Almost by itself, the Student Loan Program is Destroying the American Middle Class: The sad story of Steve and Darnelle Mason

Several newspapers carried a story about Steve and Darnelle Mason, a married couple who co-signed student loans for their daughter Lisa to attend college.  Lisa borrowed a lot of money--$100,000, but it was probably a good investment because she graduated with a nursing degree that led to a job as a critical-care nurse.

Lisa Mason
Photo credit: Steve Mason &
USA Today

Unfortunately, Lisa died at age 27 of liver failure, leaving three young children.  Had Lisa borrowed the money from the federal student loan program, the debt would have been forgiven with her death.

But Lisa borrowed the money from private banks, and loan-service companies that took over her loans didn't forgive the debt. As co-signers on Lisa's loans, Lisa's parents are liable for the full amount.  And with penalties and accrued interest, that debt has  ballooned to $200,000.

This sad story, which has gained national attention, demonstrates the risk parents take when they co-sign student loans for their children's college education, particularly when they co-sign a loan from a private bank. They are on the hook for the full amount. And unlike the federal student loan program, most banks do not have income-based repayment options. Nor do they grant economic hardship deferments.

Jeffrey Dorfman (2014) recently wrote a story for Forbes arguing that there is no student loan crisis. Dorfman would probably say people like Steve and Darnelle Mason are a rare exception, As Dorfman, pointed out, most people borrow fare less money to attend college than Lisa Mason did, often less than a typical car loan.

It is true of course that the Mason's story is exceptional. Most 27 year-old people don't die. But a lot of them are unable to manage their student loans, and parents who co-sign those loans are on the hook to pay them back.  Parents can lose their retirement savings, the equity in their homes, literally everything they've worked for over a lifetime if they co-sign their child's student loan and the student can't pay it back.

What a lot of parents don't realize is that student loans are very hard to discharge in bankruptcy. In 2005, the banks were able to get Congress to amend the Bankruptcy Code to make private student loans nondischargeable unless the debtor could show "undue hardship."  And  the courts have interpreted "undue hardship" very harshly.  Just a few months ago, a 63-year old man's petition to discharge almost a quarter million dollars in student loans for his children was denied, even though the man was unemployed and about to lose his home in foreclosure (Murphy v. Educational Credit Management Corporation, 2014).

Millions of people are suffering from unmanageable student loans.  Although most people don't borrow as much as Lisa Mason did, even a small loan is impossible to pay if the debtor is unemployed.  And the poor souls who fall behind on their payments and default often see their loan balances double because the creditors add accrued interest and penalties to the unpaid debt.

President Obama and Secretary of Education Arne Duncan know how bad the student-loan crisis is,but their efforts to bring this crisis under control have been feeble.  The Department of Education doesn't report the actual default rate and its solution to the overall problem is to encourage student-loan debtors to sign up for long-term income-based repayment plans.

In essence, the Obama administration's response to the student-loan catastrophe has been to obscure the enormity of the problem, hoping it won't blow up before President Obama leaves office.  What needs to be done?

First and foremost, the Bankruptcy Code must be amended to make unmanageable student -loan debts dischargeable in bankruptcy. This one reform would shut down the private student loan business because the banks would not lend money for education if they knew student-loan debtors could wipe out their student loan debt in a bankruptcy court.

Steve and Darnelle Mason, for example, would be able to discharge their debts in bankruptcy if they had maxed out their credit cards to go on expensive vacations or had foolishly invested in some get-rich-quick scheme. But they can't discharge the student-loan debt that Lisa accumulated in good faith to get a college education, even though it is crushing them financially.

 Day by day, the student-loan program is destroying the middle class by making it impossible for young people to buy homes, start families, and save for their retirement.  And many parents who co-signed student loans for their children are now faced with the loss of their entire life savings.

This state of affairs is not right, and we won't truly begin to deal with the student-loan crisis until we give people who are overwhelmed by student debt a fresh start in bankruptcy.

References

Grant, Tim. Private student loan debt can outlive student. Pittsburgh Post-Gazette, September 12, 2014. Accessible at http://www.post-gazette.com/business/2014/09/12/Private-student-loan-can-outlive-student/stories/201409120016.

