The Private Student Loan Scandal: More Worthless Advice From the New York Times (which cares so much about the little guy)

You think the federal student loan program is a mess? You should take a look at the private student loan program.  In contrast to federal student loans, which have fixed interest rates, private loans (the loans students take out from private banks and other financial institutions) often have variable interest rates.  The federal loan program--for all its many faults--at least allows students to obtain economic hardship deferments and offers an income-based repayment program (IBRP).  Private student-loan lenders are not obligated to show an overstressed debtor any mercy--and often they do not. Many students are not even aware of the difference between federal student loans and private loans and are shocked to learn that the terms and conditions of their private loans are more onerous than the federal program.

The New York Times--that tireless champion of the little guy--made this tepid suggestion for reforming the private student-loan program on today's editorial page (October 25, 2012).

The federal government needs to open up refinancing and debt relief opportunities for [private student-loan borrowers], as it did for some mortgage holders. The [Consumer Financial Protection Bureau] should also set national standards for loan servicers to require clear disclosure of conditions . . . and prompt resolution of customer requests for information. And borrowers who might be eligible for federal student loans should be advised to examine that option before plunging headlong into private debt.

Yep. A little more federal regulation will straighten out the private student loan scandal.  That's like saying Mussolini would have been a little nicer if he had only gotten the right medication.

If we want to stop the abuses in the private student-loan industry, we only need to do one thing: allow insolvent private student-loan debtors to discharge their loans in bankruptcy like any other non-secured debt.  They could do that until 2005, when the banking industry persuaded Congress to pass legislation to make it almost impossible to discharge a private student loan in bankruptcy.

If the banks knew their student-loan borrowers could file bankruptcy and discharge their loans, they would have an incentive to work with overstressed borrowers.  In fact, they might get out of the student-loan business altogether.

The Times' latest suggestion for reforming the massive student-loan debacle is typically tepid, not coming close to the heart of the problem. But what do you expect from a newspaper that makes its money selling advertising space to such luxury firms as Versace, Saks Fifth Avenue, and Armani? Do you think the Times really cares about some poor smuck who got in over his head by taking out a private student loan from Wells Fargo?

References

Editorial (2012, October 25). Student Debt Debacles. New York Times, p. A24.
   

Think Long and Hard Before Borrowing Money to Go to a Prestigious University Like Harvard

According to an article in Inside Higher Education, Harvard Graduate School of Education (HBSE) is retiring its Ed.D. degree and replacing it with the Ph.D. As an Ed.D. graduate of HGSE, I am happy to see this happen. I would much rather have gotten a Ph.D. from Harvard instead of an Ed.D., and I would certainly have selected the Ph.D. option when I was a student at Harvard had that option been available to me.

Reading the Inside Higher Education article prompted me to think back on my Harvard experience and to ask myself this question: Was the doctoral degree I received from Harvard Graduate School of Education worth the money I invested?  If I had the opportunity to make the decision again, would I still elect to pursue a doctoral degree at Harvard?  The answer to both questions is no.

Me in my embarrassingly flashy Harvard academic regalia

At the time I was a student at HGSE, annual tuition was about $12,000 per year. Tuition has roughly tripled since then--it’s about $35,000 per year now.  And that doesn’t count opportunity costs. I was out of the job market for three years while I studied at Harvard, and the cost of living for the Boston area was high then as it is now--much higher than the South or the Midwest.

Of course I chose to study at Harvard because of Harvard’s prestige. In fact, I did not even consider studying elsewhere. I recall taking classes from two excellent professors while I was at HGSE--my education law professor and my economics professor. Both professors were gifted teachers, and to this day I try to model my own teaching after the way these two fine scholars taught. I was also introduced to the case method of teaching while at HGSE; and I teach cases to this day, sometimes writing my own teaching cases. 

On the other hand, most of my Harvard classroom experiences were pretty ordinary. Since graduating from Harvard, I have taught in educational administration programs at three public universities, and I know dozens of professors who teach in my field at universities all over the United States. When I consider my three years at Harvard as a whole, I feel sure I could have received a comparable educational experience at a good state university at a far lower cost.

