The Abu Dhabi Scandal: New York University Should Be Kicked Out of the Federal Student Loan Program

Today's New York Times carried a front-page story about New York University's recently constructed campus in Abu Dhabi.  According to the Times, the campus was built by immigrant laborers who worked under harsh conditions for salaries of as little as $272 a month.

Photo credit: NYU Photo Bureau

  

New York University pledged that the Abu Dhabi campus would be built by construction workers who would work under humane conditions and receive fair wages; but apparently that did not happen.  As many as 15 workers lived in tiny rooms, and apparently they were not paid the wages that had been promised to them.  When workers went on strike, the police were called in; and some of the workers were beaten.

New York University is a private institution with extremely high tuition--about $64,000 a year for tuition, room and board.  NYU students graduate with some of the highest student-loan debt levels in the country.  In 2010, NYU students graduated with a total of $659 million in student loans. That's right--nearly two-thirds of a billion!

Nevertheless, John Sexton, NYU's president, is compensated at an obscene level; and the university operates as if it should be answerable to nobody. And when I say obscene--I mean obscene.  President Sexton makes almost $1.5 million per year and is guaranteed a "length of service" bonus of $2.5 million.  When he retires--supposedly in 2016--he will receive annual retirement income of $800,000 a year.  Oh yeah--and he also get an apartment near Washington Square.

Here are a few other recent stories of unseemly behavior by this behemoth institution.

•  According to a recent news story, the university provides a luxury apartment for scholar Henry Louis Gates at below-market rent. Professor Gates is not even employed by NYU; he works at Harvard.

• NYU paid Jacob Lew, now Secretary of the Treasury, an exit bonus of several hundred thousand dollars when Lew left NYU to go to work in private industry.

• NYU gave President Sexton and other favored faculty members low interest loans to purchase second homes. For example, a former law school dean and his wife used a NYU loan to buy a 65-acre estate in Connecticut. 

NYU has the right to operate as it wishes and to disregard its many critics.  The governing board has paid no attention to a vote of no confidence in Sexton's leadership that the Arts & Science faculty issued in 2013.

But does NYU deserve to participate in the Federal student loan program, which is financed by American taxpayers, when it shows so little regard to financial propriety?

I don't think so.  If it wants to pay its president more than $1 million a year and start a high-profile campus in the Middle East, let it do so.  But NYU should not benefit from a federal student loan program that was intended to provide broader access to higher education--not subsidize a lavish and unseemly enterprise.

References

Jake Flanagin. The Expensive Romance of NYU. Atlantic, August 13, 2013. Available at: http://www.theatlantic.com/national/archive/2013/08/the-expensive-romance-of-nyu/278904/

Ariel Kaminer &  Alain Delaquieriere. N.Y.U. Gives Its Stars Loans for Summer Homes. New York Times, June 17,2013.

Ariel Kaminer & Sean O'Driscoll. Worker's at N.Y.U.'s Abu Dhabi Site Face Harsh Conditions. New York Times, May 19, 2014, p. 1.

Abby Ohlheiser. John Sexton will officially leave NYU in 2016. The Wire, August 14, 2013. Available at: http://www.thewire.com/national/2013/08/john-sexton-will-officially-leave-nyu-2016/68346/

Bruce Wright, Harvard Prof. Henry Louis Gates Gets Unreal Housing Perks from NYU. Boston.com, May 17, 2014. Available at: http://www.boston.com/news/nation/2014/05/17/harvard-prof-henry-louis-gates-gets-unreal-housing-perks-from-nyu/pXTFg7YDd3BMSekltbQ4tI/story.html

"Be sure To drink your Ovaltine": Inside Higher Ed partners with a Inceptia, a "debt prevention" company, to produce a tepid booklet of bromides on the student loan crisis

"Be sure to drink your Ovaltine"

Remember the Olvatine scene from the movie The Christmas Story? Ralphie Parker, an avid fan of the Little Orphan Annie radio program, writes to the program's sponsor and asks for a "Little Orphan Annie Decoder Ring."

When the  "Little Orphan Annie" program comes on the air, Ralphie anxiously uses the ring to decode Little Orphan Annie's secret message to  radio listeners. Ralphie thinks the message might have something to do with one of Little Orphan Annie's adventures.

