DOE plays Whack-a-Mole with the Student Loan Program: Not a safety net but a noose

According to Techopedia, the term “whack-a-mole” describes a process "where a pervasive problem keeps recurring after it is supposedly fixed."

That's a great description of what the Department of Education is doing with the federal student-loan program.  It's playing whack-a-mole.

Here's DOE's latest fun-house trick to create a "safety net" to "permanently fix a broken student loan system."

The Department is going to revamp its Rube Goldberg system of income-based repayment plans into a new program that will make college damn near free for millions of college students.

As DOE spokespeople explained, student debtors in income-based repayment plans will only be required to pay five percent of their discretionary income toward paying back their loans--no matter how much they borrow!

Pretty sweet. But the deal gets sweeter.  DOE's generous new repayment plan describes discretionary income as 225 percent of a person's income above the federal poverty level.

Here's an example of how DOE's new repayment scheme will work. Single student borrowers will only have to pay 5 percent of their annual income above $30,000 on their student debt. 

Let's suppose a single guy graduates from St. Nobody College owing $58,000 in student loans. (That's the average debt load for graduates of private schools.)

Let's further suppose our guy earns a salary of $55,000 a year, the average starting salary for a recent college graduate.

What will be our guy's monthly student-loan payment on the $58,000 he borrowed to attend St. Nobody? 

The math is simple. He will pay five percent of $25,000 ($55,000 minus $30,000). That's $1,250 a year or $104 a month.

And if our young scholar is married and has two children when he graduates from college, his discretionary income will be adjusted upward. He won't have to pay anything on his student loans--not one fuckin' dime!

Don't take my word for it. That's what DOE's January 10 press release reported. 

How about accruing interest? Under DOE's old income-based repayment plans, small monthly payments on student loans often don't cover accruing interest on the debt, so the debt grows larger with each passing month.

Again, no problem! Education Secretary Cardona's new student-loan bonanza won't charge you interest! 

In sum, Education Secretary Cardona is playing whack-a-mole with the student loan program. Instead of doing something to fix this trillion-dollar problem, he's rolling out a scheme that's designed so that most student borrowers don't have to pay back their debts.

James Kvall, Undersecretary of Education, described DOE's razzle-dazzle plan as a safety net.  But's he wrong. It's not a safety net; it's a noose designed to strangle American taxpayers.

Let's play whacka-mole!

Independent expert predicts student loan program will lose a half trillion bucks: Is he right?

 In 2018, Education Secretary Betsy DeVos hired Jeff Courtney, a former JP Morgan executive, to do a forensic analysis of the federal student loan program.  DeVos suspected the program was generating huge losses. 

In fact, in November 2018, DeVos said publicly that only one in four student borrowers were paying down both principal and interest on their debt. She also acknowledged that 20 percent of all federal student loans were either delinquent or in default.

Mr. Courtney's analysis confirmed Secretary DeVos's suspicions. Courtney concluded that roughly one-third of the Education Department's student-loan portfolio will never be paid back. That's about a half-trillion-dollar loss.

The Department of Education rejects Mr. Courtney's conclusions. DOE says his "analysis used incomplete, inaccurate data and suffered from significant methodological shortcomings . .  . ."

Maybe. But we don't need a sophisticated economic model to know that the federal student-loan program is underwater.  We know that 8 million student borrowers are in income-based repayment programs and are making payments too small to pay down their loans' principal plus accruing interest.

So, that is 8 million student debtors who will never pay back their loans. That fact alone should dispel any notion that the federal student loan program is solvent.

Policymakers on the left and on the right can continue arguing about the student-loan crisis as if it were merely a political issue.  But it is not--it is an economic calamity for millions of distressed student-loan debtors. 

We know for sure that burdensome student-loan debt is hindering young Americans from buying homes, having children, and saving for their retirement.  Granting partial student-debt relief, as some politicians propose, will do little to relieve widespread suffering.

In my view, the way to address the student-loan mess is for Congress to amend the Bankruptcy Code to allow insolvent student borrowers to discharge their loans in bankruptcy like any other consumer debt.

Congress also needs shut down the Parent PLUS program, which has a high default rate, particularly among minority and low-income families. 

