Showing posts with label student loan forgiveness. Show all posts
Showing posts with label student loan forgiveness. Show all posts

Friday, December 4, 2020

Steve Rhode: Here is Why Forgiving Student Loans is an Impossible Issue with an Easy Solution

Written by Steve Rhode

 Originally published at Get Out of Debt Guy

When it comes to a rapidly accelerating financial burden on American families, there is no greater concern than student loans.

The debt is burdensome and unfair on many levels that I’ll explore below.

However, there is a straightforward and simple solution for dealing with all of this outside of struggling to develop a fair forgiveness strategy. I’ll talk about that after we look at common opinions on the subject.

Is Student Loan Forgiveness Fair?

The talk of forgiveness is a difficult topic because how do you reach any level of fairness.

And let me be clear when people talk about forgiving student loans, it only applies to federal student loans. Not private student loans.

As Howard Dvorkin, Chairman of Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.”

Dvorkin went on to say, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

Student Loans – Another Financial Mistake for Many

A 2019 student by New York Life of 2,200 adults found the average participant reported taking 18.5 years to pay off their student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

What is shocking is the number of people that have student loan debt but who never graduated. I’ve seen statics as high as 75 percent of people with any student loans never obtained the degree.

And the wave of for-profit schools that have oversold education to people that never should have purchased their product is another national disaster.

“For-profit schools are not worth the money,” said Dvorkin. “As an employer, I hire people with traditional non-profit college degrees before I would hire someone with a for-profit degree.”

The Federal Reserve Bank of New York said, “Students who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The study went on to say, “Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes. This is an important set of findings for several reasons. First, a substantial amount of public funds go to for-profit institutions through the financial aid system. Our estimates indicate the return to such expenditures may be quite low. Second, the results suggest that students who attend local for-profit institutions when there is a negative labor demand shock may be making mistakes: they would be better off attending the local public college or university instead.”

But even non-profit schools are ramping up tuition and selling students into seats that maybe should not have been admitted.

Student loan debt is a life sentence in painful debt for many: The Impossibility of Forgiveness

Opinions on forgiveness range all over the place. Betsy DeVos, the current Secretary of Education said recently, “Policies should never entice students into greater debt. Nor should they put taxpayer dollars at greater risk. There are too many politicians today who support policy that does both.”

 

She also labeled student loan forgiveness as an “insidious notion of government gift giving. We’ve heard shrill calls to “cancel,” to “forgive,” to “make it all free.” Any innocuous label out there can’t obfuscate what it really is: wrong.”

Forgiveness is never going to be fair, and it’s not going to a quick and effective way to stimulate the economy in a difficult time from a pandemic, as some claim.

Today, student loan forgiveness would result in people not making loans they are already in default on or making payments that are too low to pay the debt off. At most, it will result in people not having to make some loan payments monthly.

The economic impact will be felt over a long period of time rather than the boost and support the economy needs now.

While DeVos talks about avoiding policies that entice students into greater debt, her own Department of Education is a big part of the problem, with help from Congress.

As the federal student loan program stands now, there is $1.37 trillion of outstanding debt to students, and the Education Department has determined that borrowers will only pay back $935 billion. That leaves the program in the red and holding for $435 billion of bad loans.

The Wall Street Journal said, “The analysis was based on government accounting standards and didn’t include roughly $150 billion in loans originated by private lenders and backed by the government.”

 

To deal with that shortage, “Congress will have to raise taxes, cut services or increase the deficit to cover the losses.” That solution is also not fair to the many that repaid their loans.

So the Battles and Arguments About Student Loan Forgiveness Are Complicated

We can argue and politically position ourselves around the idea of forgiving student loans is either the best thing or the worst thing ever to happen.

It is actually a moot point since the program is in so much trouble already.

Let’s not forget the 42 million student loan borrowers will become due again in January 2020, as a result of the CARES Act forbearance ending.

People that can’t afford their student loans will suddenly be required to begin payments again. Defaults will explode even more.

As it stands now, the Department of Education’s base position is students should feel lucky they can enroll student loan debt in an Income-Driven Repayment program (IDR) that will give them a loan payment based on income. But, as I wrote before, it’s a trap.

As it stands now, while a student loan debtor might enroll in an income-based repayment program, the minimum payment is not enough to cover the interest being charged on the loan, and the balance owed grows. While people say, “certainly Congress will change that.” The reality is they have not, over the many years the programs have been in place.

