Showing posts with label income based repayment plans. Show all posts
Showing posts with label income based repayment plans. Show all posts

Tuesday, July 5, 2016

Democratic Party Platform Plank on Higher Education: A Big Pile of Horse Manure

The Democratic Party released its Platform this week, or rather it released a draft marked "Deliberative and Predecisional." The Higher Education plank is only a few hundred words long, but it still adds up to one big pile of horse manure.

First, the Democrats promise to cut interest rates on student loans, "thereby preventing the federal government from making billions of dollars in profits from student loans." What was the Platform Committee smoking when it wrote that sentence?

Everyone who knows even a little bit about the student-loan crisis realizes that the federal government is not making a profit on student loans. It is incurring huge losses--losses that are growing by the day.

Why do I say this? First of all, the student-loan default rate is catastrophic--far higher than the anemic rate the Department of Education publishes every autumn. The Brookings Institution reported that almost half of students who take out loans to attend a for-profit institution default in five years. The five-year default rate for students overall is 28 percent.

Moreover, the Obama administration is pushing distressed student-loan borrowers into long-term repayment plans that set monthly payments so low that borrowers are not paying down accruing interest. In fact, more than half of student borrowers are seeing their loan balances go up two years after beginning the repayment phase of their loan--not down.

Do the Brookings numbers indicate to you that the government is making a profit on the student loan program? Of course not. And the fact that Senators Elizabeth Warren, Charles Schumer, Barbara Boxer, and now the whole Democratic Party insist that the government is reaping huge profits off the student loan program demonstrates that the Democrats are clueless about the student-loan crisis or that they are lying about it.

The Democrats also promise to "simplify and expand access to income-based repayment so that no student loan borrowers have to pay more than they can afford." In other words, the Democrats want to push more and more student borrowers into 20- or 25-year income based repayment plans (IBRPs).

Five million people are in IBRPs now; and President Obama wants to enroll 2 million more by the end of next year. Apparently, the Democrats want to increase that number even further.

Of course, IBRPs are nothing more than a conspiracy by our government to create a giant class of sharecroppers who will pay a percentage of their incomes to Uncle Sam over the majority of their working lives.

And finally, the Democrats pledge to "restore the prior standard in bankruptcy law to allow borrowers with student loans to discharge their debts in bankruptcy as a measure of last resort." I interpret this pie-in-the-sky promise to mean the Democrats will delete the "undue hardship" provision from the Bankruptcy Code.

I hope that is a promise the Democrats will keep if Hillary becomes President. If Congress would actually strike the "undue hardship" standard from the Bankruptcy Code, millions of Americans would be lining up to file bankruptcy within a week after the law is changed. And if distressed student-loan borrowers could truly get relief from their oppressive student-loan debt, a half trillion dollars in student loans would be wiped off the books.

That scenario would cause the student-loan program to collapse, which would cause hundreds of colleges and universities to close.

Our government will never let that happen. Which is why the Democratic Party's Higher Education platform is a big pile of horse manure.

Image result for elizabeth warren and charles schumer
Senators Schumer and Warren: Shoveling horse manure

References

Democratic Party Platform Draft, July 1, 2016 [Deliberative and Predecisional]. Accessible at https://demconvention.com/wp-content/uploads/2016/07/2016-DEMOCRATIC-PARTY-PLATFORM-DRAFT-7.1.16.pdf

Schumer and Warren Pushing Obama to Address Student Debt. CNN Transcript, January 12, 2016. Accessible at http://www.cnn.com/TRANSCRIPTS/1601/12/nday.06.html

Democrartic Senators Highlight Obscene Government Profits Off Student Loan Program. Senator Warren press release, January 31, 2014. Accessible at https://www.warren.senate.gov/?p=press_release&id=329


Thursday, June 9, 2016

The Student Loan Crisis and the Democratic Party Platform: Key Reform Proposals Would Entice Young Voters to vote for Hillary

Hillary Clinton has a problem with young  voters. They went 3 or 4 to 1 for Bernie Sanders in the various Democratic primaries this spring. Why did young voters go to Bernie, and how can Hillary win them over?

The Democratic Party insiders--dinosaurs like Nancy Pelosi, Harry Reid, Debbie Wasserman Schultz, Charles Schumer, etc--don't realize it but the number one domestic policy issue in the United States today is the student loan crisis.  Approximately 43 million Americans are carrying $1.3 trillion in student-loan debt, and at least half of them can't pay it back.