But he is wrong.  When he finishes decoding the message, the disillusioned Ralphie finds that it just an advertisement for the program's sponsor. "Be sure to drink your Ovaltine."

"A crummy commercial?" Ralphie wails. "Son of a bitch!"

I felt a bit like Ralphie when I looked at the online collection of Inside Higher Ed articles that Inside Higher Ed produced recently on the future of student loans.  I was expecting some hard hitting pieces on the student loan crisis. But what I found was a booklet of tepid pieces that was produced in partnership with Inceptia, a nonprofit company that cryptically describes itself as a "leader in default prevention and financial education solutions."

What does Inceptia do to prevent student loan defaults? I'm not sure, but I'll bet its activities include contacting students who are at risk of default and encouraging them to sign up for economic hardship deferments. Senator Tom Harkin's committee report on the for-profit loan industry pointed out that putting at-risk students into economic hardship deferments is good for the colleges because those students will not be counted as people who default on their loans within three years of beginning repayment--even though they are not making payments on their loans. And if those students officially default after DOE's three-year default measurement period expires--who cares? 

Inceptia is a unit of the National Student Loan Program (formerly the Nebraska Student Loan Program), which is located in Lincoln, Nebraska.  Randy Heesacker, Inceptia's CEO, is well paid.  I couldn't find out his current income, but I found the Nebraska Student Loan Program's 2011 federal tax return.  According to that tax filing, Heesacker received total compensation of $378,457 when he was CEO of the Nebraska Student Loan Program (including bonuses and deferred compensation).

Does that sound like an extravagant salary for a non-profit oranization's employee?  Don't worry.  The Nebraska Student Loan Program's tax return assured the IRS that "[o]utside legal counsel undertakes a comprehensive evaluation of the compensation and benefit packages for officers and other affected employees of the organization, comparing the same relevant industry and other market comparables."

Oh, that's a relief.

And if Heesacker made $378,457 in 2011 as CEO of the Nebraska Student Loan Program, what do you think he's making now as CEO of Inceptia?  

I think it is a safe bet that the articles Inside Higher Ed chose for its online booklet were acceptable to Inceptia.  And not surprisingly, most of the articles quoted various student-loan organizations that basically support the status quo.

One writer advocated larger Pell Grants. Someone argued for lower interest rates on student loans.  And one organization wants lending standards loosened for Parent PLUS loans. 

No one in the  Inside Higher ED's collection of articles advocated for revising the bankruptcy laws to make it easier for distressed student-loan debtors to discharge their loans in bankruptcy. No one recommended elimination of the Bankruptcy Code provision that makes private student loans very difficult to discharge in the bankruptcy courts.

No one recommended tighter restrictions on the for-profit college industry or regulations to stop abusive collection practices or the garnishment of of Social Security checks.

No--almost everyone who participates in the public conversation about the future of the student loan program is an insider--an organization that benefits directly or indirectly from the $100 billion that the federal government spends each year to subsidize the higher education industry, which has been raising the cost of attending college every year for the past 30 years.

I'm sorry Inside Higher Ed and Inceptia--your vision of the future of student loans is not sustainable.

Someday--and I hope that day comes soon--we will have to introduce radical remedies for the student loan mess.  Those remedies--to be effective--will have to include bankruptcy relief for distressed student loan debtors, strict regulation of for-profit colleges, and a candid reporting on what the student-loan default rates really are.

 References

Inside Higher Ed (with support from Inceptia). The Future of Student Loans: A Selection of Higher Ed Articles and Essays. May 2014.

It Seemed Like a Good Idea at the Time: Student-Loan Forgiveness Programs are Making the Student Loan Crisis Worse

The federal government's student-loan forgiveness programs--like  Germany's decision to invade Russia in 1941--must have seemed like a good idea at the time.

After all, millions of college students are burdened by crushing student loans, the student-loan default rate creeps ever upward, and many college graduates have not gotten jobs that pay well enough to service their student-loan debt.

So why not create some programs that will lower student borrowers' monthly loan payments?