Dorfman, Jeffrey. Time To Stop the Sob Stories About Student Loan Debt. Forbes, September 18, 2014. Accessible at http://www.forbes.com/sites/jeffreydorfman/2014/09/18/time-to-stop-the-sob-stories-about-student-loan-debt/

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Serico, Chris. After daughter's death, parents plead for forgiveness of her $200K student-loan debt. USA Today, July 14, 2014. Accessible at http://www.today.com/parents/after-daughters-death-parents-plead-forgiveness-her-200k-student-loan-1D79996678

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

The Department of Education Dishes Out More Baloney About Student Loan Default Rates

During World War I, it was said the British Army kept three different casualty lists: one list to deceive the public, a second list to deceive the  War Office, and a third list to deceive itself.

Something like that is going on with the Department of Education's latest report on student-loan default rates. According to DOE's latest report, which was released today,the three-year default rate actually dropped a full percentage point from 14.7 percent to 13.7 percent.

However, as Inside Higher Ed reported, DOE tweaked this year's report, adjusting rates for some institutions that were on the verge of losing their student aid due to high default rates. Students at these institutions were not counted as defaulters if they defaulted on one loan but had not defaulted on another. According to Inside Higher Ed, the adjustment will be applied retroactively to college's three-year default rates for the past two years.

Thus, as a Chronicle of Higher Education article noted,  it's "unclear whether [the adjustments for certain schools] or other factors affected the reported percentages."

The bottom line is this: As of today, we don't know whether student-loan default rates really went down or whether DOE's "adjustments" account for the decline.

Arne is full of it!

But it really doesn't matter.  As everyone in the higher education community knows, many colleges with high default rates have hired  "default management" firms to contact former students who are in danger of default and urge them to apply for economic hardship deferments.  Borrowers who get these deferments--and they are ridiculously easy to get--don't pay on their student loans but they aren't counted as defaulters.

Moreover, Arne Duncan's Department of Education has been pushing students to sign up for income-based repayment plans (IBRPs) that will lower students' monthly payments but will extend their repayment period from 10 years to 20 or even 25 years.  As I've said before, many people who obtained IBRPs are making monthly payments so small that the payments do not cover accruing interest. Thus, these people are actually seeing their loan balances get larger even though they are making payments and aren't counted as defaulters.

In short, we don't know what the true student-loan default rate is if it is defined as people who are not paying down their loan balances. But it is a lot higher than the 13.7 percent rate that DOE reported today.

Why is DOE tinkering with the numbers? One reason may be the high student-loan default rates among the HBCUs.  Last year, 14 HBCUs had three-year default rates of 30 percent--high enough to jeopardize their participation in the federal student loan program. This year, Arne Duncan announced that no HBCUs had default rates that would put them at risk of losing federal aid money.

Abrakadabra!  Arne Duncan tinkers a little with definitions and the student-loan default crisis is solved.

As Robert Cloud and I have argued in a forthcoming law review article, one of the three most important things that needs to be done to solve the student-loan crisis is to accurately report the true default rate.  And these are the other two things we must do: 1) provide easier access to bankruptcy for overburdened student-loan debtors, and 2) implement stronger regulations for the for-profit college industry.

But these things are not being done, and the student-loan crisis grows worse with each passing day. Like the British Army during the First World War, DOE doesn't want to know what the true student-loan default rate is and it doesn't want anyone else to know either.

References

Stratford, Michael. Education Dept. tweaks default rate to help colleges avoid penalties. Inside Higher Education, September 24, 2014.

Thomason, Andy. Student-Loan Defaults Decline in Latest Data, Education Dept. Says. Chronicle of Higher Education, September 24, 2014.

A Comment on Susan Dynarski's Op Ed Essay in the NY Times on President Obama's Proposed Federal College Rating System

Susan Dynarski contributed an op ed essay in a recent issue of the New York Times on President Obama's proposed college rating system.  As Ms. Dynarski explained, the President's intent is to rein in college costs.

Ms. Dynarski said up front that she does not think the President's proposal will help bring spiralling tuition costs under control--at least for the public colleges. She urged President Obama to slow down the initiative to put a college rating system in place in order to get it right.

I will go further and say that the President's college rating plan will do nothing to control college costs. Instead, it will simply add another layer of bureaucracy to the nation's higher education sector, which is already burdened with red tape created by efforts to comply with FERPA, the Clery Act, Title IX, the federal student aid program, and a blizzard of "Dear Colleague" letters issued by the Department of Education.

Without a doubt, the nation's elite schools will do just fine under any rating system that President Obama and Secretary of Education Arne Duncan are likely to devise; they have large endowment funds, lobbyists, and lawyers that will make sure they come out on top.  Don't worry about Harvard, Stanford, or Yale.