As the Wall Street Journal reported in April, about 40 percent of college-loan borrowers in the repayment phase aren't making their monthly loan payments.  And five million people are enrolled in various income-based repayment programs. Most debtors in these programs are making payments so low that the payments don't cover accruing interest. In reality then, most people in income-based repayment plans will never pay off their loan balances.

Bernie Sanders signaled that he understands the scope of the problem when he proposed a free college education at a public college for every American.  By making that pledge, he turned millions of young Americans into single-issue voters.

Hillary could attract millions of Bernie supporters by adding these  planks to the Democratic Party platform:
  • Free college education at a public college or university (as Bernie proposed).
  • Eliminating the tax penalty for people who successfully complete long-term repayment plans but who have a loan balance when they've  completed their repayment terms.
  • Stopping the garnishment of Social Security checks for elderly student-loan defaulters.
  • Forcing the for-profits to stop putting mandatory arbitration clauses in student enrollment documents.
  • Repealing the provision of the 2005 Bankruptcy Reform Act that virtually eliminated bankruptcy relief for people who took out student loans from private lenders.
If Hillary and her handlers are smart, they will adopt these ideas. I hope Bernie refuses to endorse Hillary until she endorses at least some of them. If Bernie can pressure Hillary to make a commitment to solve the student-loan crisis, his campaign for the presidency will not have been in vain. But if the presidential race between Trump and Hillary rolls toward election day without any serious discussion of the student-loan crisis, then this country is in huuuge trouble.



Image result for bernie sanders

References

Josh Mitchell. More Than 40% of Student Borrowers Aren’t Making Payments. Wall Street Journal, April 7 2015. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348 

Thursday, April 7, 2016

4.6 million student debtors are in long-term repayment plans, default rates are up, and President Obama's "best friend" is buying University of Phoenix: "Things fall apart; the centre cannot hold."

Things fall apart; the centre cannot hold;
 Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.


The Second Coming
William Butler Yeats

As William Butler Yeats put it, "Things fall apart; the centre cannot hold." Everywhere, we see signs that the federal student-loan program is on the verge of collapse. And when the loan program collapses, so will American higher education.

Here are some portents of the coming disaster:

Student borrowers are enrolling in long-term repayment plans in record numbers

First, the U.S. Department of Education recently announced that 4.6 million student debtors are enrolled in Income-Driven Repayment plans (IDRs) to pay off their college loans. This is a 48 percent increase since December 2014 and a 140 percent increase since December 2013. 

People in IDRs are obligated to pay on their student loans for 20 or even 25 years, and most are making payments so small that that their loan balances are going up, not down, due to unpaid accumulating interest. In other words, most people in IDRs will never pay off their college loans.

Yet lenient income-based plans are President Obama's chief strategy for addressing the student-loan crisis. As the DOE blog put it,"President Obama has fought hard to make college more affordable and to help borrowers keep their student loan payments manageable." And thanks to those efforts, DOE continues, students in the new IDRs never have to pay more than 10 percent of their monthly income on your federal student loans."   Indeed, borrowers who are  "temporarily unemployed" don't have to pay anything. "After all, as DOE cheerily pointed out, "10 percent of zero dollars is zero dollars."

But of course, 20-year and 25-year repayment plans are crazy, especially when we consider that most people don't sign up for these plans until their backs are against the wall. Remember Brenda Butler, who entered a 25-year repayment plan 20 years after graduating from college? She won't be finished with her student loans until 2037, 42 years after acquiring her degree!

The Feds are garnishing wages and Social Security Checks; and default rates are rising

Meanwhile, the government garnished $176 million in wages from student-loan defaulters during the last three months of 2015. And the government garnishes Social Security checks of 155,000 elderly student-loan defaulters. 

And despite governmental assurances to the contrary, student-loan default rates are rising. According to a recent analysis by Jason Deslisle, 20 percent of all borrowers with loans due are in default. A Brookings Institution report noted that almost half of  a recent cohort of student borrowers who attended for-profit colleges defaulted within 5 years

And let's not forget the nine million people in the repayment phase of their loans who aren't making payments because they've obtained economic hardship deferments or some other deferment from making loan payments.  Those folks are counted as defaulters, but in reality, most of them will never pay back their loans. 

Law schools are in trouble

And then there are the law schools, some of which are in real trouble. Over the last few years, law schools began behaving like pirates, raising tuition rates to insane levels even as the market for lawyers imploded. Now they are seeing  a 20 percent decline in enrollment applications; and many have lowered their admission standards just to get warm bodies in their classrooms. A typical law student now graduates with $140,000 in debt; and many have almost no prospect of getting jobs in the legal field.