  And so the government created two programs that are essentially student-loan forgiveness programs. One program allows people who take public service jobs to make loan payments based on a percentage of their income for ten years. At the end of the ten-year period, the balance of their loans are forgiven.


Germany invaded Russia in the summer of 1941
It seemed like a good idea at the time.

The other program--income-based repayment plans (IBRPs) --allows borrowers to make monthly student-loan payments based on a percentage of their income for 20 or 25 years (there are several variations). Just as with the public-service loan forgiveness plans, student-loan debtors will see the balance of their loans forgiven at the end of the repayment period.

The attractiveness of these programs for student-loan borrowers is obvious. They see their monthly payments go down, which may keep many student-loan debtors from going into default.

Currently, about 1.3 million borrowers are enrolled in public-service loan forgiveness plans, and about the same number are enrolled in IBRPS. 

But here is the downside.  None of these programs contain provisions to discourage students from borrowing more money than necessary.  In fact--since the monthly payments are based on a percentage of borrowers' income and not the amount borrowed, the programs contain a perverse incentive to borrow as much as possible.  As a result, many of the people making income-based loan payments will never pay back even a portion of their loans.

Here are a couple of examples--one taken from a Wall Street Journal article and one taken from a New York Times story--that illustrate the problem.

Haley Schafer borrowed $312,000 to attend veterinary school in the Caribbean, even though the job market for veterinarians in the United States is terrible  Schafer got a job making about $60,000 a year, not nearly enough to comfortably pay back her student loans under the standard 10-year repayment plan.

So Schafer signed up for a 25-year income-based repayment plan that lowered her monthly loan payments to about $400 a month. Unfortunately,  her monthly payments aren't large enough to cover accruing interest on her loans.  The New York Times estimated that her loan balance will continue to grow, and when she finishes her 25-year repayment plan her loan balance will be more than twice the amount that she borrowed--$650,000!

And that's Haley Schafer's story. Now let's hear about Max Norris, a public-service attorney who borrowed $172,000 to go to University of California's Hastings College of Law.  Under the public-service student-loan forgiveness plan, he only pays $420 a month on his loan balance, not enough to cover accruing interest.

Norris's loan balance will be forgiven after 10  years. Assuming Norris stays in public service and gets annual raises of 4 percent, the government will forgive $225,000 in student-loan indebtedness--more than Norris borrowed!

In other words, the federal government is giving Morris a 100 percent subsidy to go to law school, even though the market is flooded with lawyers. In fact there are currently two law-school graduates for every new legal job.

Surely, anyone can see that it makes no sense for the federal government to permit people to borrow $100,000 or more to train people for professions that are already overcrowded and then allow them to make loan payments that are so small that the payments don't cover the accruing interest.

But that is what our federal government is doing.  

And, although these programs may help keep the student-loan default rate down, they are actually making the student loan-crisis worse.  Not only do we have 7 million people who stopped making loan payments and are in default, we have another 9 million who aren't making payments because they received an economic hardship deferment or are entitled to some other form of forbearance.  And then we have 2.5 million people who are making loan payments based not on the amount they borrowed but on their income, which means most will never pay off the principal of their loans.

In short--the number of people who will never pay off their student loans is in the millions--many, many millions.

References

Josh Mitchell. Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Costs, Higher Tuition. Wall Street Journal, April 22, 2014.

David Segal. High Debt and Falling Demand Trap New Vets. New York Times, February 23, 2013. Available at: http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?_r=0

 

The Private Student Loan Industry Doesn't Need Better Regulation: It Needs to Be Exterminated

Businesses that protect homeowners from termites and roaches call themselves pest control companies. But speaking as a homeowner, I don't want the roaches in my house to be controlled. I want them dead.

Image credit: pestcontrolman.cm

The Consumer Financial Protection Bureau (CFPB) is much like a pest control company that looks out for the interests of the pests.  It wants to regulate the the nation's rapacious financial services sector in a way that doesn't cause the banks too much discomfort. When it comes to the private student loan industry, this attitude is a mistake.

