Showing posts with label income-driven repayment plans. Show all posts
Showing posts with label income-driven repayment plans. Show all posts

Friday, September 21, 2018

Department of Education's New Report on Student-Loan Casualties: A Dr. Strangelove Moment

You remember that great scene from the movie Dr. Strangelove.  U.S. President Muffley (played by Peter Sellers) worries about the consequences of nuclear war with Russia. "You're talking about mass murder," President Muffley muses.

But General Turgidson (played by George C. Scott) is not concerned. "I'm not saying we wouldn't get our hair mussed. But I do say no more than ten to twenty million killed, tops."

Betsy DeVos is our modern day General Turgidson. The student loan program is shattering the lives of about 20 million Americans.  But in DeVos' mind, that's a small price to pay for a program that enriches her buddies in the for-profit college industry.

And so without further ado, I will summarize the Department of Education's most recent report on the student-loan debacle.

Income-Driven Repayment Plans. As DOE reports, more and more distressed student borrowers are being herded into income-driven repayment plans (IDRPs). As of June, 7.1 million people are enrolled in IDRPs, a 20 percent increase from just a year ago.

Student borrowers in IDRPs are America's new serfs. They pay a percentage of their income for 20 or 25 years to repay the student loans they took on to attend some raggedy-ass college that didn't prepare them for a job.

Of course, IDRP monthly payments are generally low. In fact, IDRP participants who live below the poverty line make monthly payments of zero. But virtually everyone in these plans--7.1 million suckers--will die without ever paying back their loans. In fact, for most of them, their loan balances are going up with each passing month due to unpaid accruing interest.

Borrower Defense to Repayment. According to DOE, 166,000 student borrowers filed so-called "borrower defense" claims. These claimants are seeking loan forgiveness on the grounds they were defrauded by the colleges they attended. Thousands of these claims were filed by people who attended just two for-profit institutions that went bankrupt: Corinthian Colleges and ITT Tech.

As of June 30, two thirds of these claims are still pending, and only 80 percent of the processed claims were approved.  Meanwhile, borrowers who have pending claims are still obligated to make their monthly loan payments.

Delinquency Rates. Delinquency rates are down slightly, DOE assures us, but almost a quarter million borrowers defaulted on their student loans during the third quarter of this year.  That's 2755 people going into default every day.  A high percentage of these defaulters attended for-profit colleges. But apparently those casualties are acceptable to Betsy DeVos.

Public Service Loan Forgiveness Program.

Hundreds of thousands of student debtors have taken jobs in the public sector in belief that their student loans would be forgiven after 10 years under the Public Service Loan Forgiveness Program (PSLF). It now seems they were deluded.

PSLF was enacted by Congress in October 2007, so the first people entitled to PSLF relief became eligible in October 2017. So far, 28,000 people have applied for PSLF relief, but only 300 claims have been approved and only 96 people have actually had their loans forgiven!

If Betsy DeVos and her gang of former for-profit-college hacks continue to refuse to implement PSLF in good faith, hundreds of thousands of college borrowers who relied on PSLF will suffer incalculable hardship.  For example, thousands of people have graduated from third- and fourth-tier law schools with six-figure debt, and they can't find law jobs in the private sector that pay enough to service their student-loan obligations. As Paul Campos pointed out in his book Don't Go to Law School (Unless), PSLF is these people's only viable option for paying off their law-school loans.

Conclusion: The Student Loan Program is in Fine Shape: "10 to 20 Million Casualties, Tops!"

DOE's own data shows us that the federal student loan program is a disaster: high default rates, income-driven repayment plans that don't allow people to pay off their loans,  borrower-defense rules that DOE administers incompetently, and a PSLF program that DOE refuses to implement in good faith. Meanwhile, the for-profit gang is getting rich.

Literally, there are at least 20 million casualties. Betsy DeVos must think 20 million casualties is acceptable, but I do not. Why don't our  politicians--Republicans and Democrats-- begin to behave like grownups and impeach Betsy DeVos, who is running DOE like a character in Dr. Strangelove.

