Bloomberg reports that student-loan delinquencies have ticked upward: Another sign of growing misery among student debtors

Shahien Nasiripour, writing for Bloomberg.com, wrote an article last month about rising student-loan delinquency rates. As of June 30th, 18.8 percent of student borrowers were at least one month late on their loan payments.  That's about 3.3 million college borrowers.

The Department of Education's June report showed a slight uptick from the delinquency rate one year earlier, when 18.6 percent of student debtors were a month late on their loan payments.

What does this mean?

Yelena Shulyatyeva, a senior economist for Bloomberg Intelligence, professed to be mystified. "There's no fundamental reason for that to be happening," Shulyatyeva said.

James Kvaal, who was President Obama's Deputy Director of White House Domestic Policy, also seemed stumped by rising delinquency rates. "That the trend has stalled," Kvaal said, "is not yet a warning sign, but it is a question mark."

Nasiripour, who has done some fine reporting on the student loan crisis, summarized why this development is puzzling to many policy experts. "After all," she wrote, "the U.S. economy has improved since June of last year, with lower unemployment, higher household incomes and increased wealth, federal data show." Moreover, Nasiripour pointed out "Consumers are more confident about the economy, and their own personal finances, too, according to Bloomberg Consumer Comfort data."

But rising delinquency rates are just one more sign that the student loan program is in meltdown. Let's tick off some more disaster indicators:

• Last year, 1.1 million Americans defaulted on their student loans at an average rate of 3,000 defaults a day.

• A recent report released by the National Center for Education Statics revealed that almost 6 people in ten who first enrolled for postsecondary education in 1995-96 had not paid off their student loans 20 years later.

• As reported by the Wall Street Journal, more than half the students at a thousand colleges and schools had not reduced their student-loan debt by one penny seven years into repayment.

• According to a 2016 report from the Government Accounting Office, half the people who entered income-driven repayment plans to lower their monthly loan payments were removed from their IDRs for failing to recertify their income.

• A Brookings Institution report noted that more than one out of four people (28 percent) in a recent cohort of student borrowers defaulted on their loans within five years of beginning repayment. The default rate among students who attended for-profit colleges was 47 percent.

Congress, the Department of Education, and the higher education industry refuse to face reality. I suppose all the people who should be addressing this crisis are hoping they will be retired and playing golf in Florida when the student-loan program collapses.

And collapse it will. In the meantime, millions of student-loan debtors are buried under a mountain of debt.

I believe the federal bankruptcy courts are slowly awakening to this crisis and that they are increasingly willing to rule compassionately toward distressed student debtors who seek bankruptcy relief.  The Murray decision out of Kansas, which was affirmed on appeal last month, is a heartening sign.

The Murrays were fortunate enough to have been represented by an able attorney, and they also received assistance in the form of an amicus brief filed by the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys.

Unfortunately, few insolvent student debtors are able to find attorneys to take their cases. If American lawyers understood the student-loan crisis for what it is--a human rights issue, they might take up some of these cases as volunteers, much as the civil rights lawyers did in the 1960s, when attorneys from across the United States came South at the risk of their lives to represent civil rights activists.

I am convinced that the solution to the student-loan catastrophe lies with the federal bankruptcy courts. Congress does not have the collective courage to address this problem legislatively, and the higher education industry--like a cocaine addict--survives from day to day on regular infusions of federal student-aid money.

American colleges, like drug addicts, survive from day to day on regular infusions of federal student-aid money.

References

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.

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).

Shahien Nasiripour. More Americans Are Falling Behind on Student Loans, and Nobody Quite Knows Why. Bloomberg.com, September 28, 2017.

The Wrong Move on Student Loans. New York Times, April 6, 2017.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.

Jennie H. Woo, Alexander H. Bentz, Stephen Lew, Erin Dunlop Velez, Nichole Smith, RTI International,  (2017, October). Repayment  of Student Loans as of 2015 Among 1995-96 and 2003-04 First-Time Beginning Students. First Look (NCES 2018-410). U.S. Department of Education. Washington DC; National Center for Education Statistics. [Sean A Simone, Project Officer]

ITT Tech files for bankruptcy, leaving more than 35,000 students in the lurch. 23 Democrat Senators ask the Department of Education to give ITT students special assistance

ITT Educational Services, a for-profit corporation operating more than 130 vocational and technical training schools, filed for bankruptcy earlier this month. The Department of Education shut off student aid money to ITT in late August, and the corporation quickly collapsed.