As the New York Times pointed out in a recent editorial, private student loans are very different from federal student loans.  Students who take out federal student loans get a fixed interest rate, and they can apply for an economic hardship deferment if they run into financial difficulties.  Private lenders often offer variable interest rates that allow monthly loan payments to adjust upward,  and they usually don't have any process in place to assist financially distressed borrowers.

The CFPB collects hundreds of complaints each year from people who took out private student loans. In a recent analysis,  the  Bureau reported that some private student-loan borrowers were forced into default without warning even though they were current on their loan payments In particular, the CFPB documented that some student-loan borrowers who were making regular payments on their loans were forced to pay back the entire amount of their loans if a person who co-signed their loan died.  Some student borrowers received notice from their lender that their loans were being called due at the same time they were mourning the loss of the parent or grandparent who had cosigned the student's college loan. Now that's crumby behavior.

And guess which private lender received the most complaints? Sallie Mae.  The CFPB received 995 complaints about Sallie Mae between October 2013 and March 2014.  That's a 50 percent jump over the previous measuring period.

And coming in second place for most number of complaints was JP Morgan Chase.

Issuing private loans is a particularly lucrative business for the banking industry. Why? First of all, in 2005, the banks got Congress to amend the bankruptcy laws to make private student loans almost impossible to discharge in bankruptcy.

Second, about 90 percent of these loans are co-signed--often by a parent or a grandparent. Co-signers stand jointly liable with the student borrower when it comes to paying off a private student loan. And co-signers--like the student borrowers themselves--cannot discharge a private student loan in bankruptcy except under very rare circumstances.

In its recent report, the CFPB practically begged the banks to be more compassionate to their student-loan debtors.  Rohit Chopra, CFPB's Student Loan Ombudsman, pointed out that a student-loan borrower who had a bad experience with a bank would be less likely to use that bank for other banking matters. And, Chopra added, treating student-loan borrowers  badly might hurt the banks' reputation.  Yes--the CFPB's Student Loan Ombudsman actually expressed concern about the banks' reputation!

The New York Times, commenting on the CFPB's report, thinks more federal regulation is the way to deal with the rapacious private student-loan industry. "Federal regulators clearly have a lot to do to address what amounts to a student loan crisis," the Times editorialized. Regulators "can begin by preventing contracts that unfairly burden borrowers," the Times suggested and loan terms "should be clearly stated."  And--the Times concluded, student-loan borrowers should be notified when their loans are at risk and borrowers in good standing should not be "shoved into default."

Personally, I don't give a damn about Sallie Mae's reputation or the reputation of the banks that have been mistreating private student-loan debtors. And I don't think another layer of regulation will make the banks behave more compassionately or more responsibly.

The way to deal with problems in the private student-loan industry is to shut this sleazy business down. And that can be easily done. All Congress needs to do is to repeal the 2005 law that made it exceedingly difficult for private student-loan debtors and their guarantors to discharge student loans in the bankruptcy courts.

If Sallie Mae, JP Morgan Chase, Wells Fargo and the other major players in the private student loan industry knew that distressed student-loan debtors could discharge their student loans in bankruptcy in the same way they could discharge other non-secured debts, they would get out of the student loan business in a hurry.  And that is exactly what we should want them to do.

References

Rohit Chopra. Mid-year update on student loan complaints. Consumer Financial Protection Bureau, April 2014.

Editorial. Troubling Student Loans. New York Times, April 29, 2014, p. A20.

David Leonhardt says it's harder and harder to get into Harvard University: "Frankly, my dear, I don't give a damn!"

David Leonhardt wrote an essay in the Sunday issue of the New York Times about how hard it is these days for someone get admitted to an Ivy League college--particularly if the applicant is an American. In 1994, Leonhardt wrote, about 45 college-age Americans out of every 100,000 were attending Harvard.  In 2012, that number dropped to just 33 out of every 100,000.

David Leonhardt

At the same time, the number of foreign students attending our nation's most elite institutions is growing. According to Leonhardt, about 10 percent of the student body at many of the nation's most selective colleges are foreigners.

Why are our elite institutions admitting more foreign students?  Because they can pay the full freight of tuition, room and board without the need for grants or scholarships In other words, foreign students from wealthy families are an important revenue source for America's most prestigious colleges and universities.