So the way the “lowest payment” solution works right now is that the government lets you pay less than is due, that grows the balance, and in two decades, when the exploded balance is forgiven, people will owe income tax on that debt unless they are insolvent. It sounds crazy, but it is true.

Here is a case that is a great example of the madness. The student loan debtor could not afford to pay off her $40,000 of student loans over 14 years but is now required to enroll and remain in an IDR that will drive her balance up.

The article by Richard Fossey J.D. says, “How could the judge conclude that Hladly might someday pay off her student loans when the amount she initially borrowed had tripled since the time she graduated from law school? If Hlady could not pay off $40,000 in student loans over 14 years, how will she ever pay $140,000 over the next 25 years, especially since her loan balance grows by $20 a day in accruing interest?

As Judge Scarcella observed, Ms. Hlady is 48 years old. Her 25-year repayment plan will terminate when she is 73. By that time, her loan balance will be more than a quarter of a million dollars. This amount will be forgiven, but the forgiven debt will be taxed as income unless Hlady is insolvent at the time.”

With IDR Plans, the Government Has Already Accepted the Loan Forgiveness Proposition

In my opinion, with federal student loan forgiveness programs already on the books, policymakers have already accepted some form of loan forgiveness. Yet, the current talk of student loan forgiveness ranges from its “socialism” to its “a right.”

As it stands today, the federal government already runs a student loan program that is rapidly increasing in delinquencies, defaults, and repayment plans that will only grow the balance.

The only current winners in the student loan cycle are the schools that can sell students on attending and get easy money from the federal government.

Students enroll, schools get paid and accept almost no responsibility for the outcome. When a student loan debtor was sold education, they could never logically or mathematically afford and later defaults; the school does not have to pay back the loan.

Howard Dvorkin said, “Colleges must start operating as a business and deliver service within income. The days of college expansion paid for from easy government student loan money needs to stop.”

He’s right.

Student Loan Forgiveness is Much-Ado-About-Nothing and Misdirected

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

BAPCPA made private student loans harder to discharge in bankruptcy. And private student loans are growing as well.

The issue is students are drowning in debt. It can be argued that because of student loan debt, they are also having to take out other debt and reduce retirement savings.

When those people are old enough and can no longer work, the lack of retirement savings will create a public safety net drain. No matter how you look at this, the systemic problem of easy money for education has driven up the debt, and we will all pay for it in one way or another.

The Solution Seems So Apparent

Up until 1976, all student loans were dischargeable in bankruptcy. Bankruptcy is a legal right for consumers to get a fresh financial start, and it is even a part of the U.S. Constitution. Those that file for bankruptcy generate an immediate stimulus for the economy and have a second chance to do better, having learned hard lessons from mistakes.

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines.

2.      The debt is forgiven tax-free.

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc.

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy.

5.      Forgiveness will be restricted to only those that qualify.

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody.

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available.

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy.

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

If We Restore Bankruptcy Student Loan Debt Elimination to All Then We Can Focus on Doing Better

There is no argument that education leads to opportunity. I don’t care if that is education at a trade school, some other hands-on education, or a degree in some college subject at the best school in a 200-mile radius.

I heard recently about a “toilet paper” degree program. That’s where plumbers make much more than people to go to college. I do know some very rich electricians and plumbers. I guess that’s a raw subject for me since I’ve spent $3,000 in plumbing bills in the last 30 days.

We have a wonderful system in place to allow people to have affordable access to start their education. The local community college is a fantastic place to start.

It is affordable, and as Dvorkin said, “When thinking of how to get started on the journey of education, community college is a great investment. Think about this: why pay much higher tuition to take classes that use the same books as the community college class uses. Start affordably and then transfer to a more expensive school if you want to continue to finish your college degree.”

The power of community colleges is not new. It is proven. My very own father started his education from a farm in Michigan at the local community college. He then went on to become the very first Ph.D. graduate in Political Science at Michigan State.

So let’s all stop trying to reinvent the wheel here. Just restore the bankruptcy provision for all student loans and require some commonsense and responsibility on future lending.

There will never be any universally accepted plan for past forgiveness of student loans that were flawed from the start.

We are a great country and instead of looking back, let’s do better moving forward.

 

Thursday, December 3, 2020

Steve Rhode points out that wholesale forgiveness of student loans is impossible. Bankruptcy Relief for distressed college debtors is the best option

 Millions of words have been written about the student loan crisis. Heck, I've probably written a couple of million words about it myself. 