ITT's bankruptcy left  about 35,000 students in the lurch.  Most of them took out federal student loans to pay ITT's extraordinarily high tuition, and none of them will be able to complete their studies. DOE Secretary John King sent a message to these students telling them they had just two options: transfer their credits to other institutions or file for loan forgiveness under DOE's "closed school"forgiveness regulations.

On September 15, 23 Democratic Senators sent Secretary King a letter asking DOE to grant ITT's former students special assistance. The letter is slightly incoherent, which is understandable given the fact that 23 politicians had to agree on the text. Nevertheless, the Senators articulated several specific requests for relief.

Extending the eligibility guidelines for total student-debt relief for ITT's former students. First, the Senators want DOE to loosen the eligibility requirements for ITT students who file for total loan forgiveness under DOE's "closed school" relief regulations.  Under current DOE guidelines, ITT's former students can apply for debt relief under DOE's "closed school" procedures if they were enrolled at ITT at the time it closed or withdrew from ITT up to 120 days prior to closure.

The Democrats asked Secretary King to expand the 120-day window to a little more than two years. If King grants this request, any student who withdrew from ITT on or after March 1, 2014 will qualify to have their ITT student loans forgiven under DOE's "closed school" discharge process.

Preservation of ITT's student records. The Senators also asked DOE to preserve all of ITT's documents and records that might be relevant to an ongoing investigation of ITT's  activities or that could be helpful to students seeking to get their loans discharged..

Explore legal authority to automatically discharge ITT students' federal loans.  Finally, the Senators urged DOE to determine its authority to automatically discharge student loans of ITT    students and to consider discharging loans of all students who don't transfer their ITT credits to another institution within three years and who are otherwise eligible for a "closed school" discharge.

All these recommendations are commendable but they are far too timid. After all, as the Senators attested in their letter, DOE shut off ITT's funding based on serious concerns about "ITT Tech's deceptive practices, dubious educational quality, and financial integrity."

As reported in Bloomberg News, the U.S. Securities and Exchange Commission sued ITT for fraud in 2015, and the Consumer Financial Protection Bureau sued the company in in 2014, "accusing it of overstating students' job prospects and potential salaries and then pushing them into high-cost private loans that were likely to default." Both suits are still pending.

ITT has enrolled thousands of students over the years. Many of these students--my guess is most of them--received little or no economic benefit for their ITT tuition dollars.

I'm sure ITT can point to some students who completed their ITT studies and found good paying jobs, but I think for every success story  there is surely one or more students who  got no economic benefit from their ITT studies and wound up heavily in debt.

One thing is certain. The for-profit college industry is imploding, and DOE needs a comprehensive process for assisting students who attended one of the collapsing for-profit schools.  Several years ago, Professor Robert C. Cloud and I proposed a change in the Bankruptcy Code that would allow anyone who accumulated student-loan debt from attending a for-profit college and who is insolvent to receive a bankruptcy discharge of student-loan debt without having to show "undue hardship."

In other words, we argued that student debt acquired to attend a for-profit college should be treated like any other unsecured debt, which would make it readily dischargeable in bankruptcy. In my view, this proposal makes more sense than for DOE to deal with each collapsing for-profit college on an ad hoc basis.

Let's see if our U.S. Senators have the courage to offer broader relief for for-profit college students than the tepid proposals contained in the Democratic Senators' recent letter.


References

Richard Fossey, Robert C. Cloud, R. (2011). From the cone of uncertainty to the dirty side of the storm: A proposal to provide student-loan debtors who attended for-profit colleges with reasonable access to the bankruptcy courts. Education Law Reporter, 272, 1-18.

Secretary of Education John B. King Jr. A Message from the Secretary of Education to ITT Students. Accessible at http://blog.ed.gov/2016/09/message-secretary-education-itt-students/

Letter to the Honorable John King, Secretary of Education, from 23 Democratic Senators, September 15,2016. https://www.insidehighered.com/sites/default/server_files/files/9_15_16%20ITT%20Tech%20ED%20Letter%20(1).pdf

Dawn McCarty and Shahien Nasirpour. ITT Educational Services Files for Bankruptcy After Shutdown. Bloomberg, September 16, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-09-16/itt-educational-services-files-for-bankruptcy-after-shutdown-it6byu6t

Reuters. ITT Educational Services Files for Bankruptcy After Aid Crackdown. International New York Times, September 17, 2016. Accessible at http://www.nytimes.com/2016/09/18/business/itt-educational-services-files-for-bankruptcy-after-aid-crackdown.html?_r=0

ITT Tech is teetering on the brink of collapse due to pressure from the U.S. Department of Education: Why did DOE wait so long to aggressively regulate the for-profit college industry?

