Nearly 95 million Americans aren't working: The government's unemployment rate is just a bullshit number

During the First World War, it is said. the British military kept three separate casualty lists: one list to deceive the public, a second list to deceive the War Office, and a third list to deceive itself.

We could say much the same thing about the government's official unemployment rate.  The Bureau of Labor Statistics (BLS) claims the nation's unemployment rate is only 4.7 percent, less than half the rate in Europe and about half what it was when Obama came into office.  "We cut unemployment in half, years before a lot of economists thought we could," President Obama boasted recently to a crowd in Indiana.

The BLS unemployment rate is just a bullshit number

But nobody believes that. Everyone knows the government's official unemployment rate is just a bullshit number.

Even the government admits the unemployment rate is higher if we include people who are working part-time involuntarily and the people who have given up looking for work. But including those people in the analysis still understates how bad the employment situation is.

In fact, when we ponder how many American adults are simply not working, we get a clearer understanding of the employment picture.  A few days ago, BLS reported that 94,708,000 American adults are not in the labor force--37 percent of the entire American adult population.

Of course, not all of these people are unemployed. Millions are retired, millions are pursuing post-secondary education, and millions are not working  because they are disabled and receiving disability benefits. Obviously, not all non-working Americans are suffering.

But a lot of non-working Americans are suffering. Millions of Americans are unemployed or underemployed, millions gave up looking for work and elected to take early retirement at reduced benefits. And there are millions who are still in the labor force but are working at substandard wages, including a lot of college graduates who hold jobs that don't require a college degree.

Signs of economic decline are everywhere

Although Obama takes credit for leading the nation out of the 2008 recession, the standard of living for millions of Americans continues to decline.  As the Brooking Institution paper noted in 2012, median wages for male workers have gone down precipitously in recent years.  In constant dollars, median wages for American men have slipped  by 19 percent since 1970.

Although the Obama administration insists that the economy is creating new jobs, that's probably bullshit as well. BLS reported last week that 38,000 new jobs came on line in May, a dramatic decline from an average of 178,000 a month over the first three months of 2016.  But a Brookings analysis, using a different form of measurement, claims the economy actually lost 4,000 jobs last month.

 And more and more people are on food stamps--1 out of 7 Americans are now receiving food-stamp assistance. That's 45 million people--up from around 28 million when Obama took office.  Do these numbers suggest that the economy is in recovery?

And then there's the student-loan crisis

And then there's the student loan crisis.  Approximately 43 million Americans owe 1.3 trillion in student-loan debt.  Although  the Department of Education's three-year default rate is only around 10 percent, that's just more bullshit.  By encouraging people to obtain economic hardship deferments, the government has artificially kept default rates down, because people with deferments aren't counted as defaulters even though they aren't making loan payments.

But of course people who accepted deferments are seeing their loan balances go up because interest continues to accrue. Now the only way they can service their loans is by signing up for 20-year income-base repayment plans.

The true student-loan default rate is probably 25 percent; and it's 50 percent for people who took out loans to attend for-profit colleges. And even this estimate may be too low.

Millions of Americans are suffering and they're  foaming with rage

In short, millions of Americans are suffering. They know the economy is deteriorating; they know their standard of living is going down. They know Barack Obama despises ordinary Americans--the poor stiffs who live in fly-over country and still go to church on Sundays.

And ordinary Americans are foaming with rage.

The political and media elites think they can keep a lid on all this anger, that they can persuade a majority of Americans to vote for Hillary and prolong the status quo. They think Americans are listening to Anderson Cooper and Don Lemon when they paint Trump as a racist and a bigot on CNN. They think columnist Froma Harrop will persuade her readers that Bernie Sanders is a racist.

But I've got news for the elites. The people who are angry aren't listening to CNN. They aren't reading Froma Harrop. The elites may succeed in crowning Hillary Clinton as the next queen of post-modern America, but the pundits will never tamp this anger down. It's real, it's ugly, and it's permanent.

References

Alan Bjerga. Food Stamps Still Feed One in Seven Americans Despite Recovery. Bloomberg News, February 3, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-02-03/food-stamps-still-feed-one-in-seven-americans-despite-recovery

Christopher Goins, 44.7 Million Americans Now on Food Stamps--More than at Any Time Under Bush, CNS News, February 3, 2012. Accessible at http://cnsnews.com/news/article/447-million-americans-now-food-stamps-more-any-time-under-bush

 Michael Greenstone and Adam Looney. The Uncomfortable Truth About American Wages. Brooking Institution, October 23, 2012. Accessible at http://www.brookings.edu/research/opinions/2012/10/22-wages-greenstone-looney

Susan Jones, Record 94,708,000 Americans Not in Labor Force; Participation Rate Drops in May. CNS News, June 3, 2016. Accessible at http://www.cnsnews.com/news/article/susan-jones/record-94708000-americans-not-labor-force-participation-rate-drops

Matthew Boesler. More College Grads Finding Work, But Not in the Best Jobs. Bloomberg.com, April 7, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-04-07/more-college-grads-finding-work-but-not-in-the-best-jobs

Nicholas Wells and Mark Fahey. What's the REAL unemloyment rate? CNBC.com, January 8, 2016. Accessible at http://www.cnbc.com/2016/01/08/

Jonathan Wright. Amidst unimpressive official jobs report for May, alternative measure make little difference. Brookings Institution, June 3, 2016. Accessible at http://www.brookings.edu/blogs/jobs/posts/2016/06/03-amidst-unimpressive-official-jobs-report-for-may-alternative-measures-wright?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=30258460&_hsenc=p2ANqtz-8wODcWxeX-Vo8PGswc2439RPH_hV1yCM05S_knJvJmuSfYUbz-xh1mWd76dc0m2GG5fhL55iubJxPERM_sbHc3qH5Hfg&_hsmi=30258460

Why the Obama administration launched its REPAYE plan: It had no choice

Late last year, the Obama administration's Department of Education launched its eighth student-loan repayment program, labeling it REPAYE.  Very similar to a previous Obama initiative titled PAYE, the REPAYE program allows college-loan borrowers to pay off their student loans over 20 years. The chief new feature of REPAYE is broader eligibility. Nearly every student-loan debtor will qualify to participate in the REPAY program.