For my money, Steve Rhode's succinct and cogent essay, published yesterday, is the best analysis of this catastrophe. Mr. Rhode explains why massive student-loan forgiveness is a bad idea. Instead, he argues that bankruptcy relief is the better option. He also points out the fatal flaws in the federal student-loan program, which have brought us to the brink of calamity.

I urge you to read Steve Rhode's essay in its entirety.  My commentary will highlight a few key points.

First of all, Rhode points out that taking out student loans to pay for a college education was a mistake for millions of Americans. He cites a New York Life survey, which found that the average student-loan borrower took 18.5 years to pay off student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

Shockingly, millions of Americans took out student loans and never finished their degrees. For those people, student loans are a dead loss.  Instead of enhancing their economic future, dropouts shot themselves in the foot by taking out student loans.

Rhode also points out (as have many others) that the for-profit college industry has wreaked havoc among a population of Americans who took out student loans to attend for-profit schools. He cites a study by the Federal Reserve Bank of New York, which found that “[s]tudents who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The Federal Reserve Bank study then went on to say: "Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes."

The federal student loan program is a mess. It is probably the worst public policy decision Congress ever made when it launched a program more than a half-century ago that now has more than 40 million people ensnared by a total of $1.7 trillion in outstanding student-loan debt.

But massive student-loan forgiveness is not a viable option. 

First of all, wiping out all that debt is fundamentally unfair. And here I will quote Steve Rhode's analysis:

As Howard Dvorkin, Chairman of  Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.” 

As Mr. Dvorkin pointed out, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

In any event, as Mr. Rhode explained, millions of people are already in a loan forgiveness plan. About 9 million people are in income-based repayment plans that allow them to make minimal loan payments that don't even cover accruing interest on their underlying debt.

So what is the solution to the train wreck we call the federal student-loan program? This is what Steve Rhode recommends:

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

It was this pernicious law that made even private student loans virtually nondischargeable in bankruptcy.  Many of the congresspeople who voted for this bill still hold elected office. They should be ashamed of themselves. 

Just as importantly, Mr. Rhode argues, Congress needs to remove the "undue hardship" language from the Bankruptcy Code and allow distressed debtors to discharge their college loans in bankruptcy like any other consumer debt.

Steve Rhode succinctly points out the merits of reasonable bankruptcy relief:

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines. 

2.      The debt is forgiven tax-free. 

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc. 

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy. 

5.      Forgiveness will be restricted to only those that qualify. 

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody. 

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available. 

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy. 

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

As I said at the beginning of this commentary, I urge people to read Steve Rhode's article in its entirety. I agree with him completely.

Let's see what Congress does in the coming months. The way out of the nightmare is to amend the Bankruptcy Code.  Various student-loan forgiveness scenarios will not fix this enormous problem. 

If loan forgiveness is the best idea Congress has to offer, then our nation's political leaders will have opted for the status quo. And the status quo will ultimately destroy our nation's colleges and universities along with the lives of millions of student-loan debtors. 



Thursday, April 30, 2020

Massive student-loan forgiveness is now a mainstream idea: Even Al Jazeera is on board

Around 45 million Americans owe a total of $1.6 trillion in student loans, and approximately 20 million of those debtors are not paying them back.  Betsy DeVos, President Trump's Education Secretary, admitted more than a year ago that only one out of four student borrowers was paying down principal and interest on their federal loans. "In the commercial world," DeVos observed, "no bank regulator would allow this portfolio to be valued at full, face value."  

So why not just forgive all this festering debt--debt that is preventing struggling Americans from buying homes, having children, or saving for their retirement?

That notion is now a mainstream idea in American politics. Senator Bernie Sanders got the ball rolling when he called for wiping out all this debt.  Senator Elizabeth Warren proposed something slightly less radical--forgiving student debt up to $50,000.  And Joe Biden, the Democrats' presumptive nominee for the Presidency, wants to forgive all debt owed by individuals who attended a public university or a historically black college (HBCU).

Even Al Jazeera, an Arabic-focused news organization, based in Qatar, wants to forgive all federal student loan debt.  America is experiencing its worst economic crisis since the 1930s, Al Jazeera reporters pointed out, and the U.S. needs to prioritize relief  for "people, not profit." Al Jazeera calls for canceling all student loan debt, which would "help those hit hard by the coronavirus pandemic to "rebuild their futures."

