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.

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.

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

The Underemployed Law School Graduate With Massive Student-Loan Obligations: The Hedlund Bankruptcy Case

Almost 37 million people owe money on their college loans, and millions are in default or behind on their loan payments (Brown et al. 2012). Most overburdened student-loan debtors suffer their college-loan debt in silence, and the public is generally unaware of their plight. In a few cases, however, student-loan debtors file for bankruptcy, seeking a discharge from the loan obligations. Often the court decisions in these cases provide details of a particular student-loan debtor’s financial situation.  In particular, the Hedlund case (2012) provides a window into the world of the underemployed law-school graduate who is swamped by massive student-loan obligations.

A Young Man Borrows Money to Go to Law School But Can’t Pay Back the Loans

In the early 1990s, Michael Eric Hedlund borrowed more than $85,000 to go to law school. It must have seemed like a good idea at the time. Michael’s father and brother were attorneys, and he anticipated going to work in his father’s law firm.

Things did not work out as Michael hoped. After graduating from Willamette University’s law school in 1997, Michael took a job in the District Attorney’s office in Klamath Falls, Oregon. He planned to work there for a couple of years and then join his father’s law firm. Unfortunately, Michael failed the bar exam twice. Unable to practice law, he received several extensions on his loan obligations. He applied for a student-loan consolidation, but was told he was ineligible for consolidation because he was not current on his loan payments.

In 1999, Michael found a job as a juvenile counselor, which paid him about $40,000 a year.  His monthly loan payments were $800, which he did not pay regularly. In fact, he only made one loan payment.  In 2002, two loan creditors began garnishing his wages; and in May 2003, Michael filed for bankruptcy.

Michael’s bankruptcy proceedings stretched on for years. In fact, the original bankruptcy judge who presided over his case died before the case was resolved. In March 2012--nine years after Michael filed for bankruptcy, a federal district court ruled that Michael was not entitled to discharge his student loans in bankruptcy.  According Judge Ann Aiken, Michael was not entitled to bankruptcy relief because he had not made a good-faith effort to pay on his loans.

The Pathetic Plight of Many Law School Graduates

Although Judge Aiken rejected Michael’s plea to have his student loans discharged, she was not unsympathetic.  Judge Aiken pointed out that law school tuition rose more than three hundred percent between 1989 and 2009, which is twice the rate of inflation for that period and four times the rate of job growth. “Accordingly,” Judge Aiken observed, “with the exception of the independently wealthy, students must take out loans in order to finance their [law] degrees” (p. 907).

Meanwhile, as tuition costs keep going up, wages for beginning attorney are going down. Citing a report by the National Association for Law Placement, Judge Aiken pointed out that annual compensation for first-year associate attorneys in private practice went down in 2010.  In addition, the demand for new attorneys is shrinking. According to Judge Aiken, “The most recent statistics indicate that, through the year 2018, there will only be 25,000 openings for the law schools’ 45,000 new graduates each year” (p. 907).

In Judge Aiken’s opinion, “[T]he current higher education system is untenable and unsustainable; as a result, increasing numbers of students will be forced to file for bankruptcy” (p. 908). In the judge’s view, the student loan issue--she did not use the word “crisis”--needs to be addressed at a systematic level.

What is the Significance of the Hedlund Case?

Judge Aiken’s opinion in the Hedlund case paints a poignant picture of the plight of underemployed law-school graduate who borrowed heavily to attend law school.  As Judge Aiken pointed out, law school tuitions are now so high that most people must borrow money--a lot of money--to get a legal education. A few years ago, borrowing money to get a law degree was a good bet, but the demand for new lawyers is shrinking and salaries for beginning attorneys are going down.  Thousands of law school graduates are finding themselves underemployed in jobs outside the legal field and unable to pay back their student loans.  Obviously, this is a huge national problem, not only for law-school graduates, but for law schools and for the legal profession as well. 

Under federal bankruptcy law, student-loan debtors cannot discharge their student loans in bankruptcy unless they can show “undue hardship.”  Most law-school graduates are able to find some kind of employment and thus will not qualify for a bankruptcy discharge under this rigorous standard.  Mr. Hedlund, for example, found a non-legal job paying $about 40,000.

Nevertheless, most underemployed law school graduates who have massive student loans will be in dire economic circumstances.  Mr. Hedlund was obligated to pay $800 a month on his loans after he graduated, almost an impossible burden for someone making $40,000 a year.

Unable to discharge their student loans in bankruptcy, a lot of underemployed law-school graduates will be forced to apply for an Income-Based Repayment plan (IBR) in order to manage their loan obligations. Under an IBR, as modified by the Obama administration, debtors will obligate themselves to pay 10 percent of their discretionary income for a period of 20 years (White House, 2012).

Obviously, IBR plans are not an ideal solution for law-school graduates who can’t find well-paying jobs. Instead of beginning good careers practicing law, many graduates will wind up being long-term indentured servants to the government, forking over a percentage of their income over a 20-year period. If Michael Hedlund ultimately chooses the IBR option, he won’t be free of his law-school loan obligations until he is in his 60s.  Somehow, that does not seem fair.

References

Brown, M., Haughwout, A., Lee, D., & Mabutas, M. (2012). Grading student loans.  Federal Reserve Bank of New York.

Hedlund v. Educational Resources Institute, Inc., 468 B.R. 901 (D. Or. 2012).

White House, Office of Press Secretary (2012, June 6). Fact Sheet: Helping Americans manage student loan debt with improvements to repayment options. Retrieved from: http://www.whitehouse.gov/the-press-office/2012/06/06/fact-sheet-helping-americans-manage-student-loan-debt-improvements-repay