"Deserves got nothin' to do with it": Is Elizabeth Warren's student-loan forgiveness plan fair to people who played by the rules?

An Iowa man challenged Senator Elizabeth Warren about her student-loan forgiveness plan during a campaign event in Grimes, Iowa.

"I just wanted to ask one question," the man said to Warren. "My daughter is getting out of school. I've saved all my money. She doesn't have any student loans. Am I going to get my money back?" he said.

"Of course not, Warren replied.

"So you're going to pay for people who didn't save any money and those of us who did the right thing get screwed," the man said.

"No, you're not going to get screwed," Warren lamely responded.

I get the Iowa guy's point. It seems unfair to grant wholesale student-loan forgiveness to millions of people, while parents who made severe financial sacrifices to pay for their children's college education get no relief.

But let's face it. About half of all student loans are not being paid back anyway. That's right--about half.

More than a quarter of all student-loan borrowers default on their student loans within five years. Another 20 percent or so are in income-based repayment plans that are structured so that the borrowers never pay off their loans. And then there are millions of people who have their loans in forbearance or deferment, while interest piles upon the principal of their debt. 

In a way, Senator Warren's student-loan forgiveness plan is like President Jimmy Carter's decision to grant amnesty to the young men who fled to Canada to escape the draft during the Vietnam War. Critics said it was unfair for draft dodgers to suffer no penalties while millions of Americans went into the Army and more than than 50,000 Americans died in the jungles of Vietnam.

Unfortunately, huge moral quagmires have no clear-cut solutions. The Vietnam War was an enormous national tragedy, a senseless and immoral affair. Or so I believe.

Likewise, the student-loan crisis is a moral crisis. Forty-five million people are carrying student-loan debt that totals $1.6 trillion and millions of these people got little or no financial benefit from their college experience.  

The for-profit colleges raked in enormous wads of federal cash and dished out overpriced and often worthless college degrees. The law schools and business schools jacked up the prices of their professional programs simply to suck up more federal money, and a lot of that money went toward bloated salaries for college administrators.

There is no perfectly fair solution to this crisis.  As a nation, we simply must grant relief to suffering college-loan debtors.  And Senator Warren's plan is a reasonable proposal for doing that.

Personally, I would prefer for Congress to amend the Bankruptcy Code and allow insolvent debtors to discharge their student loans through bankruptcy.  That would be fairer to people like Senator Warren's critic in Grimes, Iowa.

But the student-loan catastrophe has got to be addressed head-on.  Senator Warren's plan and Senator Sanders' plan are pretty good solutions.  In my opinion, bankruptcy relief is a better solution. 

Any plan will benefit some people who do not deserve student-debt relief. But as Clint Eastwood's character said in the movie The Unforgiven, "Deserves got nothin' to do with it." 

Let's move forward to clean up the student-loan program before it totally destroys the integrity of higher education--not to mention America's middle class.

"Deserves got nothin' to do with it." 

Lee Siegel foolishly touts the virtues of student-loan default in a New York Times op ed essay

Lee Siegel, a successful writer, defaulted on his student loans;  and he bragged about it in the New York Times.

In a Times op ed essay, Siegel admitted that his loans paid for a valuable college experience. In fact, Siegel wrote, his education "opened a new life to me beyond my modest origins."

So why didn't Siegel pay off his loans? Apparently because meeting his financial obligations would have destroyed his "precious young life" by forcing him to take a job that would have stifled his creativity.

Siegel was vague about his loan obligations in his Times essay. He did not say where he attended college, how much he borrowed, or how much he now owes. Nor did he say how he manages to live comfortably with a huge debt hanging over his head, although he advised defaulters to marry or at least live with someone who has good credit. Thanks for the tip, Lee.

Siegel described his philosophy as one of "desperate nihilism," but I would be surprised if there is anything desperate about his lifestyle. He writes for the nation's most prestigious journals, he has written books, he appeared as a celebrity guest on CNBC. He has probably traveled overseas on numerous occasions. Perhaps he vacations in the Hamptons.

I think it was a mistake for Siegel to brag about defaulting on his student loans in the New York Times. He may think his essay displays his edginess, even his nobility. But basically he told the entire world he is a deadbeat.

Most student loan defaulters enter a world of pain.

Fortunately, Siegel stopped short of urging others to default on their student loans; it is a tort after all to interfere with others' contractual obligations. He did suggest, however, that a mass number of student-loan defaults might trigger wholesale reform of the way higher education is financed.

But Siegel is wrong about that. According to the Consumer Financial Protection Bureau, 7 million people are in default on their student loans and 9 million more are not making loan payments because they are in some form of deferral or forbearance.  Another million and half or so are in income-based repayment plans, and half of the people in those plans were kicked out for not reporting their income on an annual basis.Those are big numbers, but the massive meltdown of the federal student loan program has not prompted Congress to reform it.

It is totally irresponsible for a successful writer to tout student-loan default as a noble course of action. Most of the defaulting millions have had their lives wrecked by their failure to pay off their student loans. Their credit is shot, their wages are garnished, their income-tax refunds are levied, and they are hounded by debt collectors. And, if they are elderly, their Social Security checks are subject to garnishment.   Is there anything noble about that scenario?

Moreover, the New York Times acted irresponsibly when it published Siegel's essay. Siegel's self-serving defense of voluntary student-loan default may encourage other people to take the same reckless course of action; and most people who default on their student loans will enter a world of hurt.

It is true, of course, that millions of student-loan debtors are morally entitled to have their loans forgiven. People who were lured by fraud or misrepresentations into worthless for-profit college programs should have their loans wiped out. Many naive young people who borrowed money to enroll in mediocre programs at elite private colleges are also morally entitled to loan forgiveness.