And Congress must put some realistic cap on the amount of money students can borrow for their college education. It is insane for private colleges to peg their tuition rates at $25,000 a semester. They can only get away with this highway robbery because students can take out federal loans to finance their studies.

Mr. Jeff Courtney believes one-third of student-loan dollars will never be paid back. If Congress doesn't address the college-loan crisis forthrightly and very soon, the losses will be much higher than that.

Bard College: Tuition is $56,000 a year

Coronavirus bailouts for the casinos but nothing for harried student-loan debtors: Let'em eat cake!

Congress turned on the money spigot last month and spewed out cash to millions of people and businesses that were hurt by the coronavirus pandemic.

The airlines are getting bailout money, the casinos are eligible for aid, and corporations are accepting loans they don't need. AutoWeb, for example, got a $1.4 million federal loan and gave its CEO a $1.7 million bonus one week later.

Meanwhile, millions of Americans are burdened by federal student loans they can't repay.  More than a year before the coronavirus outbreak, Education Secretary Betsy DeVos publicly admitted that only one out of four student borrowers were paying down both principal and interest on their federal loans.  One out of five borrowers, DeVos disclosed, were delinquent on their debts or in default.

Now, with the unemployment rate hovering near 15 percent, and millions of hourly workers out of a job, college-loan debtors are struggling more than ever.

And what has the Department of Education done to assist harried student debtors? Not much.

DOE is giving college-loan borrowers a six-month deferment from making their monthly payments, and it won't assess interest on outstanding loans during that time. DOE has also temporarily stopped seizing wages, Social Security benefits, and tax refunds of people who defaulted on their federal student loans.

In other words, the Trump administration is shoveling big bucks to corporations, while it throws a few crumbs to college-loan borrowers.

Here's an illustration that shows just how meaningless the Trump administration's response to the student-loan crisis has been.

Laurina Bukovics borrowed $20,000 more than 30 years ago to obtain a bachelor's degree from Wisconsin University. Through the years, she made regular monthly loan payments except during times when DOE gave her deferments or forbearances due to her financial difficulties.

Over 25 years, Bukovics repaid $29,000 on her student loans—140 percent of what she borrowed. Nevertheless, by the time she showed up in bankruptcy court, her student-loan debt had grown to $80,000—four times what she had received from the federal loan program.

How much relief does a six-month moratorium on loan payments give to people like  Ms. Bukovics, who have been burdened by student debt for their entire adult lives and have seen their loan burdens double, triple, or even quadruple?

Hardly any relief at all.  The federal government has poured out trillions to alleviate the financial crisis that was triggered by the COVID-19 virus.  But much of this money has gone to corporations and businesses. 

When corporations ask the feds for money to help them get through the coronavirus pandemic, the government responds by saying, "Where do we send the check?"

On the other hand, when beaten-down student-loan debtors try to discharge their student debt in bankruptcy, the federal government almost always opposes relief. Ms. Bukovics, for example, was unemployed while she was in bankruptcy and living temporarily with a friend. She had no car, and she was so impoverished that she qualified for food stamps and Medicaid.

And what was the response by the Department of Education's debt collector to Ms. Bukovics's plight?  ECMC opposed bankruptcy relief because it believed Bukokvics was spending too much money on food.

Betsy DeVos's summer home

Betsy DeVos compares the student-loan program to a thunderstorm looming on the horizon

Betsy DeVos, President Trump's Secretary of Education, gave a speech a few days ago in which she candidly acknowledged that the federal student-loan program is in crisis. In fact, she compared the student loan program to a "thunderstorm loom[ing] on the horizon."

Here is what Secretary DeVos said in her speech:

• The federal government holds $1.5 trillion in outstanding student loans, one-third of all federal assets.

• Only one in four federal student-loan borrowers are paying down the principal and interest on their debt.

• Twenty percent of all federal student loans are delinquent or in default. That's seven times the delinquency rate on credit card debt.

• The debt level of individual borrowers has ballooned since 2010. Most of this growth is due to the fact that postsecondary students are borrowing substantially more money than they did just eight years ago.

• The federal government's portfolio of outstanding student loans now constitutes 10 percent of our nation's total national debt.