Writing off all federal student debt is not a crazy idea, especially, as I just said, a bunch of it isn't being paid back anyway. But does Congress have the political will to do it? I don't think so.

After all, the straightforward solution to this crisis would be to simply allow overwhelmed debtors to discharge their student loans in bankruptcy. Bills have been introduced in Congress that would accomplish just that, but those bills have gotten nowhere. 

I've said this before, and I will repeat it. Congress should allow insolvent Americans to file for bankruptcy and discharge their student loans like any other consumer debt: credit cards, car loans, and business obligations. 

And all Congress needs to do to accomplish this sweeping reform is to remove two words from the U.S. Bankruptcy Code: "undue hardship." It is the "undue hardship" language, after all, that the federal courts have interpreted so harshly, and which has denied bankruptcy relief to millions of honest student-loan debtors.

Of course, if Congress abolished the "undue hardship" standard, it would need to appoint a lot more bankruptcy judges to deal with a torrent of bankruptcy filings. And the judges would need to make sure that people who have the financial wherewithal to repay their loans don't fraudulently apply for bankruptcy relief.


In my view, calls to wipe out all student debt are irresponsible because politicians know this is never going to happen. Bankruptcy reform provides an orderly and fair way to give unfortunate student debtors a fresh start while guarding against fraud. 





Saturday, April 11, 2020

Joe Biden's student-loan forgiveness is seriously flawed, but it is a step in the right direction

Joe Biden announced his plan for student-loan forgiveness in a Medium commentary posted a few days ago.  He proposes to forgive all federal student loans for persons who earn up to $125,000 a year and who acquired their loans to attend a community college, a public college or university, or an HBCU (historically black college or university).

Biden's debt forgiveness plan is a step in the right direction, but it is seriously flawed.

First, Biden's plan does nothing for people who racked up student debt to attend for-profit colleges. We've known for a long time that the for-profit college industry has preyed on disadvantaged populations--people from low-income families, minorities, and first-generation college attendees.  On average, students leave their for-profit institutions with more debt than they would have acquired had they attended a public university.

So why not extended student-loan forgiveness to people who took out loans to attend a for-profit institution?

Second, student debtors who enrolled at private universities get no relief under Biden's plan unless they attended a private HBCU. This makes no sense to me at all.

Why should students who studied at Xavier University, a Catholic university in New Orleans, get debt forgiveness, while students who attended Loyola University, another New Orleans Catholic school, receive no relief at all? Are students who attended HBCUs more worthy of assistance than students who attended other colleges and universities? I don't think so.

Finally, Vice President Biden's proposal gives no relief to people who took out private student loans. Let's remember the fact that the so-called Bankruptcy Reform Act of 2005 explicitly made private student-loans virtually nondischargeable in bankruptcy.  Then-Senator Biden supported that bill and voted for it.

Why should a student who took out student loans from Wells Fargo or Sallie Mae be denied debt relief while students who took out federal loans get their student debt completely wiped out?

I support any legislation that brings assistance to overburdened student debtors--including plans proposed by Senator SandersSenator Elizabeth Warren, and former VP Biden.  So Biden's plan, imperfect as it is, has my support.

But wouldn't be simpler and fairer to amend the Bankruptcy Code and allow beaten down debtors to shed their student loans in bankruptcy like any other nonsecured consumer debt--regardless of where they went to college?

After all, the bankruptcy judges have the authority and the expertise to reject bankruptcy claims that are fraudulent or brought by people who have the financial means to pay back their lawful debts.

In my view, Biden's student loan relief plan is not well thought out. If implemented, it will ignite bitter resentment from people who are burdened by college loans taken out to attend private universities or for-profit colleges. And it will undoubtedly offend people who took out private student loans that are nondischargeable in bankruptcy because of a law Joe Biden helped enact back in 2005.

Joe Biden wants to forgive your student loans if you attended this Catholic university but not if you attended another Catholic school located in the same city.

Monday, August 19, 2019

Trump hires a fox to run the chicken house: Former student-loan servicing exec named as new Student-Loan Ombudsman

President Trump and Education Secretary Betsy DeVos remind me of the two bullies in The Christmas Story: Scott Farkus and Grover Dill, who spend their days terrorizing elementary-school kids.