But many people who borrowed money to attend college have done quite well; and apparently Lee Siegel is one of them. It is the height of arrogance for someone in Siegel's position to say, in essence, that the taxpayers should pay for his college education, an education he admits was valuable to him.

I have said, and I say again, that a reasonable bankruptcy process is the proper way to determine which people are legally entitled to have their student loans discharged. People who borrowed money for worthless college experiences; people who fell on hard times due to a job loss, illness, or divorce; people who tried to maximize their income but were unable to make enough money to pay on their student loans--all these people should be legally entitled to bankruptcy relief.

But simply walking away from student-loan debt is not an option. In fact, people who default on their student loans suffer catastrophic consequences. The Times would serve its readers better by editorializing in favor of bankruptcy relief for oppressed student-loan debtors, rather than publishing Siegel's very foolish essay.

References

David Marans, This Author Called for A Student Loan Boycott, And CNBC Was Not Having It. Huffington Post, June 8, 2015. Accessible at: http://www.huffingtonpost.com/2015/06/08/cnbc-student-loan-boycott_n_7537432.html

Lee Siegel. Why I Defaulted on My Student Loans. New York Times, June 7, 2015, Sunday ReviewSection, p. 4.

Albert Lord Says Student Loan Program is Not in a Bubble: Should We Believe Him?

Albert Lord
CEO, Sallie Mae

According to recent news stories, Albert Lord, CEO of Sallie Mae (SLM Corp.)  rejected any claim that student loan debt has reached dangerous levels.  “We don’t see anything of any evidence close to a bubble,” Lord said in a conference call to financial analysts. “This country underwent a significant financial crisis in our very recent past. It’s not really a surprise that many see bubbles around every corner” (Mulholland, 2012). 

So Mr. Lord assures us the student loan program is not in a bubble. Should we believe him?

No, we should not. First of all, as everyone knows, the percentage of students who borrow money to attend college is going up and students' average indebtedness is going up as well.   Moreover, annual student-loan default rates have almost doubled between 2003 and 2009—going from 4.5 percent to 8.8 percent.  And these numbers only reflect the numbers of students who default within two years after beginning repayment.  When the default rate is expanded to measure defaults during the first three years after repayment begins, the rate goes up substantially—especially for students who borrowed money to attend for-profit colleges.  According to one projection, the three-year default rate for the 2009 cohort is 29 percent for students who attended for-profit schools.  (Lederman, 2011). Surely this is a sign of serious trouble ahead for the student loan program.

We should also look at some recent reports by outside analysts when we assess Mr. Lord’s assurances about the student loan program. The Federal Reserve Bank of San Francisco, in a 2011 publication, reported that private lending increased dramatically from 2000 to 2007, reaching 26 percent of all student loans during the 2006-2007 academic year. Private loan volume then retreated from a high of $22.6 billion in 2006-2007 to only $7.9 billion in 2010-2011.  (Choi, 2011). This may be an indication that the private banking industry has concluded that student loans are becoming riskier for banks, in spite of the fact that these loans—like federally guaranteed loans—are almost impossible to discharge in bankruptcy.

In a 2012 publication, the Federal Reserve Bank of New York reported that total outstanding student-loan indebtedness has reached $870 billion, surpassing the nation’s entire outstanding credit-card balances and its outstanding car-loan balances. According to the New York Reserve Bank, there are about 37million people with student-loan balances, Sixty percent of these borrowers are 30 years old or older, and about 27 percent of all borrowers have at least one past-due student-loan account.  Seventy-five percent of individuals with past-due student-loan accounts are 30 years old or older, and 40 percent are 40 years older or older.  These numbers tell us that a lot of people are struggling with student-loan debt well into midlife. 

In addition, Moody’s issued a report in July 2011, which is sharply different in tone from Mr. Lord’s optimistic reassurances. “The long-run outlook for student lending and borrowers remains worrisome,” the Moody report stated. “[T]here is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers—and lenders—have unrealistic expectations about borrowers’ future earnings.” Moody’s warned that “[u]nless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place” (Moody’s Analytics, 2011).

In my opinion, Mr. Lord is wrong to say the student loan program is not in a bubble. Independent analysts see trouble ahead.  As I have written earlier, there are many things we can do to ease the burdens that weigh down overstressed student-loan borrowers.  But the first thing we must do is face reality and admit that the student loan program is out of control.

References

Choi, L. (2011, December). Student debt and default in the 12^th District. San Francisco: Federal Reserve Bank of San Francisco. http://www.frbsf.org/publications/community/research-briefs/Student-Debt-and-Default-in-the-12th-District.html (last visited April 23, 2012).

Brown, M., Haughwout, A., Lee, Donghoon, Mabutas, M., & van der Klaauw, W.(2012). Grading students loans. New York: Federal Reserve Bank of New York.  http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html (last visited April 23, 2012).

Deritis, C. (2011, July). Moody’s Analytics: Student Lending’s Failing Grade.


Lederman, D. (2011, May 23). Trouble ahead on student loan defaults. Inside Higher Education. http://www.insidehighered.com/news/2011/05/23/student_loan_default_rates_rise_sharply_especially_for_for_profit_colleges (last visited April 23, 2011). 

Mulholland, S. (2012, April 19). Sallie Mae CEO Albert Lord Rejects Education Loan Bubble Claims. Huffington Post. http://www.huffingtonpost.com/2012/04/19/sallie-mae-ceo-albert-lor_n_1438595.html (last visited April 23, 2012).