The HBCUs will also do all right under any rating system that the Obama administration designs; nobody wants to increase pressure on them. And, judging by their past success in fending off effective federal oversight, most of the for-profits will also manage to thrive under any new college rating system that is likely to be put in place.

But, as Ms. Dynarski pointed out, the new rating system will probably hurt the private, nonprofit colleges most, particularly the non-selective nonprofits that do not have large endowments.  Many may be forced to close their doors. She is right to warn that these colleges "will do everything they can to avoid this, including lobbying to tweak the ratings."

I hope President Obama and Secretary Duncan heed Ms. Dynarski's advice and put their college-rating system on the back burner.  If Obama and Duncan want to bring costs under control, they should continue putting the heat on the for-profit college sector, where tuition costs are highest. In my view, the for-profits should be kicked out of the federal student-aid program, which would cause most of them to be shut down. The federal aid money that now goes to the for-profits receive--about $35 billion per year-should be invested in low-cost community colleges.


References

Dynarski, Susan. Why Federal College Ratings Won't Rein in Tuition. New York Times, September 20, 2014. Accessible at:
http://www.nytimes.com/2014/09/21/upshot/why-federal-college-ratings-wont-rein-in-tuition.html

Time To Stop the Sob Stories About Student Loan Debt, Jeffrey Dorfman Said in a Forbes Article. But Dorfman Failed To Analyze Key Signs of Crisis.

Jeffrey Dorfman wrote an online essay for Forbes this week entitled "Time To Stop the Sob Stories About Student Loan Debt."  Basically, Dorfman argued that there is no student-loan crisis, pointing out that most students have only modest student-loan debt loads, usually smaller than a typical car loan.

Mr. Dorfman is right to point out that the number of people who have borrowed extravagantly to
attend college is relatively small. "In fact," Dorfman wrote, "only four percent of households headed by people between 20 and 40 years old have student loan debt of over $36,000 per person and two-thirds of those have a graduate degree to show for that debt."

But I think Mr. Dorman's article overlooked some key data that are very troubling. First, as Mr. Dorfman pointed out, the three-year student-loan default rate is 14.7 percent, and that number is disturbing by itself.  Student-loan default rates have doubled in just six years.

Moreover, the Department of Education's official student-loan default rate only measures people who default in the first three years of the repayment period.  Many people default on their loans after three years. And the student-loan default rate for people who attended for-profit colleges is more than 20 percent.  That's right--one out of five people who attended for-profit colleges during DOE's latest measurement period defaulted within the first three years of repayment!

And, as Senator Tom Harkin's Senate Committee report pointed out, the for-profit colleges are encouraging their former students to get economic hardship deferments that temporarily excuse debtors from making loan payments.  This strategy helps the for-profits keep their institutional default rates down.

But in reality, many people who obtained economic hardship deferments will never pay back their loans, and their loan balances get larger as interest accrues during the time they are not making loan payments.

In my opinion, the student-loan default rate for people who attended for-profit colleges is probably 40 percent when measured over the lifetime of the loan repayment period, and that should alarm everybody--even Mr. Dorfman.

And Mr. Dorfman did not comment on recent reports that more and more people in their late 20s and early 30s are living with their parents and that more than 40 percent of college graduates hold jobs that don't require college degrees. Nor did he comment on recent efforts by the Obama administration to lure student-loan debtors into long-term income-based repayment plans that will require debtors to pay on their loans for 25 years.  Isn't that a sign that the student-loan program is in trouble?

Finally, although Mr. Dorfman is correct to say that most people with student loans have modest loan balances, even $10,000 is very hard to pay off if you are holding a minimum-wage job.  Many of the people who borrowed money to attend for-profit colleges are from low-income families. If those people dropped out of a for-profit college without getting a degree (and a large percentage of people fall into this category), paying off even a small loan may be impossible.

 The Brookings Institution, which Mr. Dorfman cited, has been downplaying the student-loan crisis even as it advocates for long-term repayment plans.  But the crisis is real.

A lot of people who live in Mr. Dorman's world are making money off the federal student loan program or the private student loan industry. Sallie Mae is making money off of student loans, the banks are making money off of private student loans, the loan servicing companies are making money chasing down student-loan debtors who are in default,and colleges and universities are making money as they raise their tuition every year. Goldman Sachs owns an interest in Education Management Corporation, the entity behind several for-profit colleges, and the Washington Post Company has a stake in Kaplan University.

But millions of Americans are suffering under unsustainable student-loan debt, and the crisis grows larger every day. Mr. Dorfman is living in a fantasy world if he thinks otherwise.