10 to 20 million casualties--tops!

Friday, June 22, 2018

Researchers say Income-Driven Repayment Plans create moral hazard: Yuh think?

More and more student borrowers are being forced into income-driven repayment plans (IDRPs) because they can't pay back their college loans under a standard 10-year repayment schedule. According to an article in Educational Researcher, the proportion of student borrowers in IDRPs increased from 5 percent in 2012 to 20 percent in 2016.

Three researchers affiliated with a North Carolina research institute analyzed data on IDRPs, and their findings are not surprising. They found people entering IDRPs borrowed more than people who did not enter these plans. IDRP participants also had lower-income backgrounds than people who did not sign up for IDRPs.

They also found that IDRPs create a "moral hazard" because monthly loan payments under these plans are not coupled to the amount of money students borrow. "As IDR plans become more generous," the authors wrote, "students have less incentive to limit their borrowing and less incentive to seek high-paying jobs because upon leaving school their monthly loan payments depend only on discretionary income, not loan amounts." And, as students become more willing to borrow, colleges and universities "face lower incentives to curb tuition increases."

Put another way, if borrowers know their loan payments will stay the same regardless of whether they borrow $50,000 or $100,000, then why not borrow $100,000? And from a university's perspective, if students are willing to borrow enormous amounts of money to pursue their studies, then why not jack up tuition rates?

The researchers also pointed out that a lot of IDRP participants are making payments so low that their loan balances are growing due to accrued interest. In other words, their loans are negatively amortizing. Thus at the end of a 20- or 25-year IDRP, many borrowers will owe more than they borrowed.  People who complete IDRPs will see their remaining loan balances forgiven, but the forgiven amount is considered taxable income by the IRS.

Income-driven repayment plans were touted by the Obama administration as a good way for student borrowers to manage growing levels of debt. But the article in Educational Researcher adds to a growing body of evidence pointing to this stark reality: millions of people in IDRPs have student-debt loads they will never pay off.

So why did the U.S. Department of Education expand its income-driven repayment options? After all, even a child could foresee the moral hazard built into these programs.  These plans are being peddled for one reason and one reason only: They help obscure the fact that millions of Americans--probably 20 million--are not paying off their student loans.



References

Lacy, T. Austin, Conzelmann, Johnathan G.,  & Smith, Nicole D. (2018). Federal Income-Driven Repayment Plans and Short-Term Student Loan Outcomes. Educational Researcher, 47, 255-258.


Saturday, December 9, 2017

It's official: The Republicans hate student-loan debtors

A few days ago, Republicans introduced their bill for revising the Higher Education Act. Some provisions in the GOP proposal are astonishing in their cruelty and contempt for student debtors.
  • Abolishing income-drive repayment plans. For starters, the Republicans want to end all student-loan forgiveness. Goodbye PAYE. Goodbye REPAY. Students who can't pay off their loans under the standard 10-year repayment plan will be forced into income-driven repayment plans that continue until their loans are paid off--which for many of them will be never.
  • Abolishing the Public Service Loan Forgiveness Program. The GOP wants to abolish the Public Service Loan Forgiveness Program, which Congress created in 2007. Hundreds of thousands of students have entered into public-service jobs expecting to have their college loans forgiven after 10 years. If the Republican proposal becomes law, some of these people may be grandfathered into the PSLF program, but the program will be shut down.
  • Forbidding states from enforcing consumer protection laws against student loan servicers. Buried on page 464 of the GOP's bill is a provision that forbids states from regulating the student-loan serving companies.  Some state AGs have vigorously pursued wrongdoers in the loan servicing business, and Republicans apparently want to shield the debt collectors from state consumer protection laws.
Where are these pernicious Republican ideas coming from? Representative Virginia Foxx (R-NC) is Chair of the House Education Committee, and she supports all these nasty proposals. But Foxx is not pulling the strings. These toxic proposals are coming from the heart of the Trump administration--and undoubtedly from Secretary of Education Betsy DeVos.