DeVos basically admitted that a lot of federal student loans will never be paid back. In the commercial world, she said, no bank regulator would value the government's massive portfolio of student loans at full value. And she also admitted that the Department of Education, by itself, could only make "a few, small tactical measures" to address this enormous problem.

 In my view, DeVos's speech is the most useful statement about the student-loan program coming from a federal official since the publication of A Closer Look at the Trillion, released more than five years ago by the Consumer Financial Protection Bureau's Student Loan Ombudsman, Rohit Chopra.

As I have said repeatedly, the student-loan crisis will not be resolved until the for-profit college industry is shut down and struggling debtors have access to the bankruptcy courts to discharge their student loans.

But those reforms are not politically possible right now. In the meantime, Congress should join DeVos in adopting some "small tactical measures" to ease massive suffering. Here are some suggestions:

• Congress should adopt legislation banning the federal government from garnishing the Social Security checks of elderly student-loan defaulters. As the Government Accountability Office pointed out two years ago, most of the money collected from garnishing Social Security checks goes to paying off interest and penalties and not paying down the principal on the debt.

• Disabled veterans should have their student loans forgiven automatically by the government without the necessity of making a formal application.

• The Department of Education should streamline the loan-forgiveness process for borrowers who signed up for the Public Service Loan Forgiveness Program (PSLF).  As of a few months ago, DOE had approved less than 100 of 28,000 PSLF applicants.

• Insolvent students who took out private student loans and financially distressed parents who co-signed student loans for their children or who took out  Parent PLUS loans should have free access to the bankruptcy courts.

These measures, if adopted, would do little to relieve the massive suffering caused by mountains of student loan debt. But they would be a token of good faith by our government and a sign that our political leaders finally understand that the federal student loan program is out of control and has ruined the lives of millions of Americans who took out student loans in the naive hope that a college education would lead to a better life.

References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/.

Betsy DeVos. Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid's Training Conference. November 27, 2018.

United States Government Accountability Office. Social Security Offsets: Improvement to Program Design Could Better Assist Older Student Borrowers with Obtaining Permitted Relief. Washington DC: Author, December 2016).

The Student-Loan Catastrophe: Postcards From the Rubble. On sale at AMAZON.COM for $13.50

For many Americans, student loans are a necessary evil. The average incoming college freshman understands little of the long-term impact of repayment plans. With millions defaulting on their loans, there’s no doubt about it: the federal student loan program is a bubble—it’s just that no one knows when it will burst. But when it does, it could be a disaster akin to the 2008 real estate crash.

In this series of revelatory essays, author and professor Richard Fossey delves into the political muck to deliver hard truths about the federal student loan program. In-depth analysis sheds light on just how pervasive the crisis is and what average loan holders can do about their balances.

With unique insight and no-holds-barred honesty, Fossey brings readers tales from the front lines of the student loan crisis. Learn about the heartless Social Security garnishment of senior citizens who default on their loans and the link between suicide and student loans.

Whether you’re in search of cautionary tales to share with your college student or seeking solutions to your own mounting student loan debt, The Student Loan Catastrophe: Postcards from the Rubble is your guide to stability in the face of an uncertain future.

The Inuits Flipped a Duck at the Federal Government in 1961: A Suggestion for Mass Protests Against the Abuses of the Federal Student Loan Program

 In May 1961, the Inupiat people of Barrow, Alaska staged their first mass act of civil disobedience in the long and noble history of the Inuit people. Perhaps their community protest offers some lessons for the millions of Americans who suffer under the burden of crushing student-loan debt.

The Barrow Duck-In of 1961

Here's what happened. Under the Migratory Bird Treaty Act, ratified by Congress in 1918, spring hunting of migratory waterfowl was made illegal in the United States. The ban on spring hunting was justified as a way to protect migratory birds during the spring nesting season.

But no one consulted the Inuit people of Alaska about the spring-hunting ban. The Inuit had hunted ducks and geese for centuries and depended on spring waterfowl hunting to obtain essential food after long arctic winters when their food supplies were depleted.