Leonhardt's essay appeared just a few days after Evan Mandery published an article in the Times deploring the fact that the nation's most elite institutions give admission preferences to the children of their alumni.  Mandery said that legacies have a big edge in the admissions process similar to the edge given to African Americans, Hispanics, and varsity athletes.

Take together, Leonhardt's essay and Mandery's essay convey a very clear message. If you want to go to an Ivy League college or a handful of other selective institutions it will help you if you are Hispanic, African American, the child of an alumnus, a varsity athlete or a wealthy foreigner.  And as Leonhardt pointed out, a "large fraction" of students from all these categories come from high-income families.

I could not tell whether Leonhardt was critical of this trend or a supporter.  Like so many New York Times op ed essays, Leonhardt's article wallows in cryptic indecision.  Leonhardt concludes his essay with these lines: "[T]hese [elite] schools have become a patchwork of diversity--gender, race, religion, and now geography. Underneath the surface, though, that patchwork still has some common threads." 

I have no idea what that means.

I do know that white male Southerners and Midwesterners who come from low-income families have very little chance of being admitted to an Ivy League school.  But so what?  Why would anyone who grew up living in the real world want to enter a higher education environment in which admission decisions are based--even in part--on race and greed? 

In my opinion, young people who want to expand their horizons by going to college should skip the elitist institutions--Harvard, Yale, Emory, Brown, etc. etc.  Instead, they should consider studying outside the United States.  Why not attend college in Monterrey or Guadalajara, for example?  Even if the educational experience is unexceptional, Americans studying in Mexico will learn an important second language and immerse themselves in another culture.

As it happened, Leonhardt's essay appeared in the same issue of the Times as an article about  Elizabeth Warren, a former Harvard Law professor and now U.S. Senator.   Warren has been critical of the federal government for regulating the finance industry in a way that favors Wall Street. "The game is rigged," Warren was quoted as saying, "and the American people know it."

Warren is right of course, but it is not only Wall Street that has rigged the game against the American people. Our elite colleges and universities have rigged the game as well.  It is no accident that Lawrence Summers, former president of Harvard, has also been a hedge fund manager and was one of President Obama's top economic advisers.

Warren quotes Summers as telling her she could be an outsider or an insider, and Warren obviously portrays herself as an outsider and friend of the little guy.  And maybe she is.  But we should not forget that Warren advanced herself in the world of academia by portraying herself as being part Native American--specifically a Cherokee--when in fact she almost certainlyis  not.

And so I repeat my question. Why would anyone want to attend an elite college where a person's advancement can be enhanced by the fact that he or she might have a trace of Native American blood?

Yes indeed, Elizabeth. The game is rigged.

"The game is rigged."

References

David Leonhardt. Getting Into the Ivies. New York Times, April 27, 2014, Sunday Review Section, p. 1.

Gretchen Morgenson. From Outside or Inside, the Deck Looks Stacked. New York Times, April 27, 2014, Sunday Business Section, p. 1.

Elitist Colleges Give Admissions Preferences to Children of Alumni: Let's Kick Them Out of the Federal Student Aid Program

Evan Mandery wrote an op ed essay in the New York Times recently decrying the preferential

admissions polices of our elitist colleges.  No--Mandery was not talking about affirmative action, whereby colleges give preference to minority applicants when making admissions decisions. He was talking about the special preferences many elitist colleges give to the children of alumni--often called legacies.

According to Mandery, the children of alumni have a 45 percent greater chance of admissions at 30 of our nation's most elite colleges than non-legacies. Mandery thinks it is wrong for colleges to favor the children of alumni when making admissions decisions, and I agree. The legacy preferences of our elitists colleges stink.

Almost in passing, Mandery acknowledged that our elitist institutions also give admission preferences to racial minorities.  In fact, Mandery noted that being a legacy is "the equivalent of 160 additional points on an applicant’s SAT, nearly as much as being a star athlete or African-American or Hispanic."  

So here is the bottom line. If you want to attend Harvard, Yale, or a couple of dozen other elitist universities, it will help enormously  if you are Hispanic, African American, or the child of an alumnus.