I don't know if these punitive GOP proposals will make it into federal law. But if they do, Republicans will push millions of college borrowers into a lifetime of indebtedness.  It's almost as if the GOP wants to create an underclass of sharecroppers.

President Trump and his fiendish Secretary of Education (who has financial ties to the debt collection business) may think their scheme to punish student borrowers will play to the Republican base. But if these proposals get through Congress, there will be hell to pay in coming elections.  

The Democrats are missing a golden opportunity if they don't take up the banner of student-debt relief.  In my view, they should forget Russia and turn their venom toward Betsy DeVos, who may be Trump's Achillese heel. The Dems need to educate college borrowers about the nation's venal Secretary of Education and rouse them to righteous fury.

Betsy DeVos summer home: Maybe you could get a job there as pool boy


References

Douglas Belkin, Josh Mitchell, & Melissa Korn. House GOP to Propose Sweeping Changes to Higher EducationWall Street Journal, November 29, 2017.

Jillian Berman. House Republicans seek to roll back state laws protecting student loan borrowers. Marketwatch.com, December 7, 2017.

Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment program, overhaul federal financial aidWashington Post, December 1, 2017.

Danielle Douglas-Gabriel. Dems raise concern about possible links betwen DeVos and student debt collection agencyWashington Post, January 17, 2017.













Thursday, November 9, 2017

Millions of Older Americans Are Delinquent On Their Loans: Long-Term Repayment Plans Will Make the Problem Worse

Several decades after obtaining their college degrees, millions of older Americans are still paying on their student loans. According to the Consumer Financial Protection Bureau, the percentage of student borrowers over 60 years of age who carry student-loan debt increased by 20 percent from 2012 to 2017.

Even more alarming is the rising number of older student borrowers who are delinquent on their student loans. In all but five states, delinquency rates among older student debtors went up over the last five years.

In California, for example, more than 300,000 people age 60 or older hold $11 billion in student-loan debt, and 15 percent of these borrowers are delinquent.

Delinquency rates for older borrowers vary substantially from state to state. In Georgia, Mississippi, Oklahoma, South Carolina, and West Virginia, one out of five student-borrowers age 60 or older are delinquent on their loan payments.

As the CFPB noted, these data show that an increasing number of older Americans are still shouldering student-loan debt at an age when most of them are living on fixed incomes.  And these data do not reflect the Department of Education’s recent campaign to recruit more and more college borrowers into income-based repayment plans that can stretch out for as long as 20 and even 25 years.

During Obama’s second term in office, the Department of Education rolled out two relatively generous income-driven repayment plans (IDRs): PAYE and REPAYE.  Both plans call for participants to pay 10 percent of their adjusted gross income on their student loans for a period of 20 years.

Most commentators have viewed these initiatives as a humane way to lower struggling borrowers’ monthly payments. But for many of the people in IDRS, probably most of them, the monthly payments don’t cover accruing interest. For these people, their IDRs cause their loan balances to go up even if they make regular monthly payments.  Thus, IDR participants will enter their retirement years with thousands of dollars in unpaid student-loan debt.

The CFPB report should be alarming to everyone. Already, we are seeing student borrowers enter their sixties with increasing levels of debt; and delinquency rates are climbing.

This is a crisis right now, but as the IDR participants reach retirement age, the crisis will grow worse. Indeed, it will be a calamity as millions of people try to service their student loans while surviving on Social Security checks and small pensions.

References

Older consumers and student loan debt vary by state. Consumer Financial Protection Bureau, August 2017.


Saturday, November 4, 2017

Matt Taibbi's Rolling Stone article on student debt crisis: You should read it

If you believe in social justice and basic human decency, you must read Matt Taibbi's article on the student-loan crisis that appeared this month in Rolling Stone.