Under both PAYE and REPAYE, college-loan debtors make monthly payments based on their income, not the amount they borrowed. Payment rates are established annually, based on the borrower's reported income for the previous year, with payments calculated to equal10 percent of the borrower's discretionary income.

In many ways, REPAYE is a good deal for overburdened student-loan debtors. Monthly payments will be lower than the standard 10-year repayment plan; and payments will be allowed to fluctuate as borrowers' income goes up or down. People who are unemployed or who live at the poverty level won't be required to make any payments at all.

All in all, the Obama administration's latest student-loan program is incredibly generous. In fact, most debtors on the REPAYE plan will be making monthly payments so low that they won't cover accruing interest on their loans. In other words, at the end of the 20-year repayment program, most debtors will still have large balances on their loans, which will be forgiven.  The forgiven amount will be absorbed by taxpayers.

Why did the Obama administration launch REPAYE, which could reasonably criticized as fiscally irresponsible? I will tell you why: it had no choice.

For years, the government has permitted overburdened student-loan debtors to enroll in economic hardship deferment programs and other forbearance plans that allowed borrowers to temporarily skip their monthly student-loan payments. Colleges encouraged this practice as a way to keep their short-term  student-loan default rates down--particularly the for-profit colleges, which needed to keep their default rates below 30 percent in order to continue receiving federal student-aid money.

For some people on these plans, however, the forbearances weren't temporary--they stretched out for years while interest accrued on their original debt. Thus for virtually everyone in a forbearance or deferment program, their loan balances were getting larger with each passing month due to accruing interest.

This phenomenon was documented in a recent Brookings Institution report written by Looney and Yanelis. These scholars found that loan balances were going up, not down, two years into the repayment period for more than half of student-loan borrowers in repayment.

In fact, for millions of people who have had their student loans in nonpayment status for any considerable period of time, it has become virtually impossible to to pay back their loans. This state of affairs drove many debtors into default, which caused their balances to grow even larger due to the penalties and fees that got tacked on to their debt.

President Obama and Arne Duncan could see that there were only two ways out of this morass. Either people must be allowed to file for bankruptcy to discharge their college-loan debt or their loans have to be refinanced to make the monthly payments lower. Since bankruptcy reform is politically impossible, Obama and Duncan chose to launch PAYE and REPAYE.

But there are enormous problems with the Obama administration's fix. First, most people entering PAYE and REPAYE are not enrolling immediately after graduating from college. Most struggle for a few years to make payments under the standard 10-year plan and then enter REPAYE because they can't service their loans. For these people, enrolling in a 20-year repayment plan extends their repayment period out over their entire working lives.

Butler v. Educational Credit Management Corporation, decided earlier this year, illustrates this problem. Beverly Butler struggled for almost 20 years to make payments on loans she took out to get her college degree, which she obtained in 1995. Eventually, she enrolled in a 25-year repayment plan that stretches out her loan repayment period until 2037--42 years after she graduated from college!

And of course the other big problem with PAYE and REPAYE is that most people in these programs are not paying back their loans at all; they are making token payments that don't cover accruing interest. In essence, these programs are designed to disguise the fact that for all practical purposes, people in long-term repayment programs have defaulted on their loans.

This is no small matter. Almost 5 million people are in income-based repayment plans now; and the Department of Education wants to enroll 2 million more by the end of next year. Without question, REPAYE is going to be the default option for most student-loan debtors in the years to come, which is what the Brookings Institution and other higher-education industry insiders want to happen.

In reality, the Obama administration has imposed a tax on most people who borrow money to attend college;  REPAYE participants will be obligated to pay a percentage of their incomes for a majority of their working lives in return for the privilege of going to college.

How ironic. Barack Obama, self-proclaimed friend of the disadvantaged, has established a huge sharecropper program for college goers. Ultimately of course, all Obama did was buy time for the college industry. In the long run, REPAYE can't sustain the status quo. At some time in the not too distant future, higher education as we now know it will collapse.

And the first cards to fall in this house of cards will be the for-profit colleges and the small private liberal arts colleges. Be patient. You don't have long to wait.

Enrollment at four-year for-profit colleges declined 9.3 percent from last year, and the University of Phoenix's enrollment has declined by half from its peak years. The private liberal arts colleges are behaving like a Texas fireworks stand (Buy One, Get One Free!!), discounting tuition for first-time freshman by 48 percent.

The end is near.

 References

Erin E. Arvedlund. A new way, REPAYE, to get out of college debt. Philadelphia Inquirer, March 29, 2016. http://articles.philly.com/2016-03-29/business/71877131_1_income-based-repayment-plan-loan-debt-standard-repayment-plan.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Rick Seltzer. Discount rates rise yet again at private colleges and universities. Inside Higher Ed, May 16, 2016. Accessible at https://www.insidehighered.com/news/2016/05/16/discount-rates-rise-yet-again-private-colleges-and-universities.

Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653

Enrollments slide, particularly for older students. Inside Higher Ed, May 24, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/05/24/enrollments-slide-particularly-older-students?utm_source=Inside+Higher+Ed&utm_campaign=74ec3a191d-DNU20160524&utm_medium=email&utm_term=0_1fcbc04421-74ec3a191d-198564813

A liberal arts degree is not worth much: Don't borrow a lot of money to pay for one

Christ. Seven years of college down the drain. Might as well join the f-cking Peace Corps."

