Showing posts with label negative amortization. Show all posts
Showing posts with label negative amortization. Show all posts

Monday, June 18, 2018

American Enterprise Institute: A ton of graduate students who attended HBCUs are not paying down their student loans

Jason Delisle, writing for the American Enterprise Institute, reported that a great many Americans who took out loans to attend graduate school are not paying them back.  Most are not defaulting; they simply are putting their loans in a holding pattern that doesn't require them to pay down their loan balances.

What's going on? As Delisle explained, student borrowers have three options for managing their graduate-school loans to keep those loans from going in to default.

Income-Based Repay Plans. First, graduate-student borrowers can enter income-based repayment plans (IBRPs), which set monthly loan payments based on income, not the amount borrowed. IBRPs allow borrowers to lower their monthly loan payments, but often (perhaps almost always), the payments aren't large enough to cover accruing interest. When this happens, loan balances grow even when borrowers are making regularly monthly payments.

Forbearance. A student-loan debtor can ask for multiple types of forbearance on their loans. As Delisle explained, "the most common forbearance effectively has no eligibility criteria."  Borrowers simply request a forbearance. Usually, interest continues to accrue during the forbearance period, which can last for no more than 36 consecutive months.

Deferment. Student borrowers can also apply for an economic hardship deferment that allows them to skip making loan payments due to economic hardship such as unemployment or severely reduced income. Borrowers automatically get a deferment while they continue to be enrolled in school. Again, interest accrues on their student loans while they are in deferment.

Graduate students typically accumulate the most student-loan debt because graduate education is expensive and there is no monetary cap on the amount of student loans that can be taken out to fund graduate education. Nevertheless, graduate students typical have low default rates. According to Delisle, only 4 percent of the 2009 cohort of graduate students were in default five years into repayment.

But a low default rate does not mean graduate-student borrowers are paying down their loans. In fact, a high percentage of graduate-student debtors are seeing their loans negatively amortize five years into repayment--meaning their loan balances are going up even though their loans are in good standing.

Why? Because thousands of graduate-student borrowers are not financially able to pay down their loans under a standard 10-year repayment plan. In order to avoid default, these borrowers select one of the three options listed above: IBRPs, loan forbearance, or deferment.

Here's where Delisle's report becomes especially interesting. Delisle lists the 20 graduate and professional schools with the highest share of graduate-student borrowers who had not reduced the principal on their loans five years into repayment.Twelve of these 20 schools are historically black colleges or universities (HBCUs); and their nonpayment rates ranged from 44 to 65 percent.

Here's the list of the 12 HBCUs with high nonpayment rates for their graduate students, along with the percentage of borrowers who had not reduced their loan principal. Of these 12 institutions, 11 are public universities.


  1. Mississippi Valley State University       65%
  2. Southern University New Orleans         62%
  3. Grambling State University                   59%
  4. Virginia State University                       53%
  5. Prairie View A & M University             51%
  6. Delaware State University                     51%
  7. Alabama A & M University                  50%
  8. Alabama State University                      49%
  9. Southern University at Baton Rouge     48%
  10. Clark Atlanta University                        47%
  11. Jackson State University                        46%
  12. Lincoln University of Pennsylvania       44%

The AEI report is additional data showing that African Americans are particularly affected by the federal student loan program. At 12 HBCUs, from 44 to 65 percent of their graduate students entering repayment had not reduced the principal on their student loans by one dime five years later.

Perhaps the AEI report will prompt legislators to examine more closely whether HBCUs funded with public monies are providing their students with useful graduate education. Something is wrong when a high percentage of graduate students who attended a HBCU are not able to pay down their student-loan debt five years after ending their studies.



References

Jason Delisle. Graduate Schools with the Lowest Rates of Student Loan Repayment. American Enterprise Institute, June 2018.





Tuesday, February 14, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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



References

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

James Howard Kunstler. Made for Each Other. Clusterfuck Nation, February 13, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).

Sunday, January 29, 2017

Alan and Catherine Murray are Poster Children for the Student Loan Crisis: Income-Driven Repayment Plans for Distressed Student-Loan Debtors are Insane

In a recent post, I wrote about Alan and Catherine Murray, who won a partial discharge of their student-loan debt in a bankruptcy case decided in December 2016.  Educational Credit Management (ECMC), the creditor in their case, is appealing the decision. We should all hope ECMC loses the appeal, because the Murrays are the poster children for the student-loan crisis.

Alan and Catherine Murray: Poster Children for the Student-Loan Crisis

Alan and Catherine Murray, a married couple in their late forties, took out 31 federal student loans to get bachelor's degrees and master's degrees in the early 1990s. In all, they borrowed about $77,000, not an unreasonable amount, given the fact that they used the loans to get a total of four degrees.

