Showing posts with label economic hardship deferments. Show all posts
Showing posts with label economic hardship deferments. Show all posts

Monday, August 27, 2018

Ben Miller, where the hell ya been? Center for American Progress finally wakes up to the magnitude of student-loan crisis

Ben Miller, senior director of the Center for American Progress, reminds me of a fuddy duddy who falls asleep at a wild party in a friend's apartment.  Just as the party starts to get interesting, he nods off on a pile of party goers' coats.

 Meanwhile, the party spins out of control: fights break out, spontaneous trysts are consummated in closets and spare bedrooms, furniture is broken, lamps are shattered. When the fuddy duddy awakes, the apartment is in shambles and the police are cuffing drunken revelers and hauling them off to jail.

"Did I miss something?", the fuddy duddy asks as he rubs the sleep from his eyes.

Miller wrote an op ed essay for the New York Times on August 8 titled "The Student Debt Problem is Worse Than We Imagined?" Ya think? Where the hell have you been, Mr. Miller?  You're like the guy who went out to buy popcorn just before the steamy scene in Last Tango in Paris.

So here is what Mr. Miller said in his op essay: student loan default rates are much higher than the Department of Education reports. I hate to break it to you, Ben; but people have known that for years. Everybody knows the for-profit colleges have been hiding their default rates by pushing their former students into deferment programs to disguise the fact the suckers weren't paying on their loans.

In fact, the problem is probably worse that Miller described it in the Times. Looney and Yannelis reported in 2015 that the five-year default rate for the 2009 cohort of student borrowers was 28 percent (Table 8).  And the five year default rate for the 2009 cohort of for-profit students was 47 percent--almost double what Miller reported for the 2012 cohort--only 25 percent.

Admittedly, Miller is looking at the 2012 cohort of debtors, while Looney and Yannelis analyzed the 2009 cohort. But surely no on believes the student-loan problem got better in recent years. Everyone knows the crisis is getting worse.

Miller's analysis briefly mentions the federal push to put student borrowers in deferment plans,  but that problem is more serious than Miller intimates. In fact 6 million student borrowers are in income-based repayment plans (IBRPs) and are making payments so small their loan balances are getting larger and larger with each passing month due to accruing interest.  For all practical purposes, the IBRP participants are also in default.

But Mr. Miller can be forgiven for waking up late to smell the coffee. Perhaps Miller, like the New York Times that published his essay, was so distracted by Stormy Daniels and the Russians that he was late to notice that American higher education is going down the toilet.  And surely, we can all agree that the person pressing down on the toilet-bowl handle  is Betsy DeVos.

What happened while Center for American Progress was snoozing?



References

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

Ben Miller. The Student Debt Problem is Worse Than We Imagined. New York Times, August 8, 2018.

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, September 28, 2017

The Department of Education's Official 3-Year Student-Loan Default Rate is Baloney

During the First World War, it is said, the British military kept three sets of casualty figures: one set to deceive the public, a second set to deceive the War Ministry, and a third set to deceive itself.

Over the years, the Department of Education has released its annual 3-year student-loan default rate in the autumn, about the time the pumpkins ripen. And every year the default rate that DOE issues is nothing but bullshit. I can't think of another word that adequately conveys DOE's mendacity and fraud.

This year, DOE reported that 11.5 percent of the the 2014 cohort of debtors defaulted on their loans within three years and that only ten institutions had default rates so high that they can be kicked out of the federal student-loan program. That's right: among the thousands of schools and colleges that suck up student-aid money, only ten fell below DOE's minimum student-loan default standard.

Why do I say DOE's three-year default rate is fraudulent?

Economic hardship deferments disguise the fact that millions of people aren't making loan payments. First of all, DOE has given millions of student-loan borrowers economic-hardship deferments or forbearances that allow borrowers to skip their monthly loan payments.  These deferments can last for several years. 

But people who are given permission to skip payments get no relief from accruing interest. Almost all these people will see their loan balances grow during the time they aren't making payments. By the time their deferment status ends, their loan balances will be too large to ever pay back.

The colleges actively encourage their former students to apply for loan deferments in order to keep their institutional default rates down. And that strategy has worked brilliantly for them. Virtually all of the colleges and schools are in good standing with DOE in spite of the fact that more than half the former students at a thousand institutions have paid nothing down on their loans seven years after beginning repayment.

Second,  DOE's three-year default rate does not include people who default after three years.  Only around 11 percent of student borrowers default within three years, but 28 percent from a recent cohort defaulted within five years. In the for-profit sector, the five-year default rate for a recent cohort of borrowers was 47 percent--damn near half.

DOE's income-driven repayment plans are a shell game.  As DOE candidly admits, the Department has been able to keep its three-year default rates low partly through encouraging floundering student borrowers to sign up for income-driven repayment plans  (IDRs) that lower monthly loan payments but stretch out the repayment period to as long as a quarter of a century.