ITT Educational Services, owner of ITT Technical Institute, is on the verge of collapse. A few days ago, the U.S. Department of Education issued a directive barring ITT from enrolling any students who rely on federal financial aid to pay their tuition.

DOE's recent action may be the coup de grâce for this tottering for-profit chain of technical schools. ITT gets 80 percent of its revenues from federal student aid monies.  Now that DOE has turned off the spigot of federal funds, ITT's days are numbered. In fact, if you want to measure ITT's pulse, just look at its stock price.   The company's stock was trading today at about 51 cents a share. In 2009, the stock sold at more than 200 times today's price--$128!

Shahien Nasiripour, a Bloomberg reporter, argued recently that the Department of Education does not know what it is doing when it comes to regulating for-profit colleges. Nasiripour wrote that DOE bungled the regulation of Corinthian Colleges and was surprised when the college chain filed for bankruptcy, leaving thousands of students in the lurch.   Nasiripour quoted an observer who said that "[t]he Education Department hasn't been a good analyst of corporate balance sheets."

Now, Nasiripour maintains, DOE is repeating its mistake with ITT and may "unwittingly exacerbate ITT's financial woes."

I disagree with Nasiripour. I think DOE knows exactly what it is doing to ITT and is fully mindful that its recent regulatory actions will likely drive ITT out of business. DOE surely knows that cutting ITT off from federal student aid money will shut off most of its revenues. And not long ago, DOE ordered ITT to almost double its cash reserves--from $124 million to $247 million, which ITT almost certainly is unable to do.

Why is the Obama's DOE acting so aggressively against the for-profit college industry now that Obama has less than three months left in his final term? Is DOE moving against the for-profits now because Obama no longer cares about the political consequences of cracking down on a powerful industry?

Or is DOE pressuring the for-profits to drive down their stock prices so that friendly investors can snap them up for a song and make a killing? Martin Nesbitt, a close confidant of Barack Obama, is leading a group of equity funds to purchase Apollo Education Group, the University of Phoenix's owner. If the deal goes through, Nesbitt's partners will only pay around $9 a share for the stock--about a tenth of Apollo's all-time-high share price.

If ITT gets bought up by financial vultures, it will be interesting to see if the new owners have ties to the Obama administration.

But let's give Obama's DOE the benefit of the doubt and assume that it is finally doing what it should have done a long time ago, which is aggressively regulate the for-profit industry in order to protect students from disreputable operators.

But DOE officials should remember that shutting down reputedly shady for-profit colleges is only half the job.  Corinthian Colleges had about 300,000 former students at the time it filed for bankruptcy and most of them took out federal student loans. All those people should have their student loans forgiven.

If DOE shuts down ITT--which it is apparently trying to do with its recent regulatory actions, it needs to provide relief for all of ITT's indebted students--both current enrollees and former students.

If  ITT closes and DOE forces all these hapless student-loan debtors into a tedious administrative process in order to get their student loans forgiven, then we will know that the Obama administration doesn't really care about the students who attended for-profit colleges.  Rather, knowingly or unknowingly, DOE may simply be driving down the value of for-profit colleges in a way that allows new investors to swoop down and scoop them up at bargain prices.

References

Shahien Nasiripour. The Obama Administration Could Cause the Next Big For-Profit College Collapsehttp://www.bloomberg.com/news/articles/2016-06-09/the-obama-administration-could-cause-the-next-big-for-profit-college-collapse. Bloomberg.com, June 9, 2016.  Accessible at http://www.bloomberg.com/news/articles/2016-06-09/the-obama-administration-could-cause-the-next-big-for-profit-college-collapse

Josh Mitchell. Education Department Orders ITT Educational to Bolster Finances. Wall Street Journal, June 6, 2016. Accessible at http://www.wsj.com/articles/education-department-orders-itt-educational-to-bolster-finances-1465246531

Mark Muckenfuss. New Sanctions Against ITT Tech will limit enrollment. Press Enterprise, August 26, 2016.  Acessible at http://www.pe.com/articles/students-811674-itt-school.html