If someone were to ask me today if the doctoral program at Harvard Graduate School of Education is a good investment, I would say no. Whether the degree obtained is called an Ed.D. or a Ph.D., I feel sure an individual can get a better value by pursuing a doctoral program at a reputable state institution--Indiana University or the University of Utah, for example--rather than going to Harvard.  Twenty years after the fact, I don’t believe my salary or my career benefited significantly from my having a degree from Harvard Graduate School of Education as opposed to one of a hundred other doctoral granting institutions.

I took out about $22,000 in student loans to attend HGSE, a modest amount by today’s standards. I can’t say these loans burdened me unduly. But many of my Harvard classmates borrowed considerably more. I remember one woman who took out a second mortgage on her home to pay for her Harvard experience.  And I know at least a couple of people who took out loans to attend HGSE and never obtained their doctoral degree.

In retrospect, I was foolish to have gone to Harvard instead of seeking out a less expensive alternative. I consider myself one of the thousands of imprudent people who take out student loans every year to attend prestigious institutions--Harvard, Dartmouth, Smith, Vanderbilt, etc. etc. and wind up with very little to show for it. We tell ourselves that a degree from an elite university must be worth the money--it’s going to pay off in the end.  We delude ourselves into believing that a degree from a high-status institution is a tangible sign that we are indeed bright and special people.  And we borrow money--sometimes a lot of money--in order to feed our delusions.

So here is a word of advice from someone with a doctorate from Harvard. Think long and hard before you go into debt to obtain a fancy degree from an elite university, and explore less expensive alternatives.  Unless you come from a wealthy family or obtain a full-ride scholarship, all a doctoral degree from Harvard can guarantee is a heavy burden from student loans and the right to wear a flashy academic gown. In fact, you may find that a degree from a prestigious university  diminishes the quality of your life rather than enhances it.

References

Basu, K. (2012, March 29). Ending the first Ed.D. program. Inside Higher Education.

http://www.insidehighered.com/news/2012/03/29/country%E2%80%99s-oldest-edd-program-will-close-down

Income-Based Repayment Plans Won't Solve the Student-Loan Crisis: Reponse to NY Times Editorial

Today's New York Times included an editorial entitled "Misleading Advice for Student Borrowers." The Times correctly states that many for-profit schools are urging their students to enter so-called "default management" programs that allow students to defer payment on their loans due to economic hardship.

 As the Times rightly observed, interest continues to accrue for many students who are in loan-deferral programs. This accrued interest is added to the principal of the debt, often causing the total amount owed to grow substantially.

The Times argued that students would be better off going into income-based repayment plans (IBRPs), whereby they are obligated to pay a percentage of their income on their student loans over a period of 20 to 25 years.  The amount that remains unpaid at the end of the lengthened repayment plan is then forgiven by the student-loan creditor.

There are three problems with IBRPs. First, like the economic-hardship deferments, interest accrues on the debt for students who are not paying enough under their IBRPs to cover accruing interest. For example, an unemployed person in an IBRP who owes $20,000 in student loans would not be obligated to pay anything on the debt until he or she found a job.  Nevertheless, the interest on the student loan would continue to accrue, making it more difficult for the debtor to ever pay off the loan.

Second, as several bankruptcy courts have noted, a student-loan debtor whose debt is forgiven at the end of a IBRP repayment period may see the amount of the forgiven debt treated as taxable income by the Internal Revenue Service. 

Third, who wants to be saddled with student loan payments for 20 years? Student-loan debtors who select an IBRP as the means of paying off their debt will in essence become serfs--bound to send a percentage of their income to the federal government for the majority of their working lives.

For the Times and for many elected politicians, IBRPs seem like the easy fix to the student loan crisis.  But that is not true.  Currently, about one million student-loan borrowers are enrolled in IBRPS, and the number is likely to grow in the years to come. All these people send a percentage of their income to the federal government or its agents for at least 20 years.  And at the end of that period, they may face a tax bill for the amount of the loan that is forgiven.

No--the answer to the student-crisis for overburdened debtors is reasonable access to the bankruptcy courts--not long-term repayment plans.