President Obama expanded the IDR options by introducing PAYE and REPAYE, repayment plans which allow borrowers to make payments equal to 10 percent of their discretionary income (income  above the poverty level) for 20 years.

But most people who sign up for IDRs are making monthly payments so low that their loan balances are growing year by year even if they faithfully make their monthly loan payments. By the time their repayment obligations cease, their loan balances may be double, triple, or even quadruple the amount the originally borrowed.

Alan and Catherine Murray, who obtained a partial discharge of their student-loan debt in bankruptcy in 2016, are a case in point. The Murrays borrowed $77,000 to obtain postsecondary education and paid back about 70 percent of that amount. But they ran into financial difficulties that forced them to obtain an economic hardship deferment on their loans.  And at some point they entered into an IDR.

Twenty years after finishing their studies, the Murrays' student-loan balance had quadrupled to $311,000!  Yet a bankruptcy court ruled that the Murrays had handled their student loans in good faith, and they had never defaulted.

DOE is engaged in accounting fraud. If the Department of Education were a private bank, its executives would go to jail for accounting fraud. (Or maybe not. Wells Fargo and Bank of America's CEOs aren't in prison yet.)  The best that can be said about DOE's annual announcement on three-year default rates is that the number DOE releases is absolutely meaningless.

This is what is really going on. More than half of the people in a recent cohort of borrowers have not paid down one penny of their student-loan debt five years into the repayment phase of their loans.  And the loan balances for these people are not stable. People who are not paying down the interest on their student loans are seeing their loan balances grow.

In short, DOE is operating a fraudulent student-loan program.  More than 44 million Americans are encumbered by student-loan  debt that totals $1.4 trillion.  At least half that amount--well over half a trillion dollars--will never be paid back.

Betsy DeVos' job is to keep the shell game going a little longer, which she is well qualified to do. After all, she is a beneficiary of Amway,  "a multi-level marketing company," which some critics have described as a pyramid scheme.

Betsy DeVos: The perfect person to oversee DOE's student-loan shell game

References

Paul Fain. Federal Loan Default Rates Rise. Insider Higher ED, September 28, 2017.

Paul Fain. Feds' data error inflated loan repayment rates on the College ScoreboardInside Higher Ed, January 16, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall 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 ratesWashington, DC: Brookings Institution (2015).

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016), aff'd, Case No. 16-2838 (D. Kan. September 22, 2017).

Joe Nocera. The Pyramid Scheme Problem, New York Times, September 15, 2015.







Tuesday, February 14, 2017

Has higher education become a criminal enterprise? "It's a cheating situation"

 I am not a doomsayer or a survivalist, and I try to stay away from apocalyptic bloggers. But James Howard Kunstler, whose blog site goes by the name of Clusterfuck Nation, is making persuasive arguments that our postmodern economy, hopped up on cheap energy and enormous debt levels, is unsustainable. In fact, he predicts an economic  meltdown sometime this spring.

Kunstler's focus is on broader economic issues than student loans, but he made a trenchant observation about higher education in his latest blog essay, which struck a nerve with me.  Pervasive accounting fraud in the national economy, Kunstler writes,"bleeds a criminal ethic into formerly legitimate enterprises like medicine and higher education, which become mere rackets, extracting maximum profits while skimping on delivery of the goods."

And of course Kunstler is right. The Department of Education shovels $150 billion a year in federal student aid to prop up the higher education industry, which is becoming nothing more than a racket. Higher education apologists stress the value of a college education, but 45 percent of recent college graduates are in jobs that do not require a college degree. 

No wonder 8 million college borrowers are in default and millions more are not paying down their student loans.  DOE knows the score but it continues to deceptively downplay the student-loan default rate, stuffing debtors into economic hardship deferments and income-driven repayment plans that hide the fact that a large percentage of student borrowers will never be free of their loans. 

Meanwhile, the for-profit college sector, which might fairly be labeled a criminal culture, rips off poor and minority Americans and gives them educational credentials that are damned near worthless. Now they are beginning to shut down and go bankrupt, leaving their former students with mountains of debt. 

The public universities, bloated and lazy, limp along by raising student tuition as state subsidies dry up.  Public university leaders are motivated solely by politics, terrified by the possibility they might inadvertently do or say something politically incorrect.

State higher education leaders refuse to reorganize public colleges to be more efficient. In my own state of Louisiana, we have regional public colleges with declining enrollment in every corner of the state, but no one has the political courage to close any of them. Many Southern states support historic black colleges at public expense, although there is absolutely no need for university systems that cater to only one race. Louisiana even has a black law school, which operates in a substandard way just a few miles away from the state's flagship school of law. 

As for the nonprofit public institutions, they now fall into two camps. The ultra elite institutions--Harvard, Yale, Stanford, etc.--have brand names so strong they can charge what ever tuition rate they want. They also have fat endowments that insulate them from economic forces. 

