Showing posts with label Prepared Remarks. Show all posts
Showing posts with label Prepared Remarks. Show all posts

Saturday, May 11, 2019

Education Secretary Betsy Devos Hires Private Accounting Firm to Audit the Student Loan program: Asking For Bad News

Secretary of Education Betsy Devos hired McKinsey & Company, a global consulting firm, to audit the federal student loan program. Why did she do that?

After all, the Congressional Budget Office, the Government Accountability Office or the Inspector General could have done the job. Why hire a private firm?

I'm thinking Secretary DeVos and the Trump administration realize the federal student-loan program is under water. They know the news is bad, but they want to know just how bad it is. After all, Secretary DeVos compared the program to a looming thunderstorm in a speech she made last November.

It took 42 years, DeVos pointed out, for the federal student-loan portfolio to reach half a trillion dollars (1965 until 2007). It took only 6 years--2007 to 2013--for the portfolio to reach $1 trillion. And in 2018--just five years later--the federal government held $1.5 trillion in outstanding student loans. In fact, uncollateralized student loans now make up 30 percent of all federal assets.

This wouldn't be a problem if student borrowers were paying off their loans. But they're not. As DeVos candidly admitted last November, "only 24 percent of FSA borrowers—one in four—are currently paying down both principal and interest." One in five borrowers are in delinquency or default, and 43 percent of all loans are "in distress" (whatever that means).

Although DeVos did not say so explicitly, she basically acknowledged that we've arrived where we are because the government is cooking the books. Student loans now constitute one third of the federal balance sheet. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk" DeVos said. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

We can hope that McKinsey and Company will give us an accurate accounting. But we already know the news will be catastrophic.  More than 7.4 million people are in income-based repayment plans (IBRPs) that stretch out for 20 and even 25 years. IBRP participants make loan payments based on their income, not the amount they borrowed. Virtually no one in these plans will ever pay off their loans. 

Millions more have their loans in deferment or are prolonging their education to postpone the day they will be obligated to start making loan payments. Thus--as DeVos disclosed--only a quarter of student-loan borrowers are paying back both principal and interest on their loans.

Over the past 15 years or so, presidential administrations have juggled the numbers to postpone the day of reckoning. "After us, the deluge," has been the watchword.  Meanwhile, university presidents are saying nothing about this looming thunderstorm. They hope the deluge won't come until they are drawing their pensions.

The McKinsey report, when it comes, will be a shock to the public consciousness. And there is only one solution. We must admit that the federal student-loan program is totally out of control and allow its victims to discharge their loans in bankruptcy.

Before the deluge: Photo Credit Yale Center for British Art

References

Michelle Hackman, Josh Mitchell, & Lalita Clozel. Trump Administration Hires McKinsey to Evaluate Student-Loan Portfolio. Wall Street Journal, May 1, 2019.

Monday, February 18, 2019

Cooking the Books: Federal Reserve Bank Says $166 Billion in Student Debt is Delinquent, But the Crisis is Worse Than That

Most Americans have confidence in what the Federal Reserve Bank says about the national economy. I know I do. But when the Federal Reserve Bank of New York reported that $166 billion in student debt is delinquent, it vastly understated the enormity of the student-loan crisis.

In its most recent quarterly household debt report, the Fed pegged total outstanding debt at $1.46 trillion as of the end of December. According to the Fed, about 11 percent of that debt ($166 billion) is delinquent or in default. That's a startling number. But the picture is far bleaker than that.

Just two months ago, Secretary of Education Betsy Devos stated publicly that only one out of four student borrowers (24 percent) are paying down the principal and interest on their loans. "As for FSA's portfolio today," DeVos said, "too many loans are either delinquent, in default, or are [in] plans on which students are paying so little, their loan balance continues to grow." In total, DeVos admitted, "43 percent of all loans are currently considered 'in distress,'" and 20 percent of all federal student loans are delinquent or in default.

DeVos also implicitly acknowledged that the federal government is cooking the books by classifying a lot of student debt as performing loans even though millions of people are not paying them back. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk," DeVos observed. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

In addition to the millions of people who have defaulted on their loans, millions more are in various plans that allow borrowers to skip their loan payments without being counted as defaulters. As of last summer, 7.4 million people were enrolled in long-term income-based repayment plans who are making payments so low that interest continues to accrue on their loans.

Think about that: 7.4 million people whose loans are labeled as performing even though their loan balances get larger with each passing month. You can label that scenario any way you like, but we're talking about 7.4 million additional defaulters.

The Department of Education has been scamming the public for a quarter of a century regarding student-loan defaults. For years, it only reported the percentage of loans that defaulted within two years of entering repayment. To keep their default rates down, colleges encouraged their former students to enter into economic-hardship deferments, which excused them from making payments without officially putting them in default.

Then DOE began reporting three-year default rates, which showed defaults ticking up slightly to the neighborhood of 11 percent. But the Brookings Institute (in a paper written by Looney and Yannelis) reported in 2015 that the 5-year default rate for a recent cohort was 28 percent--more than double the three-year rate.

In other words, for a cohort of borrowers that the Brookings researchers analyzed, more than one out of four student borrowers was officially in default after five years. According to the same Brookings report, the five-year default rate for students who attended for-profit colleges was 47 percent--nearly half!

Of course, loan default rates vary some from cohort to cohort, but there is no sign that the percentage of student borrowers paying off their loans is going up. In fact, the data show the opposite.

In short, the Fed's recent report may be technically accurate but it understates the magnitude of the student-loan crisis. When the Department of Education finally comes clean and gives us some accurate figures, I think we will find that half of all outstanding student loans are not performing--about 20 million borrowers with collective debt totally three quarters of a trillion dollars.