Biden Administration's Proposed Income-Driven Repayment Plan for Student Debtors is a Disaster

 Everything Everywhere, All at Once. That's a good description of the Department of Education's handling of the federal student-loan program. From every perspective and by any measure, the program is a disaster.

Even before COVID, the program was in crisis. Education Secretary Betsy DeVos admitted in a 2018 speech that only one out of four borrowers were paying down the principal and interest on their loans. And she reported that about 20 percent of borrowers were either delinquent on their loans or in default.

But why dwell on evil tidings?  Shortly after Betsy resigned from the Trump administration, her speech was removed from the web. 

Then came the COVID pandemic, and the feds paused all student-loan debt collection. Thus, 43 million college borrowers stopped making monthly loan payments without penalty and without accruing interest. This pause has now lasted three years.

According to the Committee for a Responsible Federal Budget, the cost of the loan repayment pause was $155 billion as of December of last year. And that cost continues going up as each day goes by.

To add fuel to the flames--the Biden Administration is rolling out a modified income-based repayment plan, which is about as close as one can get to free money.

Under the new plan, undergraduate borrowers will only pay 5 percent of their discretionary annual income on their student loans, which is generously defined as the amount over 225 percent of the federal poverty-level guidelines.

For example, college graduates in three-member households will only pay 5 percent of their annual income over $55,935. Thus, grads making $50,000 a year will make monthly payments of zero, regardless of how much they borrowed!

Our scatter-brained Department of Education estimates this plan will cost the taxpayers $138 billion over ten years--chicken feed!

However, the Penn Wharton Budget Model projects the cost to be more than double DOE's estimate--$333 billion to $361 billion.

Why are the estimates so different? Because Penn Wharton reasonably predicts that more borrowers will sign up for this new easy-peasy repayment plan. 

Currently, about a third of eligible student debtors participate in an income-based repayment plan.  Penn Wharton estimates that 70 to 75 percent of student borrowers will sign up for the new program because most borrowers will only be required to make token payments (or no payments) on their student loans. 

Penn Wharton also predicts that students will take out bigger loans when they realize the new income-based repayment plan is breathtakingly generous.  If that happens, the cost of the program will be even higher.

In short, the Department of Education's new income-based repayment plan is nutso.  It will encourage students to take out ever-larger student loans, which, in turn, will prompt colleges and universities to keep raising the cost of tuition.

DOE's revised income-based repayment plan is nutso.

Biden Administration Extends Pause on Student-Loan Payments Until End of This Year: Has The Government Created A Moral Hazard?

 Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. 

 The Economic Times

Christmas came early this year for student-loan debtors. First, the Biden administration is extending the pause on student-loan payments until the end of 2022, which means that college borrowers are getting a two-and-half-year holiday from making monthly loan payments. 

That's not all. President Biden will give every borrower under an income cap of $125,000 (or $250,000 for married couples) $10,000 in student-debt relief.

Borrowers who received Pell Grants in college will get $20,000 in debt relief.

That's big news--especially for borrowers who got Pell Grants while in school. If we add the Pell Grant money these student-borrowers obtained while in college, plus the $20,000 loan write-off, many of these people will have gotten a free education.

And there's more. The Biden administration will launch a more generous income-based repayment (IBR) plan that will lower income-based payments for undergraduate loans from 10 percent of discretionary income to just five percent. The Department of Education also intends to raise the amount of income considered nondiscretionary, meaning that undergraduate borrowers will pay less than five percent of their income on their student loans.

Still, Santa's sack of gifts is not empty. Under DOE's proposed rule, the government will cover the unpaid monthly interest for people in IBRs, meaning student debtors on income-based repayment plans won't see their loan balances go up due to negative amortization.

Party poopers like Larry Summers say that all this federal generosity will fuel more inflation, but who cares? Certainly not the student-loan debtors. In fact, rising inflation will be a bonanza for them because they will be paying back student loans with deflated dollars.