Since Trump was elected, his administration has aggressively signaled that it does it not give a goddamn about student-loan debtors. In fact,  his people seem to be looking for ways to demean them and increase their misery. Here's the latest:

The Trump administration recently announced that it is appointing Robert G. Cameron, a former executive of a student-loan servicing company as the Student Loan Ombudsman for the Consumer Financial Protection Bureau. Cameron is a former senior executive of the Pennsylvania Higher Education Assistance Agency (PHEAA), which operates nationally under the name of Fedloan Servicing, the outfit that royally screwed up the Public Service Loan Forgiveness program.

There's good money in being a student-loan servicing company. According to Mother Jones, PHEAA gave out $2.5 million in bonuses to executives in 2007 and spent hundreds of thousands of dollars a year on board retreats that included $150 cigars and falconry lessons.

As the Government Accountability Office reported last year, Fedloan Servicing (which GAO did not identify by name) processed more than one million people's applications to have their employment certified as eligible for student-loan forgiveness. Fedloan approved 75 percent of those applications.

Then when the borrowers filed to have their student loans forgiven, the Department of Education denied more than 90 percent of their claims. Fedloan Servicing has been sued for giving student borrowers inaccurate information, and the Department of Education has been sued for arbitrarily and capriciously denying public-service loan forgiveness claims.

So why would the Trump administration appoint an executive from a thoroughly discredited student-loan servicing outfit to be the Student Loan Ombudsman? Obviously, they don't care about the optics.

Trump and DeVos are blithely indifferent to the fact that there are 45 million student-loan borrowers in the United States, and most of them will vote in the 2020 election. They're "screwing over" an important constituency while Democratic presidential nominees are promising student-loan forgiveness.

By appointing Robert Cameron as Student Loan Ombudsman, Trump hired a fox to run the chicken house. But Trump forgot one important fact-- these chickens can vote.


Donald Trump and Betsy Devos: Modern-day bullies 

Saturday, June 29, 2019

Bernie Sanders wants to cancel $1.6 trillion in student debt: A bridge too far?

Senator Bernie Sanders is running for President a second time. Last week he made the news with his proposal to cancel all federal student-loan debt-- $1.6 trillion.  If Bernie makes good on this pledge, he will certainly make 45 million student-loan borrowers very happy.

Bernie also proposes to make a four-year college education tuition-free at public universities. If he can pull that off, millions of Americans will be delighted. A free college education! What's not to like?

I have supported student-loan reform for more than 20 years, and I applaud Senator Sanders for putting the student-loan crisis on the front burner of national politics. But in my view, Bernie's proposals may have gone a bridge too far.

First of all, the federal student loan program, which Congress inaugurated 50 years ago, has morphed into a giant Improvised Explosive Device (IUD). As we saw in the movie Hurt Locker, an IUD must be defused very carefully or it will blow up in our faces. No one really knows what the impact would be on the national fisc if the federal government were to write off $1.6 trillion in student-loan debt. Bernie says he will pay for this bonanza by taxing Wall Street, but that tax would fall heavily on retirees, who have most of their savings in mutual funds tied to the stock market.

Even if Bernie could cancel all student debt tomorrow, most students would still have to take out additional student loans to pay for their next semester's tuition, fees, and living expenses. Of course, Bernie's solution to that problem is to simply make a college education at a public institution tuition-free.

But let's think about Bernie's tuition-free college proposal for a moment. All public colleges receive some kind of financial support from the 50 individual states. Any plan for a tuition-free college education at a public institution must involve some coordination with 50 state governments. Is it realistic to think a Sanders administration could successfully negotiate with California, Illinois, New Jersey, and 47 other states to provide tuition-free college from sea to shining sea? I doubt it.

As for Bernie's proposal to forgive all student-loan debt, that notion seems unwise. Although it is true that millions of student-borrowers are unable to pay back their loans, some portion of the 45 million student debtors received fair value for their student-loan dollars. Do we really want to forgive student-loan debt taken out by people who attended Harvard Law School and landed high-paying jobs?

In my view, the best way to resolve the student-loan crisis is to reform the Bankruptcy Code and allow insolvent student-loan debtors to discharge their student loans through bankruptcy. People who took out student loans in good faith and cannot pay them back should get relief from their debts like any other insolvent debtor.

After all, the bankruptcy judges have the expertise and experience to determine who is entitled to bankruptcy relief from their student loans. All that needs to be done is simply to strike the "undue hardship" clause from the Bankruptcy Code.