Bluto (played by John Belushi)

Animal House

Americans cling to the touchingly pathetic belief that a college degree will improve their lives. And it is true that people who graduate from college make more money over their lifetimes than people who only have high school diplomas.

But in many instances, a college degree represents nothing more than an individual's dogged tenacity and willingness to sit through four years of meaningless classes--traits that make college graduates adaptable to the sterility and boredom of the American workplace.

That's not always true, of course. I feel quite sure that people who get degrees in engineering, journalism, and the health professions often learn valuable skills.  

But a degree in the liberal arts or the social sciences is highly overrated as a ticket to a good job. Reflecting back more than 40 years from my time at Oklahoma State University ("the Princeton of the Prairies"), I realize I learned more about how to make my way in the world from delivering newspapers as a 12-year-old for the Anadarko Daily News than I did from any of my college courses.

And I received much more vocational guidance from my father than from any college professor. Not that my father gave a damn about what I would do for a living when I left home. But after holding down several hundred bull calves while he castrated them with his Schrade pocket knife, I came to the firm conviction that I would never make it as a cattleman.

At one time, going to college was a relatively harmless activity. Rattling around a campus for four (or five, or six) years didn't do young people much harm other than delay their entrance into remunerative employment. And no question about it--studying for exams improves people's short-term memory.

But things have changed. Today, making the wrong choices about going to college can lead to a lifetime of economic hardship, at least for people who borrow too much money to pay for their college education.

What can go wrong about obtaining a liberal arts education, you might ask?  Here are some mistakes that many people make:

1) Getting a liberal arts degree from a for-profit college. By and large, for-profit colleges are more expensive than public schools; so if you attend a for-profit college you will probably borrow more money than if you attended a public institution. And the for-profits have high default rates. According to a Brookings Institution report, almost half of the people in  a recent cohort who borrowed to attend a for-profit school defaulted on their loans within five years. Thus, attending a for-profit college increases the risk of default.

So if you want to get a degree in sociology, history, literature, or women's studies, you should probably get it at a public university--even a mediocre one--rather than pursue a liberal arts degree at a for-profit institution.

2) Paying the sticker price to attend a prestigious private college.  Private colleges are more expensive than public colleges, but they are now discounting their tuition drastically. In fact, the average institutional discount rate at private colleges was 48.6 percent for first-time freshmen in 2015-2016. And the discount rate for all students attending private schools was 42.5 percent.

So don't pay the sticker price to attend a fancy private college. Keep in mind that many private schools are scrambling to keep their enrollments up, and they need you more than you need them.

3) Doubling down by going to graduate school without a clear idea how a graduate degree will improve your earning potential. About 40 percent of all outstanding student-loan debt was acquired by people who went to graduate school. Graduate education in some fields has become outrageously expensive--especially for law degrees and MBAs. But graduate degrees in the liberal arts are also pricey.

There was a time when graduate school was a reasonable default option for people with no clear vocational goal. Graduate school was a respectful place for people to park themselves while they decided what they wanted to do with their lives. And opportunity costs were relatively low because tuition was often low--particularly at public colleges.

But the game has changed. Individuals who borrow money to get a liberal arts education and then borrow more money to go to graduate school are playing Russian Roulette with their financial futures; and they're playing with three bullets in their revolvers. Don't go to graduate school unless you have a clear idea about how a graduate degree will lead to a job that pays well enough to make the investment worthwhile.

Beware: A liberal arts degree is no sure path to a middle-class lifestyle

In sum, a liberal arts degree provides no sure path to making a living, and borrowing a lot of money to get a liberal arts education can lead to financial disaster. It is a fine thing to know a little Shakespeare and to be able to identify the causes of Thirty Years' War; and it's nice to talk literature with the swells. But if you leave college with a hundred grand in student loans, you will find that the liberal arts degree you acquired didn't enhance your life; in fact, it might have destroyed it.

"Seven years of college down the drain . . . ."

References

Rick Seltzer. Discount rates rise yet again at private colleges and universities. Inside Higher Ed, May 16, 2016. Accessible at https://www.insidehighered.com/news/2016/05/16/discount-rates-rise-yet-again-private-colleges-and-universities

Susan Dynarski, Brookings Institution, and the U.S. Housing Market: Lies, Damned Lies and Statistics

Larry Summers, former Secretary of the Treasury and President Emeritus of Harvard, has expressed concern about growing student-loan indebtedness, which he linked to a slowdown in home ownership in the United States. Joe Stiglitz, Nobel Prize winner in economics, and the Federal Reserve Bank in New York have also expressed the view that growing levels of college-loan debt is hurting the housing market.

But Susan Dynarski, writing for the Brookings Institution, says this is nonsense. Crunching the data from the Federal Reserve System in a different way than the Federal Reserve Bank, she came to this conclusion: education levels, not student-loan indebtedness, explain the difference in home-ownership rates among Americans. In a nutshell, here are Dynarski's conclusions:

Those who borrow for college do have a slower start to homeownership than those who went to college debt-free. . . . But by the time people are in their thirties, when the typical borrower would have finished paying off her student loans, the home ownship rates of the two college-educated groups are statistically indistinguishable. The striking, large gap is between the college-educated and those who stopped with high school.

I have two observations to make about Dynarski's paper for the Brookings Institution.  First, if Dynarski disagrees with Larry Summers, Joe Stiglitz and the Federal Reserve Bank of New York, I"m inclined to be persuaded by these eminences rather than Dynarski.

Second, speaking purely as a layperson with no expertise in economics, Dynarski's arguments simply defy common sense. How can she say that rising levels of student-loan indebtedness has no impact on home ownership given what we know about the massive hardship that millions of college-loan borrowers are suffering?

As the New York Times noted several months ago, 10 million people have either defaulted on their student loans or are in delinquency. Can anyone say this group of people have not been shut out of the housing market?