On the other hand, small, obscure liberal arts colleges are under severe financial stress, and quite a few will close within the next five years. Parents are refusing to pay $50,000 a year for their offspring to attended a nondescript private school.  The little colleges have been forced to offer huge discounts--approaching 50 percent--to lure new students through the door. 

In short, every sector of higher education has been living in a fools paradise, but the data are now coming in, and they are alarming.

Nearly half the people who took out student loans to attend for-profit colleges default within five years. Millions of college borrowers whose loans are in repayment are seeing their student-loan balances grow larger, not smaller, due to negative amortization. Their token monthly payments keep borrowers out of default but are so small they don't cover accruing interest.

Nationwide, more than half of student borrowers owe more than they borrowed just two years into repayment. And, as the Wall Street Journal reported just a few weeks ago, half the students who took out student loans to attend more than 1000 schools and colleges have not paid down even one dollar on their loans seven years after their repayment obligations kicked in.

Kunstler is right. Evasiveness, almost criminal in its proportions, pervades almost every sector of higher education. As a classic country-and western-song might put it, "there's no use in pretending there'll be  a happy ending." Colleges and universities are in a cheating situation, refusing to recognize that the golden age of American higher education is coming to an end.



References

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall Street Journal, January 18, 2020.

James Howard Kunstler. Made for Each Other. Clusterfuck Nation, February 13, 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 ratesWashington, DC: Brookings Institution (2015).

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).

Saturday, April 4, 2015

What was your first clue, Sherlock? A Chronicle of Higher Education writer explains that some colleges are gaming their student-loan default rates

Colleges must keep their student-loan default rates down or they will lose their right to participate in the federal student loan program. If a college's three-year default rate (as measured by the Department of Education) reaches 30 percent for three consecutive years, that college can be kicked out of the federal student loan program. And most colleges cannot survive without federal student-aid money.

Ben Miller, writing for Chronicle of Higher Education, explains how colleges can artificially keep their student-loan default rates down, hiding the fact that a lot of their students are not paying back their loans.  As Miller points out, DOE's student-loan default measure only calculates the percentage of defaulters who default within three years of beginning repayment--which is a very short window of time.
[B]ecause the measure tracks results for such a short time, it is possible for colleges to game the metric by artificially lowering the number of students who default within three years. How? A college can encourage borrowers to ask for a forbearance--an option in which the federal government allows borrowers to stop making payments without their loans becoming delinquent or heading toward default. Since it takes almost a year to default, the college needs borrowers to enter forbearance for a couple of years, ensuring they cannot show up in the default rate, even if they never make a single payment.
In fact, as Senator Harkin's Senate Committee documented in its report on the for-profit college industry, many for-profits aggressively encourage students to apply for economic hardship deferments, which are ridiculously easy to obtain.

That is probably why the three-year student-loan default rate for for-profits actually went down a bit according to DOE's 2014 student-loan default rate report. The for-profits are adept at getting their former students to sign up for economic hardship deferments that obscure the fact that these students are not making their loan payments.

Miller argued persuasively that a better measurement of student-loan defaults would be compare the number of students going into repayment at a college compared to the number of graduates.  Students who are going into repayment without graduating have lower rates of success than graduates in terms of getting good jobs, and they also have higher student-loan default rates.  Therefore, a college that has a high level of students beginning repayment compared to the number of graduates is probably a college that has a high student-loan default rate.

So what did Miller find?  Among public 4-year institutions, 84 students went into repayment for every 100 graduates.  But in the 4-year for-profit sector, 233 students went into repayment for every 100 graduates.  In other words, more than twice as many students attending 4-year for-profit institutions began repayment (in the most recent cohort of borrowers) than obtained degrees.

That is a very bad sign, and a strong indicator that the for-profits have much higher student-loan default rates than DOE's anemic metric shows.  It seems reasonable to conclude that the true student-loan default rate in the for-profit sector is at least twice as high as DOE reports; it is probably at least 40 percent!

The Obama administration surely knows that the number of students who default on their loans is much higher than DOE reports every year and that the true default rate for students who attended for-profit institutions is alarmingly high.

But so far at least, the for-profits have evaded effectively regulation; and they have hidden their true default rates by encouraging their former students to sign up for economic hardship deferments. Meanwhile they suck up about one quarter of all the federal student-aid money while only enrolling about 11 percen of all the post-secondary students.

Some day this house of cards will collapse, and the public will realize that the for-profit colleges have unacceptably high student-loan default rates. And we will have to face the fact that millions of people --mostly low-income and minority students--have defaulted on their loans and have had their lives wrecked by the fact that they attended for-profit institutions.

References

Ben Miller. Student-Loan Default Rates Are Easily Gamed. Here's a Better Measure. Chronicle of Higher Education, March 26, 2015.