For almost a half century, the federal government had not enforced the Migratory Bird Treaty Act against the Inuit. But in 1961, three years after Alaska became a state, federal game wardens began arresting spring duck hunters. The Inuit protested to everyone they could find at both the state and federal level, but no one would listen.  Federal bureaucrats were convinced that Eskimos could buy their food in the grocery store just like everyone else and that it would actually be cheaper for them to buy store-bought food than shotgun shells.

On Saturday, May 31, Alaska state legislator John Nusunginya, himself an Inupiat, met with two federal game wardens in Barrow to explain the Inuits' point of view. As it happened, Nusunginya was carrying a shotgun as he and the wardens were strolling down a street in Barrow. When a flight of eider ducks flew by, Nusunginya "pumped a couple of them down" and was promptly arrested.

The Inuit faced down the federal government in 1961

The Inuits quickly organized a town meeting in the local theater and invited Harry Pinkham, one of the federal game wardens, to attend. When he arrived, 138 Inuit men each presented him with a duck and a signed statement confessing to hunting ducks out of season.

Pinkham admitted that he couldn't arrest them all: "I can't handle that much paperwork" (Burwell, p. 6). And of course federal agents had to preserve all the evidence, which meant flying nine sacks of ducks down to Fairbanks.

As I heard the story from an Inuit man who claimed to have participated in the "duck-in," Inuit women turned themselves in as well, forcing the federal government to arrest every adult in Barrow and take on childcare responsibilities for the entire village. But this recollection may be apocryphal.

Michael Burwell's account of the duck-in, presented to the Alaska Historical Society in 2004, is undoubtedly the most accurate rendition of these events; and apparently no one was actually jailed.

But the Inuit had made their point.  As one Inuit man recalled:

We were so well organized that if they had arrested every man in Barrow, the womenfolk were going to be next. And then the children. At the time there was not a jail big enough in the state of Alaska. They would have had to have a C124 coming in and out for days to move Barrow out to jails in the States! (Burwell, 2004, p. 7)

Eventually, the Inuit won a legal exemption to the Migratory Bird Treaty Act, which they enjoy to this day.


We Need Mass Protests to Demand Bankruptcy Reform for Student-Loan Debtors
Student-loan debtors should take a lesson from the Inuits' creative act of civil disobedience.  Currently, there are 7 million student-loan debtors who have defaulted on their student loans; and 9 million more have obtained economic hardship deferments and are not making loan payments. Millions of these people are suffering under the burden of massive student loans. Some have had their paychecks garnished, and others have had their income-tax refund checks seized. More than 50,000 people had  their Social Security checks garnished last year.

For the most part, these miserable people suffer in silence. The colleges and universities have their lobbyists and lawyers, as do the banks and the student-loan collection companies. They protect their interests in the halls of Congress and in the courts.

And when overburdened student-loan debtor attempt to discharge their loans in bankruptcy, the federal government and the loan collectors send their attorneys to court to stop them from getting relief. The U.S. Department of Education actually opposed bankruptcy relief for a quadriplegic man who was working full time but could not make enough money to sustain himself because he had to pay a full-time person to feed him, dress him, and drive him to and from work.

The federal government and its loan-collecting henchmen can easily beat down a few lonely souls who attempt to obtain relief in bankruptcy court. Three or four lawyers are generally enough to squelch the intrepid individuals who file adversary actions to discharge their debts.  And the federal government and the scholarly commentators spread the word that it is almost impossible to discharge a student loan in bankruptcy, so most insolvent debtors don't even try to shed their loans in bankruptcy.

But change is in the air. Several bankruptcy courts have ruled sympathetically for student-loan debtors over the past couple of years; and a couple of research articles have reported that student-loan debtors actually stand a pretty good chance of obtaining partial or total relief from their student-loan debts if they file for bankruptcy and bring adversary actions against their creditors.

So what would happen if every student-loan debtor who is truly insolvent and who took out student loans in good faith filed for bankruptcy and brought an adversary action for debt relief? And what would happen if these insolvent debtors filed for bankruptcy without a lawyer, relying on the facts of their cases and the sympathy of a bankruptcy judge in the hope of obtaining justice?