References

Dorfman, Jeffrey. Time To Stop the Sob Stories About Student Loan Debt. Forbes, September 18, 2014. Accessible at http://www.forbes.com/sites/jeffreydorfman/2014/09/18/time-to-stop-the-sob-stories-about-student-loan-debt/

Ashlee Kieler. For-Profit Colleges: Good For Investors. . . Not-So-Good For Students. Consumerist, April 24, 2014. Accessible at: http://consumerist.com/2014/04/24/your-college-education-might-be-a-better-investment-for-goldman-sachs-than-it-is-for-you/

Is it OK to beat a dead horse? The Consumer Financial Protection Bureau sues Corinthian Colleges

According to Chronicle of Higher Education, the Consumer Financial Protection Bureau has sued Corinthian Colleges, accusing the company of "predatory lending and illegal collection tactics." 

As the Chronicle noted, Corinthian is "the crippled for-profit higher-education company that is in the process of winding down its operations."  In fact, Corinthian has entered into a deal with the U.S. Department of Education, whereby the company will sell or close most of its campuses in exchange for continued access to federal student aid money.

The CFPB is accusing Corinthian of some pretty bad stuff. "We believe Corinthian lured in consumers with lies about their job prospects upon graduation, sold high-cost loans to pay for that false hope, and then harassed students for overdue debts while they were still in school," Richard Cordray, the CFPB chief,was quoted as saying in the Chronicle article.

If Corinthian Colleges did the things the CFPB accused it of doing, then it certainly deserves to be sued. But, as the Chronicle of Higher Education pointed out, the company was already in financial trouble. 

I am happy to see the Consumer Financial Protection Bureau take some strong action against the for-profit college industry, which has been wracked by reports of abusive behavior.  Several for-profits have been accused of engaging in unsavory practices. But I would be happier still if the CFPB would go after abusive for-profit colleges that are not teetering on the edge of closure.  

It is OK, I suppose, to beat a dead horse now and then. But I would like to see the CFPB to beat a few live ones.

References

Field, Kelly. Federal Watchdog's Lawsuit Accuses Corinthian Colleges of Predatory Lending. Chronicle of Higher Education, September 16, 2014. 

But who really cares? Rosemary Anderson, age 57, borrowed $65,000 in college loans and now owes $152,000

Let's take a minute to examine what happened to Rosemary Anderson, a student-loan debtor who was featured in two CNN stories recently. More than twenty years ago, Rosemary began borrowing money to attend college; and she eventually got a bachelor's degree and a master's degree in human resources. She has a job and she makes pretty good money.

Nevertheless, Rosemary is now 57 years old, and the $65,000 she originally borrowed has grown to $152,000! How did that happen?

As for so many Americans trying to survive in today's dog-eat-dog economy, life got in the way. Rosemary experienced a divorce, a job loss, and a family illness. Loans got out of hand, and she stopped making payments for a period of time. Later, she consolidated her loans at an interest rate of 8.25 percent--far higher than the prevailing rate.  Interest accrued, penalties were tacked on to what she borrowed; and now Rosemary owes $$152,000.

Although the CNN article didn't make her current situation entirely clear, apparently Rosemary is now in a 25-year Income-Based Repayment Plan, because CNN reported she will be paying nearly $700 a month until she is 81 years old!

That's right--she will finally finish paying off her student loans more than 40 years after she got her undergraduate degree. "I will be working for as long as I'm employable. I will never be able to retire," Rosemary said in the CNN story.

Is that how the American dream is supposed to work? Is this how higher education is supposed to pay off?

Some people might tell Rosemary that she has no one but herself to blame. You borrowed too much money, they might tell her, or you should never have stopped paying on your loans.

Well, sure, Rosemary probably made some mistakes in financing her higher education, but a lot of people make mistakes. That's what bankruptcy is for. But people like Rosemary will find it very difficult to discharge their student loans in bankruptcy court.

But who really cares? The media is obsessed with what happened in Ferguson, Missouri and the details of Ray Rice's elevator assault on his girl friend. Rosemary Anderson got featured in a couple of CNN stories, but millions of people in similar situations suffer in silence.

Meanwhile, college and universities, both public and private, gorge on federal student loan money and the money students borrow from private banks to pay for their college education. University presidents may pretend to care  about distressed student debtors, but they are focused on raising money to construct more buildings. President Obama pretends to care, but he's not doing anything much to help people like Rosemary Anderson. Maybe Rosemary could get a golf date with the President so she could explain her situation to him personally.