Another 5 million people have been shoved into long-term income-based repayment plans that stretch out for 20 years or more; and the Obama administration hopes to increase that figure by another 2 million people by the end of 2017. Can anyone argue that having a 20-year financial obligation hanging around one's neck has no impact on the ability to buy a home?

Susan Dynarski and the Brookings Institution have published numerous papers that basically contend  that the student-loan program is under control. Like those cops at a murder scene in a 1950s detective movie, they constantly mutter, "Move along, folks; nothing to see here; move along."

But everyone from Joe the Plumber to Larry Summers knows the federal college-loan program is out of control, with millions of people unable to make their loan payments. In my view, the Brookings Institution and many of its researchers are nothing more than shills for the higher education industry, which desperately needs large infusions of federal cash to keep the doors open.

Like all of higher education's apologists, Dynarski repeats the old bromide that people who graduate from college make more money than people who only hold a high school diploma. Of course that is true. But this platitude doesn't excuse higher education for running up tuition costs at twice the rate of inflation. It doesn't justify the behavior of the for-profit universities, which charge far too much for substandard programs and have shockingly high student-loan default rates.

In my opinion, policy makers and the public in general should discount almost everything the Brookings Institution says about the student-loan crisis, which by and large the Brookings people don't even acknowledge.  We should listen to the Vermont House of Representatives, which adopted a resolution a few days ago calling on Congress to lift restrictions on bankruptcy for student-loan debtors. After all, the small-town legislators in the Green Mountain State live in the real world, which is not the world that Susan Dynarski and her Brookings colleagues live in.

References

Micahel Bielawski. Vermont House asks Congress to let student-loan borrowers file for bankruptcy. VermongtWatchdog.org, May 3, 2016.  Accessible at http://watchdog.org/264079/legislature-requests-student-debt-relief-bankruptcy/

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26. Accessible at: http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html

Susan Dynarski. The dividing line between haves and have-nots in home ownership; Education, not student debt. Brookings Institution, May3, 2016. Accessible at http://www.brookings.edu/research/reports/2016/05/03-dividing-line-between-haves-have-nots-home-ownership-education-not-student-debt-dynarski

Bernie Sanders and Student Loan Debtors: If you are ovewhelmed by college-loan debt, Bernie is your only hope

Help me, Obi Wan Kenobi. You're my only hope.

Princess Leia

Star Wars

Bernie Sanders beat Hillary Clinton in Michigan--stunning everybody, including Bernie.

Bill O'Reilly scoffed, and pundits dismissed Bernie's victory as a blip; but change is in the wind. Bernie has the support of young people, and Hillary will never win them away. They are attracted to Bernie's clarity and straightforward message.

In particular, Bernie's call for a free college education at a state college is very appealing. And--as I've written before--his free college plan is not wacky. It would actually be cheaper than the cumbersome student aid program we now have in place..

Now I encourage Bernie to reach out specifically to overburdened student-loan debtors--and there are 20 million of them.  If he will make four simple promises to this weary and oppressed multitude, I think he will win over millions of voters to the Bernie Crusade.

And these are the promises:

1) If I am elected President, the federal government will stop garnishing Social Security checks of elderly student-loan defaulters.

2) If I am elected President, I will forbid the government and its debt collectors from slapping unreasonable fees and penalties on student-loan balances.

3) If I become president, student borrowers who complete long-term income-based repayment programs will not be taxed on any forgiven student-loan debt (a policy recommended by President Obama).

4) If I become your President, I will draft regulations forbidding for-profit colleges from requiring students to sign arbitration agreements that cut of their right to sue their college for fraud.

None of these promises are radical, and none are expensive. And in fact, if all four of these promises were fulfilled by the next President, the impact on student-loan debtors would be minimal.

But these promises would be a signal to oppressed student-loan borrowers that Bernie understands their suffering and will do what he can to give them some relief.

But whether or not Bernie makes these particular promises, he has my unwavering support right through the election process. Of all the candidates vying for the Presidency, Bernie is the only one who will do something substantive to address the student-loan crisis.  Indeed, as Princess Leia might have put it, Bernie is our only hope.

Help me, Obi Wan Ka-Bernie. You're my only hope.

Rising Student-Loan Default Rates and Ridiculously High Tuition Costs: The Big Short

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball... What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did

Mark Baum (played by Steve Carell)

The Big Short 

The Big Short, the Academy-Award winning movie on the home-mortgage crisis of 2008, shows movie goers how greedy banking institutions created a housing bubble that burst in a shower of home foreclosures and trillions of dollars in financial losses.

A similar bubble has emerged in the federal student-loan program. And although the housing bubble is more complicated than the student-loan bubble, there are some eerie similarities between the collapse of the housing market a few years ago and the student-loan crisis. For example:

Hiding risk. The Big Short includes a scene in which  Mark Baum, a skeptical investment banker played by Steve Carell, quizzes a representative of one the bond rating agencies--Moody's or Standard & Poor. The rating-agency representative admits that  the agency gives mortgage-backed securities  the highest rating--AAA--even  though the agency knows that many of the instruments are packed with risky home mortgages that are headed for foreclosure.

Something similar is happening in the federal student-loan program. Although the Department of Education recently announced that student-loan default rates went down last year--especially in the for-profit sector, that's not really true.  The for-profits have been aggressively signing up their former students in economic-hardship deferment programs that excuse borrowers from making loan payments without being counted as defaulters.

When we look at the five-year default rates in the for-profit sector, the numbers are scary. Almost half the people who took out student loans to attend a for-profit institution default within 5 years of beginning the repayment phase on their loans. And two years after beginning the repayment phase, 3 out of 4 of these students are seeing their loan balances go up--not down--due to accruing interest that is not being paid down.

In short, about half the people who take out student loans to attend for-profit colleges don't pay back their loans. Clearly, this sector of the student-loan program is a train wreck.