I tell you what would happen. If 1 million worthy individuals filed for bankruptcy during a single year, the whole rotten, stinking, bloated and predatory student loan program would collapse because the federal government and the higher education community would have to publicly admit that the present system is unsustainable. 

Something like an Eskimo flipping a duck at a federal game warden.

References

Michael Burwell. (2004). “Hunger Knows No Law”: Seminal Native Protest and The
Barrow Duck-In of 1961. Alaska Historical Society Meeting, Anchorage, AK. Accessible at: http://www.uaa.alaska.edu/cafe/upload/Hunger-Knows-No-Law-AAAMarch2005Last.pdf

Note: My account of the Inuit Duck-in of 1961 is taken entirely from Mr. Burwell's excellent paper, which is posted on the web.

Who turned on the gas at Auschwitz? Reflections on student-loan debtors in bankruptcy

Gas Chamber Door at Auschwitz--Looking Out

My father spent most of World War II as a a prisoner of war in Japanese concentration camps.

He was captured in the Philippines when the entire American army surrendered to Japanese forces in April 1942, and he survived the Bataan Death March. He remained a prisoner until August 1945, after atomic bombs were dropped on Hiroshima and Nagasaki.

Two thirds of the men who were captured with my father did not survive the War. Some were summarily executed during the Bataan Death March or later, some died of starvation or disease, and a number committed suicide. The experiences of the American prisoners of war in the Pacific are never compared to the Holocaust, but perhaps they should be.

In any event, my father's concentration camp experiences (which he often talked about when I was a child) have caused me to ponder again and again this question: How can people lose their humanity to the extent that they can kill defenseless people without remorse and even without thinking about it seriously? Who turned on the gas at Auschwitz day after day as all those Jews were gassed to death? And did those people go home to their families when their work days ended to eat a nice meal and perhaps listen to the radio?

Recently, I returned to this question  after reading several of the published bankruptcy decisions involving student-loan debtors.  In the Myhre case, for example, how could attorneys for the U.S. Department of Education oppose the discharge of student loans owed by a paraplegic man who was working full time and whose expenses exceeded his income?

And in the Stevenson case, how could lawyers for Educational Credit Management Corporation argue that a woman in her fifties who had a history of homelessness and was living on less than $1000 per month, be placed on a 25-year income-based repayment plan to pay off her student loans?

And in the Roth case, how could attorneys for the same company--headed at the time by a man who made more than $1 million dollars a year), stand before a bankruptcy judge and maintain that a woman in her sixties, who had chronic health problems and was living entirely off Social Security income of less than $800 a month, should not have her student loans discharged in bankruptcy?

I listened recently to the audio of a bankruptcy proceeding in California involving a man with more than a quarter million dollars of student-loan debt.  The man brought an adversary proceeding seeking to discharge his loans in bankruptcy.  His suit was opposed by two parties: the U.S. Department of Education and a private loan company.

Judging by their voices, the U.S Department of Education and the private company were both represented by young women.  Both argued that the man--in his 50s and making less than $2,000 a month, should not have his student-loan debts discharged.

I imagine both women graduated from good law schools, are kind to animals, and have progressive views on the political issues of the day--global warming, for example.

So how could these smart and presumably sensitive young women be working for a governmental entity and a private company engaged in the reprehensible business of stopping distressed student-loan debtors from bankruptcy relief?

I don't mean to compare these two young lawyers to the people who operated the Nazi death camps, but the insensitivity to the unjust suffering of others is somewhat similar. Millions of Americans are burdened by student-loan debt that is totally unmanageable and will never be paid off; and yet our government employs lawyers to prevent them from obtaining bankruptcy relief.

And, let us remind ourselves that the U.S. Department of Education, the agency that sought to deny bankruptcy relief to a paraplegic student-loan debtor in the Myhre case, answers to a president who won the Noble Peace Prize.

How long can the injustice and suffering spawned by the federal student loan program go on? A long time I fear. Slavery existed in this country for well over 200 years.

But ultimately, this trillion-dollar house of cards we call the federal student loan program will come tumbling down; and when it collapses it will take American higher education with it and perhaps the American economy.

That is something for American college presidents to think about as they fly around in their private jets and drink premium liquor with wealthy alumni.  University foundation board members should think about it as well before they execute multi-million dollar contracts with celebrity football coaches.