The for-profit college sector: The barbarian are at the gates

Finally, in the private sector, the barbarians are at the gates. Corinthian College, which had 350,000 students or former students as of last year, filed for bankruptcy; and thousands of its victims have filed claims to have their student loans forgiven. The Department of Education brokered a sale of some Corinthian campuses to a company affiliated with Educational Credit Management Corporation, the rapacious college-loan debt collector, just to maintain some semblance of order in the chaos of the Corinthian collapse.

Apollo Education Group, owner of the University of Phoenix, is in real trouble. Enrollments at UP dropped from a a peak of 475,000 in 2010 to less than half that number in 2015. Apollo's stock, which once sold for more than $80 a share, is now trading below 8 bucks.

Apollo is in negotiations to sell out to a group of private equity firms, including Visteria Group. Visteria was founded by Martin Nesbitt, described as President Obama's "best friend." In fact, Nesbitt was treasurer for both of Obama presidential campaigns; and he heads the Obama Foundation that is planning the Obama Presidential Library. 

If the deal goes through, Tony Miller, former Deputy Secretary of Education in the Obama administration and Martin Nesbitt's business partner, will become Apollo Education Group's new Board Chairman.  Very cozy!

"The ceremony of innocence is drowned."

To borrow a phrase from Yeats, "The ceremony of innocence is drowned" in American higher education.  Colleges and universities were once honored as the guardians of our civilization's ideals, the places where young people came to grow and learn, and to develop the civic and moral values that are indispensable to maintaining a healthy and vibrant society.

No more.  Arrogant college presidents, greedy profiteers, and mindless bureaucrats now control our once beloved universities. The best of these characters "lack all conviction, while the worst are full of passionate intensity." 

All of this craziness is paid for by federal student-loan money. And millions of college-loan borrowers are strangling in debt they can never pay off. This cannot go on forever.

President Obama and Martin Nesbitt



Anthony W. Miller official portrait.jpg
Tony Miller, former Deputy Secretary of Education
and soon-to-be Board Chairman of Apollo Education Group
References

Jillian Berman. Americans just had $17 million in wages garnished by the government due to unpaid student loans. Marketwatch.com, March 22, 2016. Accessible at http://www.marketwatch.com/story/the-government-just-garnished-176-million-in-wages-because-of-unpaid-student-loans-2016-03-21

Ronald J. Hansen. Apollo Education, parent company of University of Phoenix, to go prvate at $1.1 billion deal. Arizona Republic, February 9, 2016. Accessible at http://www.azcentral.com/story/money/business/2016/02/08/apollo-education-to-go-private-in-11b-deal/79998782/

Jason Delisle. @usedgov latest data out today shows student loan defaults just hit another record high, 20% of those w/ loans due. Mhttps://twitter.com/delislealleges/status/710539989256429568

Matt Sessa. Student Aid Posts Updated Reports to FSA Data Center. Department of Education, March 17, 2016. Accessible at https://www.nasfaa.org/news-item/7943/3-17_Federal_Student_Aid_Posts_Updated_Reports_to_FSA_Data_Center

Dan Primack. Obama's 'best friend' raises millions for private equity fund. Fortune Magazine, August 11, 2014. Accessible at http://fortune.com/2014/08/11/obamas-best-friend-raises-millions-for-private-equity-fund/

Patricia Cohen and Chad Bray. University of Phoenix Owner, Apollo Education Group, To Be Taken Private. New York Times, February 9, 2016. Accessible at http://www.nytimes.com/2016/02/09/business/dealbook/apollo-education-group-university-of-phoenix-owner-to-be-taken-private.html?

No, You Won't Be Arrested for Falling Behind On Your Student Loans. US. Department of Eduation Official Bog, April, 2016. Accessible at http://blog.ed.gov/2016/04/no-you-wont-be-arrested-for-falling-behind-on-your-student-loans/

Sunday, January 31, 2016

Brenda Butler,"poster child" for the student-loan crisis, will be done with her student loans in 2037--42 years after she graduated from college

    You load sixteen tons, what do you get?
    Another day older and deeper in debt
    Saint Peter don't you call me 'cause I can't go
    I owe my soul to the company store
Tennessee Ernie Ford

If the student-loan crisis had a poster child, it might well be Brenda Butler, who lost her bankruptcy case last week in Illinois. Butler borrowed about $14,000 to get a degree in English and creative writing from Chapman University, which she received in 1995. Over the next 20 years, she made loan payments totally $15,000--more than the amount she borrowed.

Unfortunately, she was unable to make payments from time to time, and her debt grew due to accrued interest and penalties. When she filed for bankruptcy in 2014, Butler's debt had grown to almost $33,000, more than twice what she borrowed!