Unsustainable rising costs.  As many people still remember, the cost of housing went up rapidly during the early 2000s, with people buying homes and flipping them for huge profits over a matter of months or even weeks. Everybody was making money in real estate--until the housing market collapsed.

Similarly, America has seen college tuition costs rise faster than the inflation rate for many years. The cost of attending law school, obtaining an MBA, or studying at an elite private college has gone through the roof.  I graduated from University of Texas Law School in 1980 and only paid $1,000 a year in tuition. If I enrolled at UT Law School today, it would cost me 36 times as much--$36,000 a year for Texas residents!

Of course, these tuition hikes can't be justified any more than the dizzying cost of a split-level home in Coral Gables, Florida in 2005.  And of course, those costs must eventually come down.  Already, law school enrollments have plummeted and the schools have lowered admissions standards to attract students.  And the elite private colleges are now giving huge discounts on their posted tuition rates; the average freshman now pays about half the college's sticker price.

Hidden costs and fees. Finally, the home mortgage bubble was fueled by greed and fraud. The bankers who packaged mortgage-backed securities were not taking any risks--they took their fees from the transaction costs.  The banking industry was selling toxic financial instruments to gullible investors, including pension funds and people invested in mutual funds.

Similarly, the college industry is charging a gullible public more than a liberal arts degree is worth, and the suckers enroll because, hey, going to Barnard or Brown or Amherst must be a good investment. And the colleges aren't assuming any risks. Their pliant students are borrowing from the federal student loan program, and the government guarantees the loan. Ivy League U doesn't care if its graduates default on their loans any more than Goldman Sachs cared what happened to the investors who bought their mortgage-backed securities.

And the fees! People who default on their loans get assessed huge collection fees and penalties. People are routinely going into the bankruptcy courts trying to discharge student-loan debt that is two or even three times the amount they borrowed due to accrued interest, penalties, and fees.

So if you haven't seen the Big Short, go see it. And as you watch this riveting drama, think about the student-loan program. A bubble is about to burst at a college near you.

"I thought we were better than this."

Student Loan Debtors and the Presidential Race: Hillary still has an opportunity to win over young voteers

Hillary Clinton devastated Bernie Sanders in the South Carolina Democratic Primary election. As Bernie candidly admitted, the Sanders team was "decimated." The only good news, he said, was this: Bernie beat Hillary among voters age 29 and younger.

Hillary talks herself hoarse telling voters how much she has done for them and much more she will do if she is elected President. But young people don't buy it. Essentially, they see her as an elderly political hack who sucks up to the banks.

But Hillary can still make headway with young voters if she would only promise some tangible and substantive reforms to the student-loan program. After all, there are 43 million Americans with outstanding student-loan debt; and most of them are young.

What could she promise? How about this:

1) "If elected president, I will instruct the IRS to draft regulations specifying that forgiven student-loan debt is not taxable."  

Under current law, about 4 million people are in income-based repayment plans, and most of them are seeing their total debt grow larger with each passing month due to accruing interest. When they complete their long-term repayment plans (after 20 or 25 years), their loan balances will be forgiven, but the forgiven amount will considered taxable income by the IRS. This is a real problem for people in income-based repayment plans. Why not just fix that problem with an IRS regulation?

2) "If elected president, my Department of Education will enact regulations that will cut off federal funding to any for-profit college that forces students to sign a promise not to sue the college for fraud or misrepresentation. And I will instruct the Department of Justice to cooperate with State Attorney Generals who are investigating and suing for-profit colleges that exploit students."

This promise demonstrates nothing more than common decency and would be well received by young people.

3) "When I am your president, the government will stop garnishing Social Security checks of elderly student-loan defaulters. And my administration will not oppose bankruptcy relief for elderly student-loan defaulters who are living below the poverty level."

There is nothing radical about this proposition. In fact, last month, in Precht v. U.S. Department of Education, DOE agreed to bankruptcy discharge of an elderly person's student-loan debt and stopped garnishing his Social Security check.

4) "My administration will renegotiate all contracts with student-loan debt collectors like Educational Credit Management Corporation. All these entities will be required to disclose the salaries of their executives and employees. They will also be required to disclose their profits. And I will eliminate the penalties and fees that the collection agencies have been charging distressed student-loan borrowers."

The beauty of these promises is this. All the reforms I listed could be implemented by President Hillary Clinton on the day she takes office. None of them require congressional approval.  And even if they did require statutory changes, what federal legislator would say no to these modest reforms if President Hillary asked for them?

If Hillary made these promises, she would demonstrate that she understands the magnitude of the student-loan crisis and that she  plans to take energetic action to grant some relief.  But my prediction is this: Hillary won't promise any substantive reforms of the student loan program because Goldman Sachs and the banks would disapprove. And that--in a nutshell--is why young people are not voting for Hillary.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1. 2014. Accessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Stephen Burd. Signing Away Rights. Inside Higher Ed, December 17, 2013. Available at https://www.insidehighered.com/views/2013/12/17/essay-questions-mandatory-arbitration-clauses-students-profit-higher-education

Ashley A. Smith. U.S. Urged to Deny Aid to For-Profits That Force Arbitration. Inside Higher Ed, February 24, 2016. Available at: https://www.insidehighered.com/quicktakes/2016/02/24/us-urged-deny-aid-profits-force-arbitration?utm_source=Inside+Higher+Ed&utm_campaign=183bc9e3a3-DNU20160224&utm_medium=email&utm_term=0_1fcbc04421-183bc9e3a3-198565653

The Nightingale case: Elderly student-loan debtors need a swifter process for bankruptcy relief

Nightingale v. North Carolina State Education Assistance Authority, decided last month. demonstrates how difficult it is for distressed student-loan debtors to obtain bankruptcy relief--even if they are elderly and in poor health.