In 1996, the Murrays consolidated all those loans, a sensible thing to do; and they began making payments on the consolidated loans at 9 percent interest.  Over the years they made payments totally $58,000--or 70 percent of what they borrowed.

Nevertheless, during some periods, the Murrays obtained economic hardship deferments on their loans, which allowed them to skip some payments. Interest continued to accrue, however; and by 2014, when the Murrays filed for bankruptcy, their $77,000 debt had ballooned to $311,000!

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

 Educational Credit Management Corporation (ECMC), the Murrays' student-loan creditor, appealed Judge Somers' ruling. The Murrays should have been placed in an income-driven repayment plan (IDR), ECMC argued, which would have required them to pay about $1,000 a month for a period of 20 years.

Obviously, ECMC's argument is insane. As Judge Somers pointed out, interest was accruing on the Murrays' debt at the rate of almost $2,000 a month. Thus ECMC's proposed payment schedule would have resulted in the Murrays' debt growing by a thousand dollars a month even if they faithfully made their loan payments. By the end of their 20-year payment term, their total debt would have grown to at least two thirds of a million dollars.

The Murrays' case is not atypical: Billions of dollars in student loans are negatively amortizing

You might think the Murray case is an anomaly, but it is not. Millions of people took out student loans, made payments in good faith, and wound up owing two, three, or even four times what they borrowed. In other words, millions of student loans are negatively amortizing--they are growing larger, not smaller, during the repayment period.

For example, Brenda Butler, whose bankruptcy case was decided last year, borrowed $14,000 to get a bachelor's degree in English from Chapman University, which she obtained in 1995. Like the Murrays, she made good faith efforts to pay off her loans, but she was unemployed from time to time and could not always make her loan payments.

By the time Butler filed for bankruptcy in 2014, her debt had doubled to $32,000, even though she had made payments totally $15,000--a little more than the amount she borrowed.

Unfortunately for Ms. Butler, her bankruptcy judge was not as compassionate as the Murrays' judge. The judge ruled that Butler should stay on a 25-year repayment plant, which would terminate in 2037, 42 years after she graduated from Chapman University.

Here is sad reality. Millions of people are seeing their total student-loan indebtedness go up--not down--after they begin repayment. According to the Brookings Institution,  more than half of the 2012 cohort of student-loan borrowers saw their total indebtedness go up two years after beginning the repayment phase.  Among students who attended for-profit colleges, three out of four saw their loan balances grow larger two years into repayment.

An analysis by Inside Higher Ed concluded that less that half of college borrowers (47 percent) had made any progress on paying off their student loans 5 years into repayment. In the for-profit sector, only about a third (35 percent) had paid anything down on their student loans  over a 5-year period.

And the Wall Street Journal reported recently that half the students at more than a thousand colleges and schools had not reduced their loan balances by one dime seven years after their repayment obligations began.

The Federal Student Loan Program is a Train Wreck

Awhile back, Senator Elizabeth Warren accused the federal government of making "obscene" profits on student loans because the interest rates were higher than the government's cost of borrowing money. Warren's charge might have been true if people were paying back their loans, but they are not.

Eight million people are in default and millions more are seeing their student-loan balances grow larger with each passing month.  The Murrays are the poster children for this tragedy because they handled their loans in good faith and still wound up owing four times what they borrowed.

In short, the federal student loan program is a train wreck. Judge Somers' solution for the Murrays was to wipe out the accrued interest on their debt and to simply require them to pay back the principle. This is the only sensible way to deal with the massive problem of negative amortization.



References

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

Paul Fain. Feds' data error inflated loan repayment rates on the College Scoreboard. Inside 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).

Ruth Tam. Warren: Profits from student loans are 'obscene.' Washington Post, July 17, 2013.



Thursday, November 5, 2015

Suicide and Student Loans: Is There a Link?

Death rates among white, middle-aged Americans have gone up significantly in recent years. According Anne Case and Angus Deaton, two Princeton economists, death rates for people in the 45 to 54 age group began rising in 1999. For middle-aged white people with a high school diploma or less, the mortality rate rose 22 percent between 1999 and 2013.

Why are relatively young white Americans dying at a higher rate than they did 15 years ago? Case and Deaton say most of the rising mortality rate can be attributed to suicide or deaths related to alcohol or drug abuse.People in this age group are experiencing a lot of stress, including economic stress; and they are turning to alcohol and drugs to deal with it. “What we see here is a group that’s in quite a lot of distress,” said Ms. Case in a Wall Street Journal interview.