Did Butler get rich in the 21 years that passed since she graduated from college? No, she didn't. When she filed for bankruptcy she owned no real property and drove a 2001 Saturn that had logged 147,000 miles. According to the bankruptcy court, Butler never made more than about $35,000 a year, and her monthly income at the time of her bankruptcy filing was only $1,879, about $300 less than her expenses.

In spite of her bleak financial situation and an employment history of relatively low wages, a bankruptcy judge refused to discharge Ms. Butler's student loans. In fact, in applying the three-prong Brunner test, the court ruled that she failed to meet two of the prongs.

First, the court concluded that Butler was able to maintain a minimum standard of living, in spite of the fact that she was living on unemployment benefits at the time of her hearing and these benefits were about to run out. Indeed, the court admitted that Butler "had virtually no resources to support herself."

Nevertheless, in the court's view, Butler would likely find employment soon, which would enable her to maintain a minimum standard of living and make payments under an income-base repayment plan. Thus, Butler failed the first prong of the Brunner test.

Brunner's second prong required Butler to show that additional circumstances existed that prevented her from paying on her student loans in the future. Here again, the judge ruled against her. The judge found Butler to be "capable and intelligent with no health problems or other impediments to being gainfully employed." The court acknowledged that Butler had "an unfortunate employment history through no apparent fault of her own," but she could show no exceptional circumstances that would indicate that she could not pay back her student loans in the coming years.

Interestingly, the judge ruled in Butler's favor regarding one prong of the Brunner test. In the judge's view, Butler had met her burden of showing she had made good faith efforts to pay back her loans. As the judge acknowledged, Butler had made payments totally more than the original principal on her loans, and she had made diligent efforts to improve her financial status. "This is not a case of a recent graduate trying to escape student loan debts before beginning a lucrative career," the judge admitted. On the contrary, Butler had made "substantial, though futile, efforts to pay down her student loan debt."

So why did Butler lose her case? This is the bankruptcy judge's summary:
[Butler's] financial situation is unfortunate, but more than that is required for a finding of undue hardship under the demanding Brunner test. [Butler] has shown good faith in her efforts to remain employed and pay down her student loan debt. But as a healthy, intelligent, relatively young worker with a proven ability to secure productive employment, [she] is unable to prove that her student loan obligations prevent her from maintaining a minimum standard of living, now or in the foreseeable future. Thus. . ., [Butler's] student loan debt will not be discharged.
The Butler decision is particularly unfortunate because her situation is not untypical. Like a lot of people, she obtained a liberal arts degree from a private college that never led to a well-paying job. In spite of good faith efforts to pay back her loans, she was dragged down by exorbitant penalties and accruing interest, like thousands of other Americans.

And here is the final outcome. Brenda Butler will continue in a long-term income-based repayment plan that will not conclude until 2037--42 years after she graduated from college! 

Surely this is not what Brenda Butler envisioned when she enrolled at Chapman University in 1991 with bright hopes for a future as a writer.  And surely this is not what Congress envisioned when it passed the Higher Education Act more than 50 years ago.

And that is why Brenda Butler would make a good poster child for the student-loan crisis. A good person, who went to college in good faith and made good faith efforts to pay back her student loans, will be burdened with student-loan debt--mostly penalties and interest--until she reaches retirement age.

References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).




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).

Sunday, March 22, 2015

Susan Dynarski wrings her hands because we don't have enough information about the student debt crisis. But we know enough to take action.

Susan Dynarski recently wrote a half-page article in the Sunday Times, complaining about the government's lack of useful data about the federal student loan program. She's right of course.

The U.S. Department of Education releases very little useful information about the student-loan crisis. The Federal Reserve Bank of New York, which has issued alarming reports on the problem, relies on Equifax, a private credit reporting agency, for most of its information--not DOE. 

Why don't we have better data? Dynarski quotes a former DOE official who says "lack of will" on the part of DOE's data  collectors is part of the answer, along with "reluctance of senior political leadership in the Department of Education to press for action."

In other words, the Obama administration and Arne Duncan's Department of Education don't want the public to know just how bad the student loan crisis really is.

Barack Obama and Arne Duncan just want to get out of town before the federal student loan program collapses. They are like those American officials during the Vietnam War who scrambled to get on one of the last helicopters leaving Saigon before the city fell to the North Vietnamese.