And mom and pop should think about it too before they encourage little Suzie and little Johnny to take out loans to go to an over-priced, pretentious East-Coast college.  Because when little Suzie and little Johnny take out those loans, they will live with them until they are payed off  in full or until little Suzie and Little Johnie are dead.

And if they try to discharge their loans in bankruptcy, a bright young lawyer who graduated from an elite law school--someone very much like the person who turned on the gas at Auschwitz--will be in federal bankruptcy court to keep that from happening.

Workin' for the Man: President Obama's Disasterous Plan to Expand Income-Based Repayment Programs for Student Loan Debtors

Tomorrow, President Obama is expected to announce an expansion of his "Pay as You Earn" income-based repayment program for student loan debtors. This program,  which Obama initiated by executive action in 2011, allows student-loan debtors to pay roughly 10 percent of their income on their loans for a period of 20 years.  (The exact formula is a bit more complicated that.)  At the end of the 20-year repayment period, any unpaid loan balance will be forgiven.



Passing the student-loan mess on to the next president

Pay as You Earn is popular with student debtors because it is more generous than the other income-based repayment (IBRP) options. One major program requires debtors to pay 15 percent of their income over a period of 25 years.

But a lot of student debtors don't qualify for Pay As You Earn under present regulations. According to the New York Times, Obama plans to extend eligibility to an additional 5 million student-loan borrowers, including those who took out loans before October 2007. 

Is Pay As You Earn a good thing for the nation's distressed student-loan debtors. Yes it is--at least in the short term. For people struggling to pay mountains of debt under the standard 10-year repayment plan, Pas As You Earn will lower monthly payments substantially.  People who are currently paying 15 percent of their income under a 25-year IBRP will be delighted to switch to Obama's more generous Pay As-You Earn program.  People who are unemployed or underemployed will be particularly grateful, because if their income falls below the official poverty level, they won't have to make any monthly payments at all.

Is there a down side to Pay As You Earn? You bet.

First of all, all the income-base repayment plans remove all incentives for student borrowers to limit the amount of money they borrow. If their loan payments are based on their income and not the amount they borrow, then there is no reason not to borrow as much money as you can.

Second, Pay As You Earn and other IBRPs do nothing to slow the burgeoning cost of going to college.  Colleges have no incentive to keep their costs down, because they know students will simply borrow more money to cover tuition hikes.  What do colleges care if their graduates are making student-loan payments for 20 years?

Third--and most significantly, these long-term repayment plans are going to fundamentally change the way Americans view postsecondary education and the world of work. There was a time when low-income individuals worked their way through college, graduated with no debt, and entered the workforce determined to buy homes, start families, and begin the confident climb up the economic ladder.

Now, 18- and 19-year olds are going to begin college knowing that they will pay for their postsecondary education by donating some percentage of their income to the federal government over the majority of their working lives.  In essence, they will become indentured servants for the government--sharecroppers if you will.

I think this arrangement will foster cynicism among the young, because they will realize on some level that they have been forced into unreasonable levels of indebtedness because colleges refuse to control their costs. They will see university presidents like NYU's John Sexton make outrageous amounts of money while they sign up for long-term college-loan repayment plans that they will not pay off until they are in their 40s and 50s.

And, since they won't have to pay anything under Pay As You Earn if they are unemployed or live below the poverty level, I think many of them will postpone going to work. Many will figure that it makes sense to travel or take low-wage jobs in exotic locales rather than seek more remunerative employment. And the incentive to work "off the books" will increase, because people in IBRPS who enter the cash economy will not only avoid paying taxes and making Social Security contributions, they will avoid making student-loan payments as well.

Moreover, once these college-going young people figure out that their payments will be based on their incomes and not the amount they borrow, they will borrow as much as they can.

I appreciate the President's efforts to provide overburdened college-loan debtors some immediate relief by offering plans to lower monthly loan payments while extending the loan repayment period. Unfortunately, in the long run, the results will be catastrophic.

