Sunday, October 19, 2014

The New York Times publishes another witless editorial about the student loan crisis

If you don't think the federal student loan program is in crisis, you haven't been paying attention. And speaking of people who aren't paying attention, the New York Times recently published an editorial entitled "What to Do About Student Loan Defaults," which demonstrates that the Times editorial board is totally clueless about the student loan crisis.

The Times began by saying that the student-loan default rate dropped a bit from last year. The Department of Education's most recent three-year cohort default rate (the percentage of people in a cohort  who default within three years of beginning repayment) was 13.7 percent, which is down a percentage point from last year's rate.

The Times neglected to report that the Department of Education calculated a special rate for several schools that were in danger of being kicked out of the federal student aid program because of high default rates in order to bring their default rates down. Which schools received this special favor? The Department of Education won't say.

The Times also neglected to note that the student loan rates are probably going down because colleges with the highest default rates have hired default-management companies to help bring their default rates down. These firms contact former students who are in danger of default and urge them to apply for economic hardship deferments.

Former students who have economic hardship deferments are not obligated to make loan payments but they are not counted as loan defaulters. This keeps colleges' default rates down during DOE's three-year measurement period.

Of course the bad news for student-loan debtors who have economic hardship deferments is that interest continues to accrue on their loan balances. People who defer payments for several years because they are on economic hardship deferments will wind up owing a lot more than they borrowed.

In fact, we really don't know that the true student-loan default rate is. Millions of people have received economic hardship deferments and millions more have signed up for income-based repayment plans that obligate them to make monthly student-loan payments over 25 years.  Almost all of these people are seeing their loan balances negatively amortize--in other words, the amount they owe is getting larger.

The Times knows that millions of student-loan borrowers are in trouble, but what is its solution? More education!

Yes, the Times said that "[t]he government needs to continue pressing both schools and loan servicing companies to educate students on affordable partial payment plans that can keep them out of default." And at the end of the editorial, the Times urges the government to "get out the news about affordable repayment plans that set payments according to borrowers' income, allowing them to eat and pay the rent without falling into default."

So basically what the Times is saying is this: People need to sign up for income-based repayment plans that will negatively amortize for most borrowers and obligate student-loan debtors to make monthly payments for 20 or 25 years!

Of course this is lunacy. And it is deeply discouraging that the New York Times, which bleats continually about income-inequality and the plight of the poor, offers such unimaginative and ineffective solutions to the student-loan crisis, which is destroying the economic future of millions of Americans, not to mention the integrity of America's colleges and universities.

References

What to do about student loan defaults. New York Times, October 2, 2014. Accessible at: http://www.nytimes.com/2014/10/03/opinion/what-to-do-about-student-loan-defaults.html?_r=0








Thursday, October 2, 2014

Senator Tom Harkin is Like a Shade-Tree Mechanic--He Can Tell You What's Wrong With the Student Loan Program, But He Can't Fix It: Veterans, The New GI Bill and the For-Profit Colleges

Photo credit: autoguide.com
Senator Tom Harkin reminds me of the shade-tree mechanics I patronized when I was young and poor and drove old cars,  I would drive my junker up to some Mom-and-Pop mechanic shop, the mechanic would accurately diagnose what was wrong with my car, and then he would say he couldn't fix it.

Senator Harkin did the public a major service when he chaired the committee that reported on the for-profit colleges a couple of years. In a massive report--over a thousand pages when the appendices are included, the Harkin committee spelled out the many abuses in the for-profit college industry.

Since that report was issued, almost nothing has been done to rein in the rapacious for-profit colleges, which suck up about a quarter of all federal student aid money and only enroll about 11 percent of the students.

Last July, Senator Harkinn's Senate Committee has issued a second important report. This one focuses on the way the for--profits have made out like bandits with programs targeted at veterans who have gone to college under the Post-9/11 GI Bill.

Here is a summary of the Harkin Report's findings:

  • Eight of the 10 top recipients of Post-9/11 GI Bill benefits are large, publicly traded companies that operate for-profit colleges. These eight companies received 23 percent of all the Post-9/11 GI bill money for 2012-2013.
  • Seven of those 8 companies are currently under investigation by state attorney generals offices or the federal government for deceptive or misleading recruiting or possible violations of federal law. 
  • The number of veterans attending public colleges has declined between 2009 and 2013 while the number of veterans who attend for-profit colleges has increased.
  • Although overall enrollment at the eight top for-profit beneficiaries of the Post-9/11 GI Bill has declined in recent years , the number of veterans who enrolled at these schools has increased.
Why are veterans so attractive to the for-profit colleges? As the Harkin Report explains, the Higher Education Act requires that the for-profits operate under the 90/10 rule. In other words, they can only receive 90 percent of their revenue from federal student aid money.  However, money received under the Post-9/11 GI Bill is not counted as part of the 90 percent.

Thus, for-profits who are getting 90 percent or close to 90 percent of their revenue from the general federal student-aid program can get that last ten percent of their by enrolling veterans under the Post-9/11 GI Bill.

This would be fine, I suppose, if the for-profits were doing a bang-up job of educating veterans and preparing them for good post-military jobs. But apparently, they are not. 

The Harkin Report found that "[a]t the for-profit colleges currently receiving the most benefits, up to 66 percent of students withdrew without a degree or diploma" (p. ii).  The Report also found:
Between 39 and 57 percent of the programs offered by four of the companies receiving he most Post-9/11 GI bill benefits would fail to meet the proposed gainful employment rule, suggesting that the students who attend these institutions do not earn enough to pay back the debt they take on.  (p. ii)
As the Harkin Report put it, some for-profit colleges "appear to be taking advantage of a loophole to use Post-9/11 GI Bill funds to comply with the federal requirement that no more than 90 percent of revenue come from federal student aid" (p. ii).

And of course, this cozy arrangement for the for-profits is costing taxpayers, "who are paying twice as much on average to send a veteran to a for-profit college for a year compared to the cost at a public college or university ($7,972 versus $3,914)" (p. ii).

The Harkin Committee Report makes interesting reading, but the Committee made no significant recommendations.  It is the latest in a series of reports showing that students are being ill-served by and large by the for-profit college industry.  These schools charge far more for their programs than comparable programs offered by public universities and community colleges. They have very high student-loan default rates and high student dropout rates, and very often they are enrolling students through deceptive recruiting practices and are putting students into programs that are not likely to lead to well-paying jobs.

Why don't we do something about this?  Because the for-profits have very good lobbyists and lawyers sand they make strategic campaign contributions to key federal legislators.

Thus, in the end, the latest report by Senator Harkin's Committee is very much like my fruitless conversations with the shade-tree mechanics of my youth.  "Buddy, your car is in dire need of repair, but we can't fix it."

References

Health, Education, Labor, and Pensions Committee (Senator Tom Harkin, Chairman). Is the New GI Bill Working?: For-Profit Colleges Increasing Veteran Enrollment and Federal Funds, July 30, 2014.   Washington, DC: United States Senate. Accessible at http://www.harkin.senate.gov/documents/pdf/53d8f7f69102e.pdf



Tuesday, September 30, 2014

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

Wednesday, September 24, 2014

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.




Tuesday, September 23, 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

Saturday, September 20, 2014

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/









Friday, September 19, 2014

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.