Barack & Arne just want to get out of town before the student loan crisis blows up.
Make no mistake. Barack and Arne know what's going on. They know the lid is about to blow off this smoothly managed crisis.  And they are trying to strew a little evidence around to show they are trying to address the problem without really doing anything about it. For example, President Obama released his laughable and toothless "Student Bill of Rights" earlier this month.

Solving the student-loan crisis will take more than empty platitudes. It will take courage.
  • It will take courage to rein in the for-profit college sector, which is raping low-income and minority students by enticing them to enroll in high-cost educational programs that don't lead to good jobs.
  • It will take courage to amend the Bankruptcy Code so that insolvent student-loan debtors can get reasonable access to bankruptcy relief.
  • It will take courage to stop garnishing the Social Security checks of elderly debtors who defaulted on their student loans.
  •  It will take courage to stop the private student-loan debt collectors from tacking huge penalties on to the loan balances of defaulted student-loan debtors.
And it will also take a sense of human decency, which President Obama's Department of Education apparently does not have.

Thus, in the Myhre bankruptcy case,  we see the Department of Education opposing bankruptcy relief for a quadriplegic student-loan debtor who was working full time and was still unable to support himself financially, much less pay off his student loans.

And in the Lamento bankruptcy case, the Department of Education opposed bankruptcy relief for a single mother of two who was working full time and was only able to put a roof over her children's heads because she was living rent free with her mother and stepfather.

In both the Myhe case and the Lamento case, DOE wanted these unfortunate student-loan debtors to sign up for 25-year repayment plans. And that has been the Obama administration's overall strategy for dealing with the student loan crisis.

Yes, rather than do the decent thing and work for bankruptcy relief for worthy student-loan debtors, President Obama's Department of Education is trying to force most oppressed student-loan debtors into 25-year repayment plans.

And why is DOE doing that? Because if President Obama and Arne Duncan's Department of Education were forced to publicly admit that millions of student-loan debtors are insolvent and will never pay off their loans, the whole sorry business of the federal student loan program would collapse.

But they won't admit it. And that is why, Ms. Dynarski,  the Department of Education is not releasing useful data about the student-loan crisis.

But I'll bet you already knew that, didn't you, Ms. Dynarski? After all, you are one of President Obama's advisers.

Susan Dynarski: We need more information!
 References

Susan Dynarksi. So Much Student Debt, So Little Information. New York Times, March 22, 2015, Business section, p. 5.

Richard Fossey & Robert Cloud. In re Lamento: An Honest But Unfortunate Debtor is Entitled to Sleep at Night Without Worrying About Unpayable Student-loan Debt. Teachers College Record, February 23, 2015.

In re Lamento, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

Myhre v. U.S. Department of Education, 503 B.R. 698 (Bankr. W.D. Wis. 2013).














Monday, January 26, 2015

More evidence that the New York Times is totally clueless about the Student-Loan Crisis

Today's New York Times contained a full-page advertisement  (on page A22) with this message: "What our reporters are reading can be just as insightful as what they're writing." The advertisement contains a large color photo of Times writer David Carr wearing those round, horn-rimmed spectacles that people wear in Woody Allen movies--spectacles that convey sensitivity and deep intelligence.

Of course, the Times ad is true: What Times reporters read can be insightful. The problem is that the Times reporters are not reading enough and they are reading the wrong things.

And here's a case in point.  On the front page of today's Times is an article about the economic downturn Alaska is experiencing as a result of the recent drop in oil prices.  The article's author, Kirk Johnson, reports that "historians and economists say" that Alaska's economic crisis is unprecedented "in modern times."

That is simply not accurate. I lived in Alaska in the mid-1980s when oil prices turned down. Alaska's economy went into a tail spin, with a huge number of property foreclosures and several bank failures. I recall standing on a street corner in downtown Anchorage and viewing three financial institutions with plastic sheeting spread across their names because they had collapsed and been closed by federal financial regulators.

So what is happening in Alaska right is not unprecedented in modern times; and if "historians and commentators" told Times reporter Johnson that, they are certainly incompetent.

But that Times inaccuracy is a small matter.  More important is a pollyannaish article in last Sunday's Times about the student debt crisis. Times reporter Kevin Carey wrote favorably and uncritically about federal legislation that allows students to extend their student-loan payments out over 25 years. Apparently, Carey took a positive perspective on this development  because long-term repayment programs will reduce student-loan borrowers' monthly payments to a more manageable level.

 Carey ended his article by remarking that the federal government will probably replace the states as  the "primary financier" of American higher education. "Given how much unnecessary financial hardship has been imposed on students," Carey wrote, "this is a welcome trend." And Carey ends on this wholly unwarranted optimistic note: "The sense of pervasive student loan anxiety that characterizes much of the contemporary higher education conversation could become a relic of an older time."