In reality, President Obama is simply passing the student-loan mess on to the next president to deal with.  Millions of people may see their student-loan payments go down in the short-term, but they will be significantly extending the length of their loan repayment period. Most Pay-As-You-Earn participants --I predict--won't be making loan payments large enough to cover accruing interest  or pay down the principal on their notes--which means they won't really be paying their loans back at all. 

And meantime--total student-loan indebtedness--now more than $1 trillion dollars--will continue to grow and grow.


References

Jackie Calmes. Obama Plans Steps to Ease Student Debt. New York Times, June 8, 2014, p. 17.

Today’s New York Times Editorial About Student Loans is Not Very Useful

Today’s lead editorial in the New York Times is entitled “Full Disclosure for Student Borrowers.” Basically, the Times says that “[c]olleges, lenders and Congress must ensure that students understand their debt burden.”

Pardon me, Mr. and Ms. New York Times editorial writers, but that advice is not very useful. It is true that a lot of student-loan borrowers did not understand the nature of their loan obligations. Some did not realize they had borrowed from private lenders instead of the federal student loan program, for example; and a great many made poor decisions with regard to what they chose to study. People who borrowed a $100,000 or more to pursue degrees in religious studies, sociology, or some other non-remunerative field did not make smart decisions.

But the fact that many students took out college loans without understanding the consequences is only part of the problem. A bigger part of the program is this: The student loan program has spawned a rapacious for-profit college industry, which Congress refuses to regulate. As a whole, this industry has very high student-loan default rates; and many of them are much more expensive than public-college alternatives. Today, the for-profit institutions enroll about 10 percent of all the post-secondary loan borrowers but they receive about 25 percent of the Federal student aid money.

Another problem is the private student-loan market, which generally charges students higher interest rates than the federal student-loan program and offers students fewer protections like economic hardship deferments. Congress passed legislation that makes it almost impossible for students to discharge their private student loans in bankruptcy, which is an outrage.

If the New York Times wishes to offer useful advice about solving the trillion-dollar student-loan mess, it needs to endorse the following actions:

More accurate reporting of student-loan default rates by the U.S. Department of Education, particularly the default rate for students enrolled in for-profit schools,

Repeal of the statutes making it nearly impossible for insolvent students to discharge their student loans in bankruptcy,

Passage of effective consumer-protection laws that will protect students from unscrupulous college recruiters and colleges’ misleading representations about job prospects for graduates of post-secondary programs,

Congressional or executive action to stop the federal government and the student-loan guarantee agencies from garnishing elderly defaulters’ Social Security checks.

Perhaps the New York Times has offered more useful information about the student-loan crisis in the past.  But the advice offered on today’s editorial page does not go nearly far enough toward solving a problem that is causing hardship and suffering for millions of people.

References

Editorial (2012, May 23). Full disclosure for student borrowers. New York Times, p. A20.

The Pepper Spray Incidents at UC Davis and Santa Monica College: Universities Need to Listen to Students' Concerns about the Rising Cost of a College Education

Earlier this month, campus police at Santa Monica College pepper-sprayed more than two dozen students who were trying to enter a Trustees meeting to protest a tuition hike.  Chui L. Tsang, the college’s president, defended the police officers’ conduct, insisting that police used appropriate restraint and did not arrest anyone.  (Rivera, 2012).

Last fall, campus police at UC Davis pepper-sprayed students who were peacefully participating in an Occupy Wall Street demonstration. A video of this incident, posted on You Tube, shows a helmeted police officer calmly pepper spraying students who are passively huddled on a campus sidewalk.

What’s going on here?  Don’t colleges realize that students are the customers? Don’t they understand how bad they look when people view these incidents on You Tube? How many UC Davis students and Santa Monica College students who witnessed their classmates being pepper sprayed are going to donate money to their alma maters after they graduate?

Campus police should not pepper spray anyone—student or nonstudent—who is not behaving violently or physically threatening other people.  The students at UC Davis and Santa Monica College were not behaving violently (although some of the Santa Monica College students were a bit rowdy), and they should not have been pepper sprayed. 

Instead of pepper spraying their students, colleges and universities should listen to student protests about the rising cost of tuition and burgeoning student-loan debt; and they should demonstrate that they are taking action to address their students’ concerns.

What should they be doing?