References

Editorial. (2012, October 8). Misleading Advice for Student Borrowers. New York Times Online.

DOE's Annual Report on Student Loan Defaults Is More Useful than Its Old Reports, But DOE Still Understates the Magnitude of the Student-Loan Crisis

The U.S. Department released its annual report on student-loan defaults a few days ago. For 2011, the percentage of borrowers who defaulted in the first two years of their repayment period was 9.1 percent, up slightly from the previous year.

Of course, most student-loan borrowers don't default in the first two years of the repayment period. According to a  New York Times story, the average time for an overburdened borrower to default is four years.

To get a better picture of the true default picture, DOE began publishing the three-year student-loan default rate.  Measuring default rates during the first three years of the repayment period causes the rate to rise from 9.1 percent to 13.4 percent.  For students who borrowed to attend for-profit colleges, the three-year default rate is higher--22.7 percent. In other words, more than one out of five students who borrowed to attend for-profit institutions defaulted within three years of the beginning of their repayment obligation according to DOE's most recent report.

How about the percentage of borrowers who default over the life of the loan?  The number is very high, particularly for the for-profit sector.  According to a DOE estimate (as reported in the New York Times), 49 percent of the students who borrow money to attend a for-profit college will ultimately default on their loans!

It should be obvious to everyone by now that the for-profit sector as a whole has been a failure at preparing students for the 21st century economy. The federal government should not be financing a sector that has a default rate of nearly 50 percent. Nevertheless, a sector that only enrolls about 10 percent of all post-secondary students draws 25 percent of federal student aid money.

This is a scandal, and it has brought great misery to students who borrowed money to attend for-profit colleges and then failed to get jobs that would allow them to pay back the money.

 My guess is that a great many student-loan defaulters have simply given up trying to become economically self-sufficient.  Having defaulted on their student loans, they are unable to participate in the student-loan program again until they pay back their old debt.  Under current bankruptcy law, it is virtually impossible for them to discharge their student loans in bankruptcy. Meanwhile, for most of them, the interest on their loans continues to accrue. Short of emigrating to another country, there is nothing many of these defaulters can do to get a fresh start.

References

Lewin, Tamar. Education Department Report Shows More Borrowers Defaulting on Student Loans. New York Times, September 29, 2012, p. A16..

Baloney about Higher Education from President of Wesleyan University

In Written on the Heart,  Philosopher J. Budziszewski's primer on natural law, Budziszewski argues that certain truths are innately known to all people. These truths form the natural law, and are, as it were, written on the heart. 

Midway through the book, Budziszewski describes this innate knowledge as our "baloney meter."  He maintains that all people know at some level that certain concepts are contrary to the natural law and are baloney.

Budziszewski believes (and I agree) that American higher education has adopted the mission of dismantling the baloney meters of the young people who study at our nation's colleges and universities. By the time they finish their studies, students have come to believe that there are no ultimate truths, no natural law, no fundamental principles for living. Instead they think that all truths are relative and changeable, that people make decisions based on their own self interest, and that the meaning of life is shaped by the quest for pleasure, power, and recognition. 

Yesterday's New York Times contains an example of higher education's baloney.  Michael Roth, president of Wesleyan University, responded to critics who charge that American higher education is outmoded.

Michael S. Roth, President of Wesleyan University

Basically, Mr. Roth is defending the status quo in Amerian higher education at places like Wesleyan. The purpose of higher education, Roth loftily maintains, is to "teach us habits of learning." Education should encourage students to developing an "openness to being shaped by experience."  Quoting Dewey, Roth writes, "The inclination to learn from life itself and to make the conditions of life such that all will learn in the process of living is the finest product of schooling."

In short, Roth argued, the purpose of higher education "is to give all citizens the opportunity to find 'large and human significance' in their lives and work.'"  And--Roth might have added--the cost of finding human significance at a university like Wesleyan is only about $40,000 a year.

Of course, Roth's defense of higher education is just baloney. In spite of the universities' efforts to dismantle their students' baloney meters, students are beginning to figure out that higher education is not worth what the universities are charging for it, particularly at institutions like Wesleyan, where many professors specialize in political correctness, deceptively packaged as "the liberal arts".

