014).

Millions of people are suffering from unmanageable student loans.  Although most people don't borrow as much as Lisa Mason did, even a small loan is impossible to pay if the debtor is unemployed.  And the poor souls who fall behind on their payments and default often see their loan balances double because the creditors add accrued interest and penalties to the unpaid debt.

President Obama and Secretary of Education Arne Duncan know how bad the student-loan crisis is,but their efforts to bring this crisis under control have been feeble.  The Department of Education doesn't report the actual default rate and its solution to the overall problem is to encourage student-loan debtors to sign up for long-term income-based repayment plans.

In essence, the Obama administration's response to the student-loan catastrophe has been to obscure the enormity of the problem, hoping it won't blow up before President Obama leaves office.  What needs to be done?

First and foremost, the Bankruptcy Code must be amended to make unmanageable student -loan debts dischargeable in bankruptcy. This one reform would shut down the private student loan business because the banks would not lend money for education if they knew student-loan debtors could wipe out their student loan debt in a bankruptcy court.

Steve and Darnelle Mason, for example, would be able to discharge their debts in bankruptcy if they had maxed out their credit cards to go on expensive vacations or had foolishly invested in some get-rich-quick scheme. But they can't discharge the student-loan debt that Lisa accumulated in good faith to get a college education, even though it is crushing them financially.

 Day by day, the student-loan program is destroying the middle class by making it impossible for young people to buy homes, start families, and save for their retirement.  And many parents who co-signed student loans for their children are now faced with the loss of their entire life savings.

This state of affairs is not right, and we won't truly begin to deal with the student-loan crisis until we give people who are overwhelmed by student debt a fresh start in bankruptcy.

References

Grant, Tim. Private student loan debt can outlive student. Pittsburgh Post-Gazette, September 12, 2014. Accessible at http://www.post-gazette.com/business/2014/09/12/Private-student-loan-can-outlive-student/stories/201409120016.

Dorfman, Jeffrey. Time To Stop the Sob Stories About Student Loan Debt. Forbes, September 18, 2014. Accessible at http://www.forbes.com/sites/jeffreydorfman/2014/09/18/time-to-stop-the-sob-stories-about-student-loan-debt/

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Serico, Chris. After daughter's death, parents plead for forgiveness of her $200K student-loan debt. USA Today, July 14, 2014. Accessible at http://www.today.com/parents/after-daughters-death-parents-plead-forgiveness-her-200k-student-loan-1D79996678

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

Saturday, September 6, 2014

Memo to Parents: For God's Sake, Don't Borrow Money to Pay For Your Kids' College Education

Are you a parent who is thinking about taking out a loan to pay for your child's college education? Before you do, read Murphy v. Educational Credit Management Corporation, a recent federal court decision.

In 2002, Robert Murphy lived in Duxbury, Massachusetts and was the president of a corporation. Unfortunately, he lost his job after the corporation was sold and its operations were moved overseas. Although he had diligently looked for a new job, he was still unemployed in 2014.

Between 2001 and 2007 Murphy took out 12 loans to finance a college education for each of his three children. This is remarkable, since he was unemployed during most of this six-year period. Apparently, Murphy had no difficulty borrowing money for his children's education even though he was out of a job. By May 2014, when a federal court issued its appellate opinion on his bankruptcy case, Murphy owed more than $240,000 on these loans.

By this time, Murphy was 63 years old, unemployed for almost 12 years, and in dire financial circumstances. He owed $700,000 on a home that was only worth $500,000, and his home was going into foreclosure. Although Murphy had once owned an IRA worth about a quarter of million dollars, he had cashed it out  to cover expenses. The court did not report on Murphy's family income in 2014, but it noted that Murphy and his wife had only earned about $13,000 in both 2010 and 2011, money his wife had earned as a teacher's aide.

Pretty sad story, you might think.  Nevertheless, a federal court upheld a bankruptcy court's decision to deny Murphy's request to have his children's student loans discharged.  Although the court admitted that Murphy had no current ability to pay off the loans, it noted that Murphy was in good health and might still find a high-earning job that would allow him to pay off his enormous debt.