As Case and Deaton said in their report:
Although the epidemic of pain, suicide, and drug overdoses preceded the financial crisis, ties to economic insecurity are possible. After the productivity slowdown in the early 1970s, and with widening income inequality, many of the baby-boom generation are the first to find, in midlife, that they will not be better off than were their parents. Growth in real median earnings has been slow for this group, especially those with only a high school education. 
As everyone knows, Americans' accumulated student-loan debt has been going up steadily for the past 20 years. Could there be a  link between student-loan debt and rising mortality rates among middle-aged white Americans?

Deaton and Case did not examine student-loan indebtedness in their study, and any attempt to link student loans to rising death rates would be speculative. Moreover, Case and Deaton found that middle-aged people with college degrees had not experienced higher mortality rates.

Nevertheless, suicide rates for the Baby Boomer generation have gone up dramatically in recent years. According to a report by Katherine Hempstead and Julie Phillips, the suicide rate  for people in the 40-64 age group has gone up 40 percent since 2007.

Hempstead and Philips suggest that economic problems may have contributed to the rising suicide rate among Baby Boomers, and that "adverse effects of economic difficulties on psychological well-being may have been greater for those who did not anticipate them; this may well have been the case for those who were educated and wealthier . . . ."

One thing is certain: Our federal government has constructed a student-loan scheme so heartless that it almost seems to have been designed to plunge millions of Americans into long-term clinical depression.  So isn't it reasonable to conclude there is a connection between crushing student loans and rising suicide rates among middle-aged people?

Let's examine some of the evidence pointing to growing stress among student-loan debtors:
  • As the New York Times recently pointed out, ten million people are in default on their student loans or delinquent on their loan payments.
  • According to a recent report by the Brookings Institution, loan balances for a significant number of student-loan debtors actually went up after they entered the repayment phase  of their loans. Why? Because a lot of people have obtained economic-hardship deferments that exempt them from making loan payments due to dire economic circumstances.  But because they are not paying down accruing interest, their loan balances are getting larger, making them more difficult to pay off.
  • The percentage of elderly Americans with unpaid student-loan debt is going up. According to a report from the General Accounting Office, the percentage of people in the 65 through 74 age group with outstanding student loans grew from 1 percent in 2004 to 4 percent in 2010, a four-fold increase   And the amount of student-loan debt owed by elderly people is growing as well.  In fact, the amount of debt held by elderly Americans grew six fold between 2005 and 2013--from $2.8 billion in 2005 to $18.2 billion.
  • The federal government is  garnishing more and more Social Security checks to collect on unpaid student loans.   In 2002, only 31,000 people had Social Security benefits garnished because they had defaulted on their student loans. That number ballooned five fold in just 11 years. In 2013, 155,000 Americans saw their Social Security checks reduced due to unpaid student-loans.
Let's consider that last bullet from a more personal perspective. According to a story posed on Market Watch, the U.S. government is garnishing the Social Security checks of Naomia Davis, an 80 year old woman who is suffering from advanced Alzheimer's Disease. Ms. Davis's only income is her $894 Social Security check, and the feds take $134 of it to pay down on an old student loan.

In short, it is reasonable to conclude that crushing student-loan debt contributes to depression and even suicide among Baby Boomers who are struggling to pay off college loans they took out when they were young.  The student loan crisis is not only eroding Americans' sense of economic well being; it may be literally killing them.



References

Jillian Berman. When your Social Security check disappears because of an old student loan. MarketWatch, June 25, 2015.  Accessible at: http://www.marketwatch.com/story/when-your-social-security-check-disappears-because-of-an-old-student-loan-2015-06-25

Anne  Case and Angus Deaton. Rising morbidity and mortality in midlife among white
non-Hispanic Americans in the 21st century.  Accessible at: http://www.pnas.org/content/early/2015/10/29/1518393112.full.pdf

Editorial. Death AmongMiddleAged Whites. New York Times, November 5, 2015.

Editorial. Why Student Debtors Go Unrescued. New York Times, October , 2015. Accessible at: http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html?_r=0

General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

Katherine A. Hempstead and Julie A. Phillips. Rising Suicide Among Adults Aged
40–64 Years: The Role of Job and Financial Circumstances.  American Journal of Preventive Medicine 84(5):491-500 (2015). Accessible at: http://www.ajpmonline.org/article/S0749-3797(14)00662-X/pdf

Jason Iuliano. An Empirical Assessment of Student Loan Discharge and the Undue Hardship Standard. American Bankruptcy Law Journal 86 (2012), 495.

Gina Kolata. Deaths Rates Rising Middle-Aged White Americans, Study Finds. NewYork Times, November 3, 2015. Accessibe at: http://www.nytimes.com/2015/11/03/health/death-rates-rising-for-middle-aged-white-americans-study-finds.html

Betsy McKay. The Death Rate Is Rising for Midle-Aged Whites. Wall Street Journal, November 3, 2015. Accessible at: http://www.wsj.com/articles/the-death-rate-is-rising-for-middle-aged-whites-1446499495