What baloney! Essentially Carey has portrayed the federal push to get college student-loan borrowers  to sign up for long-term repayment plans as an entirely wholesome development.  And that simply is not correct.

First of all, the prospect of former students taking 20 to 25 years to pay off their student loans should be unsettling to everyone in the American higher education community, no matter how reasonable borrowers' monthly payments are. Surely when Congress adopted the first student-loan legislation back in the 1960s, its members never dreamed that 25-year repayment plans might someday become the norm.

In essence, as I have said before, long-term income-based repayment plans are turning Americans into sharecroppers, paying a portion of their earnings to the government for the majority of their working lives for the privilege of attending college. Who could be happy about such a prospect?

Second, as currently structured, long-term repayment plans operate as a perverse incentive for colleges to keep raising their tuition. Why should colleges try to keep their costs down when students can simply borrow more money to pay for tuition hikes and then pay it back in modest monthly payments over 25 years?

Third, long-term repayment plans remove incentives on students to minimize their borrowing. What difference does it make to students whether they borrow $30,000 to attend college (the current average) or $50,000 when the amount of their monthly loan payments will be based on their income and not the amount they borrowed?

Why has the Obama administration's push for long-term repayment plans been received so favorably around the country? I will tell you why. The only voices that are heard concerning the student-loan crisis are the voices of the insiders: colleges and universities, intellectually bankrupt think tanks like the Brookings Institution,and higher education's shamelessly self-interested constituency organizations like the College Board and the American Council on Education.

The people who are being injured by the federal student loan program have no voice; they are suffering in silence while working at low-income service jobs and fending of the federal government's hired loan collection agencies--which are making tons of money chasing down student-loan defaulters.

The Brookings Institution, in one of its typically vapid policy papers, argued for having people's student-loan payments taken out of their pay checks so that they would simply become another income deduction, like health insurance and Social Security.

And friends, that day will some day come. And when that happens, it will be apparent to everyone that the federal student loan program, which was intended to help worthy young Americans get a college education regardless of their income status, has become a massive fraud perpetuated on the American people by the higher education industry and the federal government.

If we continue in the direction we are going--and we are actually accelerating our headlong drive toward catastrophe--American higher education will be destroyed. But our policy makers, our legislators, and our college and university presidents don't care. By the time this time bomb explodes--and explode it will--all the people who engineered this disaster will be retired, writing their memoirs and drinking bourbon beside the golf courses of their gated entry retirement communities. The fact that these empty-headed bozos destroyed our nation's once premier system of colleges and universities will bother them not at all.

References

Kevin Carey. Helping to Lift the Burden of Student Debt. New York Times, Sunday Business Section p. 1.

Kirk Johnson. As Oil Falls, Alaska's New Chief Faces a Novel Goa: Frugality. New York Times, January 26, p. 1.




Sunday, June 8, 2014

Workin' for the Man: President Obama's Disasterous Plan to Expand Income-Based Repayment Programs for Student Loan Debtors

Tomorrow, President Obama is expected to announce an expansion of his "Pay as You Earn" income-based repayment program for student loan debtors. This program,  which Obama initiated by executive action in 2011, allows student-loan debtors to pay roughly 10 percent of their income on their loans for a period of 20 years.  (The exact formula is a bit more complicated that.)  At the end of the 20-year repayment period, any unpaid loan balance will be forgiven.


Passing the student-loan mess on to the next president
Pay as You Earn is popular with student debtors because it is more generous than the other income-based repayment (IBRP) options. One major program requires debtors to pay 15 percent of their income over a period of 25 years.

But a lot of student debtors don't qualify for Pay As You Earn under present regulations. According to the New York Times, Obama plans to extend eligibility to an additional 5 million student-loan borrowers, including those who took out loans before October 2007. 

Is Pay As You Earn a good thing for the nation's distressed student-loan debtors. Yes it is--at least in the short term. For people struggling to pay mountains of debt under the standard 10-year repayment plan, Pas As You Earn will lower monthly payments substantially.  People who are currently paying 15 percent of their income under a 25-year IBRP will be delighted to switch to Obama's more generous Pay As-You Earn program.  People who are unemployed or underemployed will be particularly grateful, because if their income falls below the official poverty level, they won't have to make any monthly payments at all.

Is there a down side to Pay As You Earn? You bet.

First of all, all the income-base repayment plans remove all incentives for student borrowers to limit the amount of money they borrow. If their loan payments are based on their income and not the amount they borrow, then there is no reason not to borrow as much money as you can.