The Nightingale case: A 67-year-old retired teacher with chronic health problems seeks to discharge her student loans in bankruptcy

Alice Nightingale took out about $48,000 in student loans when she was in her late 50s to obtain a master's degree that would allow her to obtain a job as a public school teacher. Due to serious health issues, she went on disability leave in 2012 and received monthly disability benefits until she retired in  June  of 2014. After retiring, she lived on an income of $1,645 a month, consisting of Social Security income and state retirement benefits.

In June 2013, Nightingale filed for bankruptcy and received a discharge. She then filed an adversary complaint in the bankruptcy court to discharge her student loans.  North Carolina State Education Assistance Authority (NCSEAA), Nightingale's student-loan creditor, filed for summary judgment in 2014, arguing she was eligible for a long-term income-based repayment plan that would obligate her to pay zero on her student loans. Since paying nothing would not be an undue hardship on her, NCSEAA maintained, Nightingale was not entitled to a bankruptcy discharge.

Fortunately for Nightingale, Judge Benjamin A. Kahn, a North Carolina bankruptcy judge, denied NCSEAA's motion, pointing out that the creditor's reasoning would mean that the people who are most worthy of bankruptcy relief could never get it. Furthermore, the judge pointed out,"Participation in such a 'repayment' program in which [Nightingale's]  monthly payment is zero is not repayment at all; rather, the loan continues to accrue interest on the principal without any repayment. At the end of the twenty-five year period, [Nightingale's] loans may be forgiven, but that amount, on which interest has been accruing, may become taxable as income."

The case then went to trial, and Judge Kahn entered his decision on January 16, 2016. The judge ruled that Nightingale met two prongs of the three-pronged Brunner test. First, she could not pay back her loans and maintain a minimal standard of living. Indeed, Judge Kahn ruled, "the unrebutted evidence demonstrated that [Nightingale] is currently incapable of making any material payment on the debts while maintaining a minimal standard of living."

Brunner's second prong required Nightingale to show that she had made good faith efforts to pay back her loan.  Judge Kahn ruled that she met this prong as well. Nightingale had paid about $11,000 on he loans and was currently making income-based payments of $133 a month.

To obtain a bankruptcy discharge of her student loan, Nightingale was also required to pass the third-prong of the Brunner test by showing that exceptional circumstances prevented her from paying back her student loans in the future. In other words, she was obligated to show a "certainty of hopelessness" regarding her long-term financial circumstances.

Judge Kahn admitted that Nightingale's testimony supported a finding of exceptional circumstances. "Nightingale is elderly, has no job prospect in the field for which she was educated, lives on a meager budget, relies upon friends and family to provide shelter, and testified that she has additional medical disabilities that prevent her from returning to gainful employment." In fact, NCSEAA agreed that Nightingale's current situation was dire "and that she is barely able to remain healthy and in affordable housing, much less hold down a job."

But Judge Kahn ruled that Nightingale's own testimony about her chronic health problems was insufficient to show long-term financial distress without corroborating evidence. The judge indicated that corroborating evidence in the form of a letter from Nightingale's doctor about her health status would probably be sufficient and gave her 14 days to produce such a letter or other corroborating evidence of her health problems.

What is the significance of the Nightingale decision?

The Nightingale decision is significant for two reasons. First, Judge Benjamin Kahn flatly rejected a student-loan creditor's argument that Nightingale was ineligible for bankruptcy relief because she could enroll in a long-term income-based repayment plan that would require her to pay nothing due to her limited income. Had Judge Kahn adopted NCSEAA's argument, no student-loan debtor would be eligible for bankruptcy relief, at least not in Judge Kahn's court.

Second, the Nightingale decision demonstrates the difficulty distressed student loan debtors have when trying to discharge student loans in bankruptcy. First, Nightingale had to defeat NCSEAA's summary judgment motion, which took months to resolve. Second, she was required to round up corroborating evidence of her chronic health problems.

In many circumstances, it is entirely appropriate for a bankruptcy judge to require a student-loan debtor to provide proof of chronic health issues. As Judge Kahn correctly observed, when health problems are not obvious, corroborating evidence is necessary to avoid the possibility of fabrication and fraud.

But Alice Nightingale is 67 years old! She went on disability leave until she retired in 2014 and now lives on an income of only $1,645 a month. Why was it necessary for her to provide corroborating evidence that chronic health issues prevent her from increasing her income in the future?

I don't mean to be too hard on Judge Kahn. He was obviously sympathetic to Nightingale's situation. After all, he denied NCSEAA's motion for summary judgment, and he gave Nightingale time to provide supporting evidence of her chronic health problems.  I feel sure the judge will ultimately discharge Nightingale's student-loan debt.

Nevertheless, when an elderly person living on a small pension and a Social Security check comes into bankruptcy court to discharge her student loans, I believe she is entitled to a speedy discharge. Unfortunately for Alice Nightingale, her adversary proceeding lasted more than two years. And her case may still not be behind her. If Judge Kahn discharges her student-loan debt, as seems likely, NCSEAA may appeal.

References

Nightingale v. North Carolina State Educ. Assistance Authority, 543 B.R. 538 (Bankr. M.D.N.C. 2016) (ruling requiring Nightingale to provide corroborating evidence of her chronic health problems).

Nightingale v. North Carolina State Educ. Assistance Authority, 529 B.R. 641 (Bankr. M.D.N.C. 2015) (ruling on NCSEAA's motion for summary judgment).

In the Jubilee Year of Mercy, Catholics Should Urge the Government to Forgive Student-Loan Debt

According to Old Testament scripture, a jubilee year occurs every fifty years; and in that year, slaves are freed and debts are forgiven. Leviticus 25:8-13. Pope Francis has proclaimed a Jubilee Year of Mercy for the Catholic Church that begins on December 8, the Feast of the Immaculate Conception. Would not this be a good time for the  U.S. government to forgive  $1.3 trillion in student-loan debt?