Writing in the tradition of great American investigative journalism, Taibbi deconstructs "the great college loan swindle" that is destroying the lives of millions. Taibbi illustrates his theme by telling the story of two swindled student debtors: Scott Nailor and Veronica Martish.

Scott Nailor, a thirty-seven year-old school teacher, has contemplated suicide because he is chained to college loans he will never pay off. Nailor borrowed $35,000 to get a degree from the University of Southern Maine, which qualified him for a job as a school teacher.

This debt, which might seem modest to some people, was barely manageable on Nailor's salary as a school teacher, which initially paid just $18,000. He and his wife consolidated their student debt, which had grown to $50,000. Then the couple declared bankruptcy, but they did not discharge their student loans.

Today, Taibbi wrote, Nailor makes monthly payments of $471 a month on student-loan debt that has grown to $100,000.  None of his payments go to paying down principle. "I will never be able to pay it off," Nailor told Taibbi. "My only escape from this is to die."

And Taibbi also tells the story of Veronica Martish, a 68-year-old veteran from the Vietnam War. In 1989, she borrowed $8,000 to take courses at Quinebaug Valley Community College. Due to family problems, Martish fell behind on her loan payments and entered a loan rehabilitation program. By this time, her $8,000 had grown to $27,000 due to fees and interest tacked on by one of the federal government's debt collectors.

Martish told Taibbi that she had paid a total of $63,000 on her $8,000 student loan, but has yet to pay off the principle. By the time she dies, Martish estimates her loan balance will have grown to $200,000. "Nothing ever comes off the loan," she explained. "It's all interest and fees."

These stories may seem incredible to you, but in fact they are all too common. In fact, the bankruptcy courts have chronicled similar experiences when student-loan debtors stagger into bankruptcy court. Remember Brenda Butler, who paid $15,000 on $14,000 in student loans? Twenty years after graduating from college, she owed $32,000--twice what she borrowed. A bankruptcy judge refused to wipe out her student loans. She should stay in a long-term repayment plan, the judge advised--a plan that will not end until 42 years after Butler graduated from college.

And how about Alan and Catherine Murray, the Kansas couple who borrowed $77,000 to pay for undergraduate and graduate degrees? They made $54,000 in loan payments--about 70 percent of the principle.  Yet 20 years after finishing their studies, their accumulated student-loan debt had ballooned to $311,000--more than four times what they borrowed.

Millions of people have seen their student loans grow exponentially due to fees and unpaid interest. When that happens, a debtor's only option is to sign up for an income-driven repayment plan (IDR) that can last from 20 to 25 years. But these plans generally set monthly payments so low that the payments don't reduce the principal on the debt.  College debtors on IDRs see their loan balances grow larger and larger with each passing month even when they faithfully make their loan payments.

This was the situation Scott Nailor found himself in. No wonder he contemplated suicide.

And it gets worse. When all those millions of people in IDRs make their last monthly payment, the remaining balance on their loans will be forgiven; but the IRS considers the forgiven amount to be taxable income.

Does anyone in Congress give a damn? I don't think so. And Secretary of Education Betsy DeVos, whose family has profited from the debt-collection industry, certainly doesn't give a damn.

And so America descends into an era of shocking exploitation perpetrated by colleges, the federal government, and the debt-collection industry.

I will end this reflection by quoting a paragraph from Taibbi's searing essay:
It's a multiparty affair, what shakedown artists call a "big store scheme," like in the movie The Sting: a complex deception requiring a big cast to string the mark along every step of the way. In higher education, every party you meet, from the moment you first set foot on campus, is in on the game.
Donald Trump and Betsy DeVos: the "big store" scheme


References

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

Murray v. Educational Credit Management Corporation, CASE NO. 14-22253, CHAPTER 7, ADV. NO. 15-6099 (Bankr. D. Kan. Dec. 8, 2016), aff'd, No. 16-2838 (D. Kan. Sept. 22, 2017).

Matt Taibbi. (2017, October). The Great College Loan Swindle. Rolling Stone.



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.