No sensible person can read Rosemary Anderson's story without coming to the conclusion that people like Rosemary need easier access to bankruptcy. But that's not going to happen any time soon. Why? Because the people who have the power to come to Rosemary's aid don't really care about people like Rosemary.

And that's pretty scary to think about because there are literally millions of distressed student-loan debtors, and the number grows larger every day.

References

Blake Ellis. Student Loan Debt Surges for Senior Citizens. CNN, September 11, 2014. http://finance.yahoo.com/news/student-loan-debt-surges-senior-211900000.html

Patrick M. Sheridan. I'm 57 and owe $152,000 in student loans. CNN, August 14, 2014. http://money.cnn.com/2014/08/13/news/economy/older-student-debt?source=yahoo_hosted

The General Accounting Office's Report on Student Loan Indebtedness Among Elderly Americans: Scary Reading

The General Accounting Office released a report this week on elderly Americans with student loan debt. The report is 30 pages long but can be summarized in a few paragraphs.

First, the percentage of people aged 65 through 74 who have outstanding student loans is small but growing. In 2004, only 1 percent of people in this age category still owed on student loans. By 2010, that percentage had grown to 4 percent.

Second, the amount of student-loan debt held by elderly Americans is also growing. It grew six fold between 2005 and 2013--from $2.8 billion in 2005 to $18.2 billion last year.

Third, the number of elderly Americans who are having their Social Security Checks garnished because they defaulted on student loans has increased dramatically in recent years. In 2002, only 31,000 people had Social Security benefits garnished because they had defaulted on their student loans. That number has ballooned five fold in just 11 years; 155,000 Americans saw their Social Security checks reduced in 2013 because they had defaulted on student loans.

On one level, the GAO's report is no big deal. Currently, there are 39 million people with outstanding student loans. The number of elderly student-loan defaulters who are having their Social Security checks garnished---155,000--is only a drop in the bucket.

But that number will undoubtedly grow larger in the coming years. GAO reported that 6.9 million people who are 50 years old or older are carrying student-loan debt. That number has gone up 130 percent since 2005.

Moreover, the GAO pointed out that the amount of student loan debt held by elderly Americans grew much faster in recent years than it did for the general population. Between 2005 and 2013, the total amount of student loan indebtedness more than doubled, from $400 million to $1 trillion. But for people in the 65 to 74 age group, the amount of student loan debt grew six fold during those years.

And here's the scary part. Elderly student-loan debtors have higher default rates than younger people. Only 12 percent of federal student loans held by people in the 25 to 49 age bracket are din default. Among people 75 or older, more than half are in default!

I will make just a couple of points about this useful report.

First, in my view, a humane society should not garnish people's Social Security checks because they defaulted on their student loans. As I have said many times, Congress needs to amend the law to stop the garnishment of Social Security checks of elderly student-loan defaulters.

Let's face it, taking a small portion of people's Social Security checks (a maximum of 15 percent) probably won't even put a dent in individual debtors' total loan balances. Undoubtedly, most of them owe far more than they borrowed due to accruing interest and penalties.

Second, the Obama administration's proposal to encourage student-loan debtors to sign up for 20- and 25-year Income Based Repayment Programs (IBRPs) will only make this problem worse. A lot of people will be in their late 20s, early 30s, or even older when they begin paying off their student loans under 25-year repayment plans. Without a doubt, the percentage of people who enter retirement with outstanding student loan debt is going to increase as more and more people elect IBRPs to service their student loans.

The Department of Education, the Brookings Institution and several other education policy groups have endorsed IBRPs as a good way to help people manage their burgeoning student-loan obligations; and the New York Times also seems to like IBRPS.

But IBRPs are a terrible idea. Our nation cannot prosper economically if we have a high percentage of Americans paying on their student loans over the majority of their working lives.

It will take political courage to solve the student-loan crisis, and we won't solve it until we begin reducing the amount of money people borrow to attend college.

But we are going in the wrong direction. Every year, Americans borrow more and more money to attend college, and every year the average amount of individual indebtedness goes up. Encouraging people to pay off their loans over 25 years instead of 10 years just postpones the day when Americans will finally admit that the federal student loan program is out of control.

The federal student loan program is slowly destroying our economy and the integrity of higher education in the United States. And--with the advent of IBRPs--the number of elderly Americans who will see their retirement years blighted by student-loan debt is going to go no direction but up.

References

General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T