Perhaps not all of it. Of the 41 million people who have outstanding student loans, a great many received good value for their college education and can pay back what they borrowed. But 10 million people have either defaulted on their student loans or are delinquent in their payments. Millions more have gotten economic hardship deferments and aren't paying down their loans.

And for some people, their student loan debt is completely out of control. Liz Kelly, for example, featured in a recent New York Times article, is a 48-year old school teacher who owes $410,000 in student-loan debt--most of it accumulated interest. Will she ever pay it back? Not likely.

A 2014 law review article reported that 241,000 people with student-loan debt filed for bankruptcy in 2007, but less than 300 of them even tried to discharge their student loans. Either they figured it would be hopeless to try wipe out their student-loan debt in the bankruptcy courts or they didn't have the money to hire a lawyer to assist them.

And yet, as Paul Campos explained on his blog site and in a recent book,  we have thousands of unemployed or underemployed attorneys, many of whom have crushing student-loan debt themselves. Why doesn't the government, as an act of mercy, encourage these idle lawyers to help people discharge their student loans in bankruptcy?

Mercy, Pope Francis reminds us demands justice. "True mercy, the mercy God gives to us and teaches us, demands justice, it demands that the poor find a way to be poor no longer," Pope Francis explained. Mercy demands that institutions strive to make sure that "no one ever again stands in need of a soup-kitchen, of makeshift lodgings, of a service of legal assistance in order to have his legitimate right recognized to live and to work, to be fully a person."

Our country now has 23 million people who are unable to pay off their student-loan debt.  Indeed, about 150,000 elderly people are having their Social Security checks garnished by the federal government to offset unpaid student loans. For these people there is no Jubilee Year of Mercy--no forgiveness, and little relief even in the bankruptcy courts.

We are now a secular people--a people who pride themselves on having driven religion out of the schools and the public square. But surely we are not a heartless people. Surely our hearts are susceptible to warming by the words of a great man like Pope Francis.

So let us do mercy in the Jubilee Year of Mercy. And if our government is incapable of mercy, let us look for ways we as individuals can render mercy and to work for a system of higher education that does not drive millions of students into the poor house.

Catharine Hill, president of Vassar College, shovels horse manure in the New York Times about rising college costs

Catharine Hill dumped a load of horse manure on the op ed pages of the New York Times today, which is a good place to put it. In an essay expressing opposition to free college tuition, she made three bogus points:

1) College costs have gone up because state governments provide less funding to higher education than they once did.
2) Although the cost of going to college has gotten more expensive, it is still a good investment because college graduates make more on average than people who don't have college degrees.
3) The way to address the rising tide of student-loan indebtedness is better counseling and long-term repayment plans.

Let's look at Hill's three points.

First, declining state support for higher education has little to do with Vassar, which is a private institution. It costs a quarter million dollars to attend Vassar for four years, and that cost can't be explained by declining financial support from state governments.

Second, yes it is true that people who graduate from college earn more money on average than people who don't. But that doesn't justify skyrocketing college costs. Many college graduates attended relatively inexpensive state colleges. For those people, their increased earning potential justified the expense of going to college. But people who get liberal arts degrees from elite private colleges like Vassar often take on unmanageable student-loan debt. Many of them would have been better off going to an institution like Sam Houston State University in Huntsville, Texas, than borrowing money to listen to postmodern screeching by Vassar professors.

Finally, Hill's suggestion for handling the student-loan crisis is pure horse manure, and it isn't even fresh.  Hill recommends"better counseling," longer repayment periods and income-based repayment plans as the way to help students manage their crushing student-debt loads. Of course,this is exactly what the Obama administration is saying, along with higher education's professional organizations and sycophantic policy think tanks like the Brookings Institution.

Come on, Catharine. Come clean. Why don't you tell us the real reason you are opposed to free college tuition? You are opposed to it because the feds can't possibly provide free tuition for students to attend overpriced joints like Vassar. And a comprehensive  federal program offering free tuition would mean less money for elite colleges. You would prefer the status quo, whereby the exclusive colleges get the benefit of Pell grants and federal student loans--federal money you cannot operate without.

In fact, you reveal your true motivations in the last few paragraphs of your essay. "Without federal loan programs, many students could attend only schools that their families could afford from their current income or savings."  That's right, Catharine. You want students to attend colleges they can't afford. Otherwise, they might have to enroll at the University of Connecticut or Florida State. The horror! The horror!

Frankly, I would have expected more from Catharine Hill. After all she is an economist. Surely she knows that most of the people who sign up for 25-year repayment plans will never pay off their student-loan balances because their income-based loan payments won't be large enough to cover accruing interest. Surely she understands that making people pay for their college education over a majority of their working lives does not make economic sense.

But Catharine doesn't care. She just wants to keep the federal money rolling in so that places like Vassar, Yale, and Dartmouth can pay the professors and administrators more than they are worth to teach arrogant students who think they are smarter than the faculty and are probably correct.

And once a year, these condescending institutions have a dress-up day when the faculty wear medieval clothing and hand out bits of paper they insist on calling diplomas to the dunderheads who went hopelessly into debt for the privilege of wearing a t-shirt emblazoned with the name of some fancy college like Vassar.

Horse manure from Catharine Hill, president of Vassar

References

Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23. Accessible at: http://www.nytimes.com/2015/11/30/opinion/free-tuition-is-not-the-answer.html?_r=0

Liz Kelly, a school teacher, owes $410,000 in student loans--most of it accumulated interest. Will she ever pay it back?

Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.

Albert Einstein 

Liz Kelly, a 48-year old school teacher, owes the federal government $410,000 in student loans, which she will never pay back. How did that happen?

The New York Times article chronicled Kelly's story in this Sunday's Business Section, but the Times didn't adequately explain how Kelly got into this jam. My commentary for today is a forensic commentary on Kelly's situation.