Like most New York Times essayists, Mandery probably thinks he is a liberal progressive. But his suggestions for ending legacy preferences are about as radical as 1950s era Reader's Digest article.  Here are  his suggestions: "a huge reform" of the nation's tax structure and "improved access to higher education."  My God, Mandery's an anarchist!

Such twaddle.

Mandery's suggested reforms have nothing to do with the rotten and corrupt way our nation's elitist colleges are admitting students.  As Mandery admits--these slimy institutions give preferences to their rich alums and to racial minorities.   What's more, they brag about it!

 I suppose laws could be passed to ban these practices, but as Justice  Ruth Ginsburg said in her dissenting opinion in Gratz v. Bollinger, our nation's colleges would probably continue giving racial preferences when admitting students even if it were illegal; they would just lie about it. 

Evan J. Mandery
photo credit: Amazon.com

As for me, I think we should kick the elitist colleges and universities out of the federal student loan program and invest this money solely in public universities and public community colleges.  I favor letting Harvard, Yale, Dartmouth, Brown, Wesleyan, Smith and all the other private elitist institutions stew in their own postmodern and often racist juices.  Let them admit  students however they want; just don't give them access to federal student loan money or  Pell Grants. 

Moreover, just as our elitist colleges give special preferences to minorities and the children of their alumni when making admissions decisions, I think the American public should give a special preference to anyone who did not graduate from one of these sleazeball institutions when choosing our nation's leaders.

In other words, people who graduate from Harvard or Yale should be penalized in the public mind if they run for president, seek a federal judgeship, or apply for a cabinet post .  As everyone knows, our government is now run almost entirely by elitist college graduates, and the Russians are showing them up to be fools.

References

Evan J. Mandery. End College Legacy Preferances. New York Times, April 24, 1014.  Accessible  at: http://www.nytimes.com/2014/04/25/opinion/end-college-legacy-preferences.html?_r=0

The New York Times Said Something Sensible Today About Predatory For-Profit Trade Schools

I seldom agree with the New York Times.  I live in the real world, and the Times editorial writers and op ed essayists live in the land of gobbledygook.  Nevertheless, every now and then the Times makes contact with planet earth and says something sensible.

And today is such a day. In an editorial entitled "Reining in Predatory Schools," the Times commended the Obama administration for its attempts to regulate the predatory for-profit trade-school industry that has hurt so many poor and disadvantaged students.

The Obama administration seeks to impose reasonable rules on the for-profit trade schools, requiring them to maintain average debt levels for their graduates that don't exceed 8 percent of their total annual earnings. In addition, to remain eligible for student-aid money, the trade schools must keep their student loan default rates at no more than 30 percent.

These are good rules, and the Obama administration deserves credit for pushing these rules forward in spite of ferocious opposition from the for-profit college industry, its lobbyists, and the lap-dog legislators who receive receive campaign contributions from the for-profits and do the industry's bidding.  But--as the Times noted--the rules do not go far enough.

Currently, the for-profits risk being kicked out of the federal student-loan program if their student-loan default rates exceed 25 percent for three consecutive years.  As I have pointed out before, the Feds only measure loan defaults during the first three years of a student's repayment period.  Any student who defaults after three years is not counted in an institution's default rate.

The for-profits have been successful in hiding their true default rates by encouraging their former students to sign up for economic hardship deferments, which excuse students from making their loan payments.  In fact, many for-profits have formal "default management" programs that target former students and help them get deferments.

Hundreds of thousands of former trade-school students who obtained economic hardship deferments will never pay back their loans and for all practical purposes are in default.  The Times is right to say that this problem must be addressed.

And just as importantly, the federal government needs to identify all the people who took out federal loans to pay for worthless for-profit training programs-well over a million people--and forgive these loans. Otherwise, all the people who defaulted on these loans will be hounded by their student loan debts for the rest of their lives.  As I have said before, these people deserve reasonable access to the bankruptcy courts.

I could say more on this topic, but today I simply tip my hat to the Obama administration for its efforts to rein in the predatory trade-school industry and to the New York Times for supporting the Obama administration and urging it to do more.

References

Editorial. Reining In Predatory Schools. New York Times, April 17, 2014, p. A20.