In fact, Senator Sanders and several other presidential aspirants in Congress are co-sponsoring just such a bill. Titled the Student Borrower Bankruptcy Relief Act of 2019,  the bill has been filed in both the Senate and the House of Representatives. Rather than forgive $1.6 trillion in student debt in one fell swoop, Congress needs to pass this bill so that distressed student-loan debtors can obtain relief in bankruptcy.


Bernie Sanders: We can have our cake and eat it too!





Wednesday, April 24, 2019

Senator Elizabeth Warren's Proposal to Cancel Student Debt: A Great Idea (Just Needs a Little Tweaking)

Earlier this week, Senator Elizabeth Warren astonished the higher education community (and me in particular) by announcing three bold proposals: 1) free undergraduate education at public universities; 2) massive student-loan forgiveness, and 3) a ban on federal funding for for-profit colleges.

Student-loan debtors all over America should stand up and applaud Senator Warren. She is the first national political figure to call for an end to federal aid for the for-profit colleges. This sleazy racket gets about 90 percent of its revenues from federal student-aid money. If Congress shut off that spigot as Warren proposes, most of them would close in less than 30 days.

The for-profit college industry, with its armies of lawyers and lobbyists, has Congress in its back pocket. They surely understand that Senator Warren's proposal is an existential threat. Watch how this sleazy racket starts shifting resources to sabotage Warren's presidential bid.

On the other hand, Warren's call for free college education is not original. Senator Bernie Sanders promised free college during his 2016 presidential run and Senator Kamala Harris has put free college on her campaign platform. Nevertheless, it's a good idea.

It's Warren's third proposal, however, that is the real stunner. She's calling for massive student-loan debt forgiveness for 95 percent of student borrowers.

Senator Warren's student-loan forgiveness plan is a little complicated and has some limitations. she wants to forgive up to $50,000 in student-loan debt but would reduce this benefit for high-income families.  But her basic idea is sound. Why?

First of all, millions of Americans will never pay back their student loans whether Warren's proposal is implemented or not, so we might as well forgive the debt. Almost 8 million people are in income-based repayment plans (IBRPs) that allow them to make monthly payments based on their income and not how much they owe.  For most of these people (almost all of them actually), their loan payments are so small that they don't cover accruing interest.  For people in IBRPs, their debt grows larger each month as interest accrues. They will never pay back the amount they borrowed.

Several million more student-loan borrowers have their loans in deferment while the interest accrues and capitalizes on their original debt. Most of those folks will never repay their loans.

Finally, there is a good argument that forgiving all this student debt--$1.56 trillion--would boost the economy. Unburdened by debt they will never repay, millions of Americans will be able to rejoin the middle class--buy houses and cars, have children, save for retirement.  Indeed, a study by researchers at Bard College's Levy Institute makes that very argument.

Conservatives recoiled in horror at Warren's proposal to forgive student debt, spewing a lot of blather about the sacred nature of contract obligations, the unfairness to people who paid off their student loans, etc.

But in my view, Warren's student-loan forgiveness proposal does not go far enough. Millions of student-loan debtors are entitled to student-loan forgiveness with no $50,000 cap. And millions of parents have co-signed student loans or taken out Parent PLUS loans, and they also are entitled to relief.

So I propose a few tweaks to Senator Warren's brave proposal:

First, all Parent Plus loans should be forgiven immediately for any family with household income under $200,000. And all parents and relatives who cosigned private student loans should be relieved of any legal obligation to repay that debt.

Secondly, instead of instituting a loan-forgiveness plan, I propose that distressed student-debtors be allowed to discharge their student loans in bankruptcy as proposed in Representative John Katko's recently filed bill. People who took out student loans to go to law school and then got rich as corporate lawyers should pay back their loans. But people who otherwise qualify for bankruptcy relief should be able to discharge their student loans like any other consumer debt.

But let's not quibble about the details. Senator Warren's call for free college and student-loan forgiveness are basically good ideas. And her call for shutting off federal aid to the for-profit colleges is stunningly brave.

In my view, it is time to stop heckling Senator Warren about Cherokee-Gate. She is a serious presidential candidate who has made bold and thoughtful policy proposals. Americans should listen to what she has to say about the student-loan crisis because--let's face reality--a lot of student-loan debt will never be paid back.

References

Elizabeth Warren. I'm calling for something truly transformational: Universal free public college and cancellation of student loan debt. Medium, April 22, 2019.

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.