Showing posts with label REPAYE. Show all posts
Showing posts with label REPAYE. Show all posts

Thursday, August 11, 2016

The White House Council of Economic Advisers issues a feel good report on federal student loans: Ignoring reality

President Obama's Council of Economic Advisers reminds me of the French Army during the spring of 1940 as German panzer columns were streaming toward Paris. Although  the Germans had crossed the Meuse River and French troops were fleeing everywhere, General Alphonse Georges sent a message to General Maurice Gamelin that his soldiers were holding firm and fighting in the Marfée Woods. "We are calm here," Georges assured Gamelin.

In fact, French troops were not fighting in the Marfée Woods. They were south of the Woods in full retreat.

The Council of Economic Advisers report: Don't worry about debt--college is a good investment

Let's now take a look at a report issued last month by President Obama's Council of Economic Advisers. Titled Investing in Higher Education: Benefits, Challenges, and the State of Student Debt, the report basically repeats the old bromide that college is a good investment and that long-term income-based repayment plans are the smart way to deal with rising levels of student indebtedness.

Of course it is true that college graduates earn more over their lifetimes than people who only have a high school degree. But that does not mean that college is always a good investment. People who graduate from college may simply have more initiative and resources than people who do not graduate. As the CEA report admitted, "students who attend college may have been more skilled or more connected and thus would have earned more [than non-college completers] regardless."

At the very least, college graduates have the self-discipline necessary to sit through four years of boring college classes and listen to a lot of postmodernist bullshit. And that's the kind of self-discipline that can help a person obtain a relatively well paying job--whether or not that person has a college degree.

In my view, the CEA report's breezy reassurances about the value of a college degree glosses over a bleak reality, which is this:  Millions of Americans are suffering because they took out student loans to go to college and can't pay them back.

CEA report:  Cheerleader for long-term income-based repayment plans

Part of the CEA's 78-page report was devoted to singing the praises of long-term income-based repayment plans (IBRPs). About 5 million people are in these programs now, and CEA Chairman Jason Furman wants to shove more people into "these smarter repayment plans."

In my opinion, the CEA's discussion of IBRPs was utterly deceptive. First of all, the report described these plans based on the unstated assumption that most people who enter IBRPs will pay back the principal on their loans. But I don't think they will.

The report provided this unrealistic example of how the IBRP program works:  A 2008 college graduate who leaves college with $31,000 in debt and earns an income of $31,000 a year (the median income for a 2008 college graduate) will pay off the debt in 17 years, assuming typical income growth and a 2 percent inflation rate. (The COA's illustration appears in Figure 41 on page 63 of its report.)

But of course, a great many people signing up for IBRPs are not college completers who go into jobs that pay the median income for new college graduates. A lot of people in these plans are people who didn't complete college, weren't able to find well-paying jobs, or who entered IBRPs after struggling for many years to pay off their loans under standard 10-year plans. Brenda Butler, for example, whose bankruptcy case was decided this year, entered into an IBRP after trying unsuccessfully to pay off her loans for 20 years. As the court noted, she won't finish paying off her student loans until 2037--42 years after she graduated from college!

And although the CEA report touts the fact that people in IBRPS who are unemployed won't have to make any payments on their student loans during their period of unemployment, the report failed to mention that interest accrues during the time borrowers are not making payments.

In fact, the report made no mention of accruing interest for IBRP participants and no mention of the fact that many people who enter IBRPs after defaulting on their loans have loan balances far larger than the amount they borrowed due to accruing interest, penalties, and collection fees.

And the report made no mention of the tax consequences for people who complete IBRPs but fail to pay off their loan balances. The government forgives the unpaid debt for these people, but the amount of the forgiven debt is considered taxable income by the IRS.

Conclusion: The CEA says "We are calm here" while millions of student-loan debtors are suffering

It is now clear that the Obama administration's central strategy for dealing with the student-loan crisis is to push millions of people into PAYE, REPAYE and other long-term income-based repayment plans that stretch out people's loan payments over 20, 25 and even 30 years. The CEA's example for how such plans work does not portray a typical IBRP participant. Most people do not enter these plans immediately after graduating from college, they do not earn the median income for new college graduates, and their income trajectories are not typical.

Many IBRP participants are people who did not graduate from college, or who graduated from college but did not find a job that paid well enough to service their student loans. Many have defaulted and have seen their loan balances go up due to accruing interest and the fees and penalties that creditors stuck on to their loan balances.

In fact, I believe most people in IBRPs will never pay off their loan balances because their income-based payments are not large enough to cover accruing interest. Thus most people in these plans will be faced with big tax bills when they finish their payment terms because the amount of their forgiven debt is considered taxable income by the IRS.

Now I fully expect that tax regulations will eventually be amended so that forgiven loans will not be considered taxable income, but that doesn't change the fact that most people in IBRPs will never pay off their loans.

In short, the CEA, like General Georges during the Battle of France, is saying "We are calm here" while in fact the student loan program is collapsing.

French troops retreeating during the Battle of France:
"We are calm here."


References

Jason Furman. The Truth About Higher Education And Student LoansHuffingon Post, Jul 19, 2016. Accessible at: http://www.huffingtonpost.com/jason-furman/the-truth-about-higher-ed_b_11060192.html

Council on Economic Advisors. Investing in Higher Education: Benefits, Challenges, and The State of Student Debt. July 2016. accessible at https://www.whitehouse.gov/sites/default/files/page/files/20160718_cea_student_debt.pdf

Note: References to the Battle of France come from The Collaps of the Third Republic by William L. Shirer. The quotation from the message by General Alphonse Georges can be found on page 650.