Second, Pay As You Earn and other IBRPs do nothing to slow the burgeoning cost of going to college.  Colleges have no incentive to keep their costs down, because they know students will simply borrow more money to cover tuition hikes.  What do colleges care if their graduates are making student-loan payments for 20 years?

Third--and most significantly, these long-term repayment plans are going to fundamentally change the way Americans view postsecondary education and the world of work. There was a time when low-income individuals worked their way through college, graduated with no debt, and entered the workforce determined to buy homes, start families, and begin the confident climb up the economic ladder.

Now, 18- and 19-year olds are going to begin college knowing that they will pay for their postsecondary education by donating some percentage of their income to the federal government over the majority of their working lives.  In essence, they will become indentured servants for the government--sharecroppers if you will.

I think this arrangement will foster cynicism among the young, because they will realize on some level that they have been forced into unreasonable levels of indebtedness because colleges refuse to control their costs. They will see university presidents like NYU's John Sexton make outrageous amounts of money while they sign up for long-term college-loan repayment plans that they will not pay off until they are in their 40s and 50s.

And, since they won't have to pay anything under Pay As You Earn if they are unemployed or live below the poverty level, I think many of them will postpone going to work. Many will figure that it makes sense to travel or take low-wage jobs in exotic locales rather than seek more remunerative employment. And the incentive to work "off the books" will increase, because people in IBRPS who enter the cash economy will not only avoid paying taxes and making Social Security contributions, they will avoid making student-loan payments as well.

Moreover, once these college-going young people figure out that their payments will be based on their incomes and not the amount they borrow, they will borrow as much as they can.

I appreciate the President's efforts to provide overburdened college-loan debtors some immediate relief by offering plans to lower monthly loan payments while extending the loan repayment period. Unfortunately, in the long run, the results will be catastrophic.

In reality, President Obama is simply passing the student-loan mess on to the next president to deal with.  Millions of people may see their student-loan payments go down in the short-term, but they will be significantly extending the length of their loan repayment period. Most Pay-As-You-Earn participants --I predict--won't be making loan payments large enough to cover accruing interest  or pay down the principal on their notes--which means they won't really be paying their loans back at all. 

And meantime--total student-loan indebtedness--now more than $1 trillion dollars--will continue to grow and grow.


References

Jackie Calmes. Obama Plans Steps to Ease Student Debt. New York Times, June 8, 2014, p. 17.











Monday, November 4, 2013

President Obama Pushes Income-Based Repayment Plans for Student-Loan Debtors: Madness! Madness!

The U.S. Department of Education is sending e-mails to selected student-loan borrowers, urging them to consider signing up for income-based repayment plans (IBRs) to pay off their student loans. Currently, about 1.6 million student-loan borrowers participate in IBR plans, but DOE wants to sign up 3.6 million additional participants within the next six weeks.  If DOE is successful, more than 5 million people will soon be making student-loan payments based on a percentage of their income over a long period of time--20 to 25 years.

A lot of the major players in higher education like IBRs--"pay as you earn" plans as some people call them. In a co-authored essay in Chronicle of Higher Education, Sandy Baum of the College Board lauded the President's plan for notifying students about IBRs and said IBRs should be the "default option" for student-loan repayment. In other words, unless student borrowers affirmatively opt out, they would automatically be enrolled in a student-loan repayment plan that would stretch their payments out over 20 or 25 years.  Wow, what a super idea!

And how will income-based loan repayments be collected? The details aren't clear yet, but I imagine the feds will do what the Brookings Institution recommends.  Student-loan borrowers will have their loan payments deducted from their payroll checks. The IRS will become the national debt collector, and a student-loan borrower's monthly loan payments will go up or down based on the borrower's current income, like income-tax withholding payments. 

Thus, the day may be coming when former college students will see their monthly student-loan payment appear as just another deduction on their paychecks--like Social Security, mandatory retirement contributions, and federal and state taxes. And for most borrowers, those deductions will last about a quarter of a century.

President Obama probably thinks he is doing college-loan debtors a favor by encouraging them to sign up for long-term repayment plans. He reminds me of Colonel Nicholson in Bridge on the River Kwai. Colonel Nicholson (played by Alec Guinness) is so obsessed with building a bridge for the Japanese army that he loses sight of the fact that he is hurting his country's cause, not helping it.. Not until the end of the movie does the Colonel realize that he has betrayed his country and the soldiers he commands.  The last lines of the movie are: "Madness, Madness!"
Col. Nicholson in Bridge on the River Kwai
"Madness! Madness!"