Grumps also argue that the Biden student-loan forgiveness scheme acts as a moral hazard, and I think this is true. If students know they will make loan payments based on their income, not the amount they borrowed, they have every incentive to borrow extravagantly.  

And Biden's munificent changes in income-based repayment plans will likely act as a moral hazard for the colleges as well. University leaders have no incentive to keep their costs in line when they know that students will cheerfully absorb tuition hikes because their loan-repayment plans are so generous that it won't matter whether their tuition bills get larger.

In defense of Biden's sweeping student-loan reforms,  I think everyone agrees that many students took out loans to get a college education that wasn't worth much and was too expensive. 

Millions of students were scammed by for-profit colleges or private nonprofit universities that cranked out overpriced, worthless graduate degrees. Surely the victims of the higher education racket deserve some relief. 

Nevertheless, the federal government is headed for catastrophe if it rolls out student-loan repayment plans that are overly generous while doing nothing to rein in the higher-education racket.

Unfortunately, the feds are doing nothing to stop students from being scammed. Instead, federal money is propping up the colleges--both profit and nonprofit, which allows them to raise tuition prices yearly. 

At the same time, the hucksters who run the colleges offer students educational experiences that don't help them get jobs after they graduate. As a consolation, I suppose, the government is making it very easy for ripped-off students to manage their college debt.

The cold war Russian economy, it was said, ran on the principle that the government pretended to pay the workers and the workers pretended to work.

Something like that is going on in American higher education. The colleges are pretending to educate their students, and the students are pretending to pay for it.

This will end badly for everyone--students, colleges, and taxpayers.  

Merry Christmas!

White House Extends Pause on Student-Loan Payments Until the End of August: Will Biden Go the Full Monty?

The White House is extending the pause on student-loan payments until August 31st--an extraordinary development. By the time this pause ends in September, millions of student borrowers will have been relieved from making payments on their student loans for almost two-and-a-half years.

Indeed, as Ron Kline, President Biden's chief of staff, pointed out:

Joe Biden, right now, is the only president in history where no one's paid on their student loans for the entirety of his presidency.  

 What's next? I predict President Biden will announce significant student-debt relief this fall--in time to impact the 2022 midterm elections. 

After all, it would be political madness for the Biden administration to force student borrowers to begin making payments again only weeks before the nation goes to the polls to elect the next Congress.

Sometime in August or September, I think the President will do one of three things:

• He may reduce each student debtor's loan balance by $10,000, which he promised to do on the campaign trail.

• He might wipe out $50,000 of debt for each college borrower, something Senator Elizabeth Warren, Senator Chuck Schumer, and other progressive Democrats have urged him to do.

• President Biden might go the full monty and cancel all student debt, totaling $1.7 trillion.

In my opinion, the President will take the middle course and give college borrowers $50,000 in debt relief. A $10,000 write-off is not big enough to satisfy his base, and wiping out all $1.7 trillion in student debt is too audacious.

But regardless of what President Biden decides to do regarding student-debt relief, here are things the federal government will probably not do:

Congress will not rein in the for-profit colleges. The for-profits' lobbyists and campaign contributions will continue protecting this sleazy racket.  

Congress will not reform or eliminate the Parent PLUS program. Parent PLUS has brought financial ruin to hundreds of thousands of low-income families, but too many colleges depend on Parent PLUS money for Congress to shut down the program.

Congress will not reform the Bankruptcy Code to allow distressed student borrowers to shed their college loans in bankruptcy. 

As I have said for twenty years, the simplest and most equitable way to address the student-loan crisis would be to allow honest but unfortunate college borrowers to discharge their student loans in the bankruptcy courts. But that reform makes too goddamned much sense for Congress to do it.

In short, what we are likely to see in the coming months is massive student-loan debt relief with no reforms whatsoever for the federal student-loan program--the biggest boondoggle in American history.

Will President Biden wipe out all student loan debt?

Take this student loan and shove it: Will student debtors start making payments on their college loans when the government's payment holiday ends?

When we go on vacation, most of us sleep late, basking in the luxury of rising in the morning whenever we wish.