Ending its opinion on a remarkably callous note, the court observed that Murphy had struck a bargain with the government when he borrowed money to pay for his children's college education.  "All bargains contain risks," the court pointed out, and Murphy's bargain was especially risky since he had been unemployed during the time he took out most of the loans. 

In short, the court ruled, Murphy's situation did not present "truly exceptional circumstances" that would permit him to shed his student-loan debt.  Thus, the federal court agreed with the bankruptcy court's  decision to deny Murphy relief in bankruptcy for his children's student loans.

The Murphy decision serves as a warning to all parents who are thinking about borrowing money to help their children get a college education. Whether the parent takes out a federal student loan or borrows money from a private bank, a college loan cannot be discharged in bankruptcy unless the parent can show "undue hardship."

Mr. Murphy was unable to show undue hardship in spite of the fact that he had been unemployed for 12 years, had liquidated his retirement account and was in the process of losing his house in foreclosure.

According to a recent article in the Huffington Post, parents currently owe an accumulated $62 billion in Parent Plus Loans, which are guaranteed by the federal government. And this figure doesn't include loans parents took out with private banks that are not federally guaranteed.  A  2012 Huffington Post article reported that about one million Parent Plus loans were taken out during 2011, totally more than $10 billion in just that one year.

Parents who guarantee their children's college loans or who take out loans to pay for their children's education put their financial futures at grave risk.  Before borrowing to pay for your children to go to college, you should think about Mr. Murphy. Sixty-three years old, unemployed, and living on an income near the poverty level, Mr. Murphy is burdened by almost a quarter million dollars of student-loan debt.  That's a pretty scary story.

References

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

Monday, November 12, 2012

Crocodile Tears for Overburdened Student-Loan Debtors: Congress or the Obama Administration Should Do Something Tangible to Help These People


A recent article in the New York Times (Lewin, 2012) reported on the plight of older Americans who took out loans to pay for their children’s college education.   About 2.2 million people who are 60 years old or older owe on student loans, and the total amount of their debt is $43 billion. According to experts cited in the Times, almost all of these loans were taken out by parents to pay for their children’s education.  Parent Plus loans, loans taken out by parents for their children’s college education, now represent about 10 percent of all the federal student loan money that is borrowed.
Crocodile tears for the overburdened
student-loan debtor
Senior debtors who are in arrears on student loans can see their Social Security checks garnished.  So far this year, the federal government has garnished the Social Security checks of 119,000 people (as reported in the Times).  
President Obama and Governor Romney talked some about the federal student-loan crisis during the presidential campaign. President Obama made much of the fact that he pushed through the direct lending program for college students.  But neither President Obama nor Governor Romney offered any significant relief for the millions of people who are drowning in student-loan debt.  In my opinion, both men cried crocodile tears—expressing empathy and sympathy while proposing nothing that would give these sufferers some relief.
What can be done to help these poor people?
Proposal Number One. Congress should pass a law protecting people’s Social Security checks from garnishment for delinquent student loans. If Congress won’t do this, President Obama should stop the garnishment of Social Security checks by Executive Order, much the same way that he implemented the Dream Act, which Congress refused to pass.
Proposal Number Two. Overburdened student-loan debtors—including parents who went into debt to finance their children’s education—should have the same access to bankruptcy relief that is available to any other debtor who has unsecured loans.   Scholars have argued for this change in the Bankruptcy Code for many years.
Proposal Number Three. We’ve got to kick the for-profit colleges out of the federal student loan program.  The for-profit sector has the highest student-loan default rates, and many of them have engaged in unfair recruiting practices to attract students. Not all for-profit colleges are bad eggs, but there are enough problems in this sector to justify removing them from the federal student-loan program.
Our politicians can cry crocodile tears about the suffering being experienced by student-loan debtors who are unable to pay back their loans, but those tears won’t be genuine until the federal government in both the Executive and Legislative branches take tangible action to provide relief for student-loan debtors and their parents—and the action they need to take is painfully obvious.
References

Lewin, Tamar.(2012, November 11).  Child's Education, but Parents' Crushing Loans. New York Times.