Why are all the insiders lining up in favor of IBRs? Two reasons:

IBR plans will hide the student-loan default crisis. First and most importantly, IBRs are a cosmetic fix for the soaring student-loan default rate.  As I've explained before, the true student-loan default rate is probably twice as high as the anemic three-year default rate DOE reports every year. In the for-profit sector, the overall default rate is at least 40 percent.  Over the long run, such a default rate is economically and politically unsustainable.

For years now, the for-profits have hid their institutional default rates by encouraging their students to sign up for economic hardship deferments so they won't be counted as defaulters. Millions of people have these deferments, but this shell game can't last forever. Eventually, the government will have to admit that a lot of people on economic-hardship deferments (probably most of them) are really defaulters who will never pay back their loans.

Putting people in IBRs is unlikely to increase the number of people who pay off their loans, but it will obscure the true student-loan default rate for several years. How? If people are automatically enrolled in IBRs, their loan payments will be lowered perhaps as low as zero for people who are unemployed or are in low-paying jobs.  These people won't be paying off their loan balances because interest will continue to accrue.  But they won't be counted as defaulters.

IBRs will take the heat off colleges and universities to keep their costs down.  Second, IBRs benefit the colleges and universities. If students pay for their college experiences based on a percentage of their income instead of the amount they borrow, they will have little incentive to shop for a college based on price. And governmental agencies will have less incentive to try to keep college costs down. Colleges and universities can perpetuate the status quo indefinitely, raising their tuition rates every year without being pressured to keep their costs down.

The for-profits will be the big winners if IBR plans become the default option for student borrowers because their student-loan default rates will drop to zero in spite of the fact that too many students who attend for-profit colleges are paying exorbitant tuition and getting substandard educational experiences.

For most students and for American Society, IBRs will be a disaster. Income-based repayments may make sense for a small percentage of student-loan debtors, but if IBRs become the default option for college-student borrowers, the consequences will be disastrous.

First of all,  as I just said, IBRs reduce students' incentive to borrow as little money as possible to attend college. In fact, many students will conclude that it makes economic sense to borrow to the max. Thus, if IBRs become popular, the total amount of money students borrow every year to attend college will  continue going up--perhaps at a faster rate than in the past.

In addition, mass adoption of IBRs will hurt the American economy. If young people are locked into making student-loan payments for 20 or 25 years, their take-home pay will be smaller and they will have less money to purchase homes, have children, and save for retirement.

But this is the most chilling fact about IBRs: They have the potential for creating a large class of people who are in essence share croppers for the federal government They will be forced to contribute a percentage of their earnings to Uncle Sam for the majority of their working lives. No one can say with certainty what the psychological impact of this arrangement will be on American college graduates, but it could reduce their faith in the American dream and lead to mass cynicism about the American political process.

And IBRs will not increase the number of people who pay off their student loans. I predict that a majority of students who select IBR plans as their student-loan repayment option will be students who pay too much to attend for-profit colleges and don't make enough money after they complete their studies to pay back their loans.  A lot of these people will be unemployed or working in low-wage jobs that entitle them to pay nothing on their loans or to pay so little that their payments won't cover accruing interest.

These poor people will see their federal loan debt grow, not shrink, over the years, even if they make all their loan payments on time.  For example, the New York Times ran a story about a veterinarian who borrowed $300,000 to attend a for-profit veterinary school outside the United States. Even though this individual found a job as a veterinarian and is making regular student-loan payments under an IBR, her current job does not pay enough to enable her to make loan payments that are large enough to cover the accruing interest on her debt. A financial analyst estimated that when this veterinarian completes her 25 year repayment period, the amount of her debt will not have been paid off.  In fact, it will have doubled--from the $300,000 she originally borrowed to more than $600,000!

In short--and I say this emphatically--wholesale adoption of income-based repayment plans is madness and its long term effect will be drive millions of people out of the middle class and into a new class of Americans--sharecroppers for the federal government.

References

Sandy Baum & Michael McPherson. Obama's Aid Proposals Could Use a Reality Check. Chronicle of Higher Education, August 26, 2013. Accessible at: http://chronicle.com/article/Obamas-Aid-Proposals-Could/141265/

David Segal. High debt and falling demand Traps New Vets. New York Times, February 23, 2013. Accessible at: http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?pagewanted=1&_r=0

Michael Stratford. You've Got Mail. Inside Higher Education, November 4, 2013. Accessible at: http://www.insidehighered.com/news/2013/11/04/education-dept-will-email-35-million-student-loan-borrowers-about-income-based