All university presidents can express high-minded ideals about the value of higher education, and some of them can quote John Dewey.  But we should not take these attestations seriously until we see college presidents rein in their own salaries, lower tuition costs, and figure out ways to make sure a college degree leads to a well-paying job.  By the way, Wesleyan University is one of the ten most expensive colleges in the United States.

References

Budziszewski, J. Written on the Heart: The Case for Natural Law. Intervarsity Press, 1997.

Dawson, Christopher. The Crisis of Western Education. Steubenville, OH: Franciscan University Press, 1989.

Roth, Michael. "Learning as Freedom." New York Times, September 6, 2012, p. A23.

How Many People Are Behind on Their Student Loans? At Least 6 Milion

College loans have been a problem for students for more than 20 years.  Yet the national dialogue on the student loan crisis is just getting started. Why did we wait so long to examine the student loan morass?

I think we are aware of the student loan crisis now because objective parties outside of higher education have begun issuing reports about it.  The Federal Reserve Bank of San Francisco, the Federal Reserve Bank of New York, Moody's, the Consumer Financial Protection Bureau and other independent entities are giving us objective assessments of this problem.

If we look closely at these reports, we can see just how big the student loan crisis is.  In fact, it is now apparent that millions of people have stopped making payments on their student loans.  How many millions?  Let's take a look.

According to a recent report by the Consumer Financial Protection Bureau, 850,000 private loans are delinquent.  That is an astonishing number when we consider that private loans are only a small part of the overall student loan industry--less than 10 percent.  Also, private loans undoubtedly have a lower default rate than federally guaranteed student loans.  This is because the vast majority of private loans include a co-signing guarantor.  In other words, Mom or Pop usually sign on private student loans; and Mom or Pop must pay off the loan if their child defaults. 

How many people have stopped paying on their federal student loans? According to a report issued this year by the Federal Reserve Bank of New York, 27 percent of 20 million student-loan borrowers in the repayment stage are behind on their payments or in default--that's 5.4 million people.

When we add the number of people who are behind on their private loans with the number of people who are behind on their federal student loans, we get a big number.  More than 6 million people are not current on their student loans and many of these people are in default.

We know from newspaper stories and the bankruptcy cases that people who default on their student loans are in financial purgatory.  They are subject to having their wages garnished, their credit ratings are ruined, they are unable in most cases to file bankruptcy.  Six million people--that is a lot of human misery.

References

Consumer Financial Protection Bureau. Private Student Loans. Washington, DC: author, 2012.

Meta Brown, Andrew Haughwout, Donghoon Lee, Maricar Mabutas, & Wilbert van de Klaaw. Grading Student Loans. New York: Federal Reserve Bank of New York, 2012.

Dear New York Times: Your Suggestion for Controlling Abuse in the Private Student-Loan Industry is Pathetic

Some people think all the problems of the world will be solved when people are better informed. That seems to be the view of the New York Times--the nation's nanny.

Today the Times--in other tepid and timid editorial--calls for better disclosure for private student loans.  The Times is responding to the recent report by the Consumer Financial Protection Bureau.   The report found that 40 percent of students who took out private loans were eligible for less costly federal loans.

 The Times supports a pending bill "that would require colleges and lenders to thoroughly explain borrowing options to students." In addition, the Times reports, the proposed law will "prevent unnecessary borrowing by requiring lenders to check with colleges to determine how much money students are eligible to receive."

Blah, blah, blah.

Here are the central facts about private student loans.

1. Like federal student loans, private student loans are almost impossible to discharge in bankruptcy.
2. Ninety percent of private student loans are issued to student borrowers with a co-signor. In other words,  parents are often co-signing their children's student loans and obligate themselves to pay them back if their child defaults.
3. According to the CFPB report (p. 64), 850,000 private student loans--an astonishing number--are in default.

Congress can do one simple thing to protect private student-loan borrowers; it can amend the Bankruptcy Code to make private student loans dischargeable in bankruptcy.  

References

Editorial, "Better Disclosure for Private Loans," New York Times, July 26,2012.