Compound interest. As the Times story reported, Kelly didn't borrow $410,000 to finance her studies. She actually borrowed less than $150,000. Two thirds of her total debt is accumulated interest.

Albert Einstein observed that "[c]ompound interest is the eighth wonder of the world. He who understands it, earns it . . . he who doesn't . . . pays it." As Liz Kelly's story illustrates, most people don't understand Einstein's simple observation about compound interest any better than they understand his theory of relativity.

Over the years, Kelly took out student loans to pay for her undergraduate education, graduate studies, child care and living expenses. She also borrowed money to get a law degree, which she did not complete, and a Ph.D. from Texas A & M, which she also did not complete.

Her graduate studies enabled her to postpone making payments on her loans, but she continued borrowing more money; and the interest on her loans continued to accrue. Some of her loans accrued interest at 8. 25 percent--a pretty high interest rate. When her total indebtedness reached $260,000, she consolidated her student loans at 7 percent interest--still pretty high.

Over a period of 25 years, Kelly received a series of forbearances or deferments, and she never made a single payment on her loans. Thus, it is easy to understand how the total amount of her indebtedness tripled over the amount she borrowed.  In fact, as the Times pointed out, the annual cost of interest on her unpaid student loans is now larger than the total amount she borrowed for her undergraduate education!

Back in the old days, when people received interest on their savings, most people understood the principle of compound interest. People knew, for example, that money saved at 7 percent interest doubled in 10 years, and that money saved at 10 percent interest doubled in 7 years.

But no one gets interest on their savings any more, and perhaps that explains why many student-loan borrowers don't understand that their total indebtedness grows every year their loans are in deferment. Certainly Liz Kelly didn't understand this. The Times reported that she was shocked to learn that she owed $410,000.

No cap on student loans.  Although Kelly never made a single payment on her student loans, the federal government continued to loan her money. In fact, in 2011, she borrowed about $7,500 to pursue a Ph.D. in education, even though her total indebtedness at that time was more than a third of a million dollars and she had made no loan payments.

As the Times writer succinctly observed:

A private sector lender approached by a potential borrower with no assets, a modest income, and $350,000 in debt who had never made a payment on that loan in over 20 years would not, presumably, lend that person an addition $7,800. But that is exactly what the federal government did for Ms. Kelly. Legally it could do nothing else.

Obviously, a federal student-loan system that works this way is dysfunctional, irrational, and unsustainable. The feds should have shut off the student-loan spigot long before Kelly borrowed money to get a Ph.D.

The Charade of Income-Based Repayment Plans. If Kelly had accumulated $410,000 in consumer debt or a home mortgage, she could discharge the debt in bankruptcy. But discharging a student loan in bankruptcy is very hard to do. Indeed, Kelly might find it very difficult to meet the so-called "good faith" prong of the three-part Brunner test. After all, she continued taking out student loans over a period of 20 years and never made any loan payments.

Kelly's only reasonable escape from her predicament is to enroll in the federal government's loan forgiveness program, which would allow her to make payments based on a percentage of her income for a period of 10 years so long as she works in an approved public-service job. As a school teacher, she should easily qualify for this program.

But as Kelly herself pointed out, her monthly loan payments under such a plan would not even cover accumulating interest on the $410,000 she owes. At the end of her 10-year repayment program, her total indebtedness would be larger than it is now--easily a half million. That amount would be forgiven, leaving the taxpayers on the hook.

In fact, Kelly's situation is a perfect illustration for the argument that income-based repayment programs are not a solution to the student-loan crisis. Most people who participate in them--about 4 million people--will not pay down the principal on their loans.  Income-based repayment plans are really just a penance for borrowing too much money--say one Our Father and three Hail Marys and go and sin no more.

Conclusion

The Times story on Liz Kelly concluded with the observation that Kelly's story is unusual, but that's not really true. As the Times itself observed in a recent editorial, 10 million people have either defaulted on their loans or are in delinquency. The Consumer Financial Protection Bureau reported in 2013 that 9 million people were not making payments on their student loans because they had obtained a forbearance or deferment. And about 4 million people are in income-based repayment plans.

Thus, at least 23 million people have loans in the repayment phase who are not making standard loan payments. So what should we do?

1) First, the federal government should not loan people more money if they are not making payments on the money they already borrowed. No one did Liz Kelly any favors by loaning her an additional $7,500 when she had already accumulated indebtedness of $350,000 and didn't have a prayer of ever paying it back.

2) There needs to be some cap on the amount of money people can borrow from the federal student-loan program. I'm not prepared to say what the cap should be, but surely it is bad public policy to lend money so that people can accumulate multiple degrees that do not further their financial prospects.

3) We've got to face the fact that income-based repayment plans--favored by the Obama administration, the New York Times, and the Brookings Institution--are not a solution to the student-loan crisis. Surely it is pointless to put Kelly on a ten-year income-based repayment plan that won't even pay the interest on her indebtedness.

As unpalatable as it is for politicians and the higher education community to admit, bankruptcy is the only humane option for people like Liz Kelly.  Did she make some big mistakes in managing her financial affairs? Yes. But the federal government and several universities allowed her to make those mistakes; and the universities received the benefit of Kelly's tuition money.

No--we need to face this plain and simple fact: Kelly will never pay off that $410,000. And putting her in a long-term income-based repayment plan is nothing more than a strategy to avoid facing reality, which is this: the federal student loan program is out of control.

Compound interest: The eighth wonder of the world

References

Kevin Carey. (2015, November 29). Lend With a Smile, Collect With a Fist. New York Times, Sunday Business Section, 1. Accessible at: http://www.nytimes.com/2015/11/29/upshot/student-debt-in-america-lend-with-a-smile-collect-with-a-fist.html?_r=0

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26. Accessible at: http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html

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/