 Then our vacation ends, and we have to set our alarm clock again. And we find it damned difficult to pop out of bed at 6 AM to get to work on time.

 Something like that will happen when the U.S. Department of Education ends its pause on student loan payments. Student debtors enjoyed a grace period on their loan obligations during the COVID pandemic. They could skip their monthly student loan payments without penalty and spend that extra cash on other things—a new car, maybe.

 Millions of student borrowers benefited from this loan-payment holiday, but nobody knows how many will start making monthly payments again when the holiday comes to an end in February.

According to Politico, Education Department officials have instructed loan services to create a "safety net" for borrowers for the first three months after payment obligations begin:

 Borrowers who miss a payment during the initial 90-day period will not take a hit on their credit reports. Those borrowers will instead be automatically placed in a forbearance and be still considered current on their loans.

Student borrowers will appreciate the safety net, but will they start making their monthly loan payments again when the government's loan-payment pause finally ends?

Even before the pandemic, the default rate on student loans was considerably higher than the default rate on credit cards and car loans.

 And this pattern makes sense. Overburdened debtors who stop making car payments lose their cars. If they quit paying on their credit card balances, their cards get canceled.

 But if student-loan debtors stop making payments on their student loans, nothing happens--at least not immediately. 

 I predict that student loan defaults will spike upward this spring. Millions of student-loan debtors got permission to stop making payments in the spring of 2020, and they will find it challenging to start writing those monthly payments again, even when they are legally obligated to do so. 

To paraphrase a great country singer, I think many college debtors will take their cue from Johnny Paycheck and tell the Department of Education to take their student loans and shove 'em.

Department of Education pauses collection efforts against student-loan debtors: Guaranty agencies garnish wages anyway

In response to the COVID pandemic, the Department of Education allowed student-loan debtors to skip their monthly loan payments without penalty until September 30, 2021.  That pause was recently extended to January 30, 2022. 

Thanks to the Department's forbearance, millions of college-loan borrowers are enjoying a respite from making loan payments, knowing that DOE will not charge interest and penalties during this grace period and that their wages will not be garnished due to nonpayment. 

But guess what? Loan guaranty agencies continued garnishing the wages of student-loan borrowers despite the federal moratorium.  According to the Student Borrower Protection Center, the guarantee agencies garnished $27.2 million in May 2021 and $12.9 million in June 2021.

Will student borrowers recover these lost wages? Probably. But it will probably take a long time. After all, the Department of Education didn't forgive all student loans taken out by people who were defrauded by ITT Tech until five years after the for-profit college filed for bankruptcy.

The federal student loan program has enormous problems, and some of them will be difficult to fix. But surely, the Department of Education can require the loan guarantee agencies to abide by Department policy and the law.

But apparently, the guaranty agencies think they are above the law. In 2016, Educational Credit Management was assessed punitive damages for repeatedly garnishing the wages of a bankrupt student debtor in violation of the Bankruptcy Code. 

In an earlier case, ECMC was sanctioned for violating the Bankruptcy Code by collecting on a debt discharged in bankruptcy. 

Perhaps, you might conclude, the guaranty agencies inadvertently violate the law because they don't have the financial resources they need to keep track of their legal obligations. But that conclusion would be incorrect. According to a report issued by the New Century Foundation in 2016, Educational Credit Management, a nonprofit corporation, had more than $1 billion in nonrestricted assets.

Congress has a lot to do to clean up the student-loan mess, but it might start by holding hearings to examine the practices of the guaranty agencies.  Congress might begin by asking why some of the guaranty agencies are so rich. It might also inquire into the agencies' attorney fees the agencies run up chasing distressed student-loan debtors into the bankruptcy courts. 

Finally, Congress might look into how much the guaranty agencies are paying their senior management.  More than ten years ago, Bloomberg reported that the current CEO of ECMC was making more than $1 million a year.  What do you think ECMC's current CEO makes?  My guess--somewhere in the high seven figures. 

We don't need no stinkin' pause on student-loan collections.