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



Tuesday, May 24, 2016

Why the Obama administration launched its REPAYE plan: It had no choice

Late last year, the Obama administration's Department of Education launched its eighth student-loan repayment program, labeling it REPAYE.  Very similar to a previous Obama initiative titled PAYE, the REPAYE program allows college-loan borrowers to pay off their student loans over 20 years. The chief new feature of REPAYE is broader eligibility. Nearly every student-loan debtor will qualify to participate in the REPAY program.

Under both PAYE and REPAYE, college-loan debtors make monthly payments based on their income, not the amount they borrowed. Payment rates are established annually, based on the borrower's reported income for the previous year, with payments calculated to equal10 percent of the borrower's discretionary income.

In many ways, REPAYE is a good deal for overburdened student-loan debtors. Monthly payments will be lower than the standard 10-year repayment plan; and payments will be allowed to fluctuate as borrowers' income goes up or down. People who are unemployed or who live at the poverty level won't be required to make any payments at all.

All in all, the Obama administration's latest student-loan program is incredibly generous. In fact, most debtors on the REPAYE plan will be making monthly payments so low that they won't cover accruing interest on their loans. In other words, at the end of the 20-year repayment program, most debtors will still have large balances on their loans, which will be forgiven.  The forgiven amount will be absorbed by taxpayers.

Why did the Obama administration launch REPAYE, which could reasonably criticized as fiscally irresponsible? I will tell you why: it had no choice.

For years, the government has permitted overburdened student-loan debtors to enroll in economic hardship deferment programs and other forbearance plans that allowed borrowers to temporarily skip their monthly student-loan payments. Colleges encouraged this practice as a way to keep their short-term  student-loan default rates down--particularly the for-profit colleges, which needed to keep their default rates below 30 percent in order to continue receiving federal student-aid money.

For some people on these plans, however, the forbearances weren't temporary--they stretched out for years while interest accrued on their original debt. Thus for virtually everyone in a forbearance or deferment program, their loan balances were getting larger with each passing month due to accruing interest.

This phenomenon was documented in a recent Brookings Institution report written by Looney and Yanelis. These scholars found that loan balances were going up, not down, two years into the repayment period for more than half of student-loan borrowers in repayment.

In fact, for millions of people who have had their student loans in nonpayment status for any considerable period of time, it has become virtually impossible to to pay back their loans. This state of affairs drove many debtors into default, which caused their balances to grow even larger due to the penalties and fees that got tacked on to their debt.

President Obama and Arne Duncan could see that there were only two ways out of this morass. Either people must be allowed to file for bankruptcy to discharge their college-loan debt or their loans have to be refinanced to make the monthly payments lower. Since bankruptcy reform is politically impossible, Obama and Duncan chose to launch PAYE and REPAYE.

But there are enormous problems with the Obama administration's fix. First, most people entering PAYE and REPAYE are not enrolling immediately after graduating from college. Most struggle for a few years to make payments under the standard 10-year plan and then enter REPAYE because they can't service their loans. For these people, enrolling in a 20-year repayment plan extends their repayment period out over their entire working lives.

Butler v. Educational Credit Management Corporation, decided earlier this year, illustrates this problem. Beverly Butler struggled for almost 20 years to make payments on loans she took out to get her college degree, which she obtained in 1995. Eventually, she enrolled in a 25-year repayment plan that stretches out her loan repayment period until 2037--42 years after she graduated from college!

And of course the other big problem with PAYE and REPAYE is that most people in these programs are not paying back their loans at all; they are making token payments that don't cover accruing interest. In essence, these programs are designed to disguise the fact that for all practical purposes, people in long-term repayment programs have defaulted on their loans.

This is no small matter. Almost 5 million people are in income-based repayment plans now; and the Department of Education wants to enroll 2 million more by the end of next year. Without question, REPAYE is going to be the default option for most student-loan debtors in the years to come, which is what the Brookings Institution and other higher-education industry insiders want to happen.

In reality, the Obama administration has imposed a tax on most people who borrow money to attend college;  REPAYE participants will be obligated to pay a percentage of their incomes for a majority of their working lives in return for the privilege of going to college.

How ironic. Barack Obama, self-proclaimed friend of the disadvantaged, has established a huge sharecropper program for college goers. Ultimately of course, all Obama did was buy time for the college industry. In the long run, REPAYE can't sustain the status quo. At some time in the not too distant future, higher education as we now know it will collapse.

And the first cards to fall in this house of cards will be the for-profit colleges and the small private liberal arts colleges. Be patient. You don't have long to wait.

Enrollment at four-year for-profit colleges declined 9.3 percent from last year, and the University of Phoenix's enrollment has declined by half from its peak years. The private liberal arts colleges are behaving like a Texas fireworks stand (Buy One, Get One Free!!), discounting tuition for first-time freshman by 48 percent.

The end is near.

 References

Erin E. Arvedlund. A new way, REPAYE, to get out of college debt. Philadelphia Inquirer, March 29, 2016. http://articles.philly.com/2016-03-29/business/71877131_1_income-based-repayment-plan-loan-debt-standard-repayment-plan.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Rick Seltzer. Discount rates rise yet again at private colleges and universities. Inside Higher Ed, May 16, 2016. Accessible at https://www.insidehighered.com/news/2016/05/16/discount-rates-rise-yet-again-private-colleges-and-universities.

Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653

Enrollments slide, particularly for older students. Inside Higher Ed, May 24, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/05/24/enrollments-slide-particularly-older-students?utm_source=Inside+Higher+Ed&utm_campaign=74ec3a191d-DNU20160524&utm_medium=email&utm_term=0_1fcbc04421-74ec3a191d-198564813




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).