• First, colleges and universities should stop raising tuition while they continue paying extravagant salaries to college presidents and senior executives. They should freeze or reduce the salaries of their highest paid employees—at least until the national economy recovers-- instead of tacking the cost of these excessive compensation packages onto students’ tuition bills.
• Second, college and university trustees should cap tuition and fees until the economy improves, and they should work harder at making their institutions more efficient.
• In addition, higher education should demonstrate their empathy for overburdened student-loan debtors by urging Congress to amend the Bankruptcy Code to give overburdened student-loan debtors reasonable access to the bankruptcy courts. They should also support legislation that would stop the federal government from garnishing the Social Security checks of elderly people who defaulted on their student loans. 

The cost of higher education is out of control, total student-loan indebtedness approaches one trillion dollars, and student-loan default rates are alarmingly high. Colleges and universities need to show students that they are helping to solve these problems.  Pepper spraying student protesters is the wrong thing to do.

References

Rivera, C. (2012, April 4). College president defends pepper spray against 'unlawful' crowd. Los Angeles Times. http://latimesblogs.latimes.com/lanow/2012/04/students-unlawful-pepper-spray-santa-monica-college-president.html

Student-Loan Defaulters: Not All of Them are Young

What is your image of the typical person who defaults on college student loans? Do you envision a young and irresponsible college graduate—someone who ripped off the federal student loan program by borrowing money to get a fancy college degree and then refused to pay it back? If so, your image would be inaccurate. A great many defaulters are from low-income families. Often they attended a for-profit institution that provided them with little value. And—this may come as a surprise—many student-loan defaulters are not young.

Researchers for the Federal Reserve Bank of New York examined the loan status of 37 million student-loan borrowers. Fourteen percent of these borrowers—approximately 5.4 million people, have at least one past-due student loan account. According to the Federal Reserve Bank report, only about 25 percent of student-loan borrowers with past due balances are under the age of 30. Forty percent of the student loan borrowers with payments in arrears are at least 40 years old. Almost one delinquent borrower in six (17.7 percent) are fifty years old or older. And about five percent of the people who are behind on their student loan payments are at least 60 years old (Brown, Haughwout, Lee, Mabutas, and van der Klaauw, 2012).

Why are so many people falling behind on their student loans in midlife or late in life? There are several explanations.

First, some of the older student-loan borrowers are people who borrowed money in midlife, expecting to increase their income potential. Then—due a variety of life circumstances, these borrowers did not earn the income they expected.  Maybe they became ill, lost their job, or were the victims of the recent economic downturn. As a consequence, some of these older student-loan borrowers fell behind on their loans.

Second, some of the nation’s older delinquent borrowers obtained economic hardship deferments on their loans, which temporarily exempted them from making regular student-loan payments. For a majority of these people, interest continued to accrue on their loans during the deferment period, causing their loan balances to grow.  Consequently, when these borrowers began making loan payments again after their deferments expired, they sometimes had a swollen loan balance that they simply could not repay.

Finally, I suspect some of the older people who are behind on their student-loan payments are people who had previously elected to pay off their loans under the income-contingent repayment option, which extends the loan repayment period out to 25 years. For some older people, the prospect of making student-loan payments during their retirement years may have seemed too daunting, causing them to stop making payments on their loans.

Older people who default on their student loans receive no dispensation from their loan obligations due to their age. In fact, in Lockhart v. United States (2005), the Supreme Court has ruled that a student-loan defaulter’s Social Security checks can be garnished.  Thus, some elderly people who failed to pay back their student loans will face severe financial hardship if they are totally dependent on Social Security income during their so-called “golden years.”

Obviously, no one would recommend a government policy that would make it easier for people to default on their student loans. Nevertheless, garnishing the Social Security checks of elderly student loan defaulters is an overly harsh measure. Congress needs to pass legislation that bars lenders and collection agencies from garnishing a student-loan defaulter’s Social Security check.

References

Brown, M., Haughwout, A., Lee, D., Mabutas, M., and van der Klaauw, W. (2012). Grading student loans. New York: Federal Reserve Bank of New York. Accessible at: http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

Lockhart v. United States, 546 U.S. 142, 126 S. Ct. 699 (2005).