America's Journey into the "Heart of Darkness": MIT Professor Jonathan Gruber, Elite Universities and Obamacare

 Heart of Darkness, Joseph Conrad's tale of one man's journey up a mysterious river into the heart of Africa, is one of those books that has embedded itself in America's postmodern psyche. How many high school students have written theme papers on Conrad's book? How many professors have crammed  Heart of Darkness down the yawning throats of indifferent sophomores imprisoned in mandatory English courses?  How many scholars have quoted the book's most famous line--"The Horror! The Horror!"--and opined on the book's rich commentary on colonialism, racism, and existential doubt?

At its core, however, Heart of Darkness is about greed. The people who ravished Africa in the late 19th  century and who people Conrad's book had nothing more in mind than making money.  Conrad described a group of European adventurers encamped on the bank of an African river as "sordid buccaneers" whose talk was "reckless without hardihood, greedy without audacity, and cruel without courage . . ." When the character Marlow asks an accountant why he took a job that landed him in an African jungle, he scornfully replies, "To make money, of course. What do you think?"

I  thought about Heart of Darkness recently as I read the news about Jonathan Gruber, the MIT professor who was one of Obamacare's chief designers.  Videos came to light in which Gruber basically admitted that Obama's healthcare law was based on deception and the contemptuous belief that Americans are too stupid to understand what the law would cost them.

Prior to passage of the healthcare law, Obama's people bragged about how smart Gruber is.  He was going to craft the most perfect and lovely healthcare system that had ever been designed, we were assured. And now we find out that Gruber was just a cynical academic who made millions of dollars packaging a swindle.

Indeed, Gruber is very much like Kurtz in Conrad's Heart of Darkness, the mysterious man in the heart of a dark continent who accumulated vasts stores of ivory and who acquired a firm hold on the imagination of the novel's central character, a riverboat captain named Marlow.

Marlow's description of Kurtz sounds very much like the Obamacrats' obsequious praise for Professor Gruber:

Hadn't I been told in all the tones of jealousy and admiration that he had collected, bartered, swindled or stolen more ivory than all the other agents together. That was not the point. The point was in his being a gifted creature, and that of all his gifts the one that stood out pre-eminently, that carried with it a sense of real presence, was his ability to talk . . . .

And of course Professor Gruber is just one of the many elitists who surround Barack Obama--all graduates of America's most prestigious colleges and universities. Almost all of them have an air of arrogance and condescension, and an unseemly sense of their own intelligence. Like the characters who grub for wealth in Heart of Darkness, most seem propelled solely by greed or the desire for power and recognition.

For some reason, Americans  have been willing to put the nation's destiny into the hands of these hollow and soulless people, most of whom have done nothing with their lives except attend elitist universities where they learned to do little more than talk. We even want our children to get degrees from the fancy colleges where Obama's bureaucrats have been spawned. We are willing to borrow vast sums of money to pay tuition costs so our children can take classes from professors like Jonathan Gruber.

And so we journey upriver into America's own Heart of Darkness: the elite colleges and universities that suck up our money and produce nothing but emptiness.  "The horror! The horror!" we will say to ourselves when we get our first student-loan bill and find we don't have the money to pay it.

MIT Professor Jonathan Gruber
"The horror! The horror!

According to the Federal Reserve Bank of New York, one third of student-loan borrowers in repayment during 2012 were delinquent!

According to the Department of Education's most recent report, 13.7 percent of student-loan debtors in the most recent cohort of borrowers defaulted on their loans within three years of beginning the repayment period.  That's not a good number, but DOE tells us that the student-loan default rate actually went down a bit from the previous year, when the three-year default rate was 14.7 percent.

The DOE's report on student-loan default rates is mildly intersting, but the Federal Reserve Bank of New York drilled down a little deeper into the data; and its findings are alarming.  In a report issued last  April,  FRBNY concluded that about 17 percent of the nation's 39 million student-loan borrowers were in default in 2012. Interestingly, people in the 30 to 49 year-old age bracket had the highest delinquency rates--higher than either younger borrowers or older borrowers.

 Moreover, as the Federal Reserve Bank pointed out, this percentage figure is based on a denominator that includes borrowers who are not in the repayment phase of their loans. Some are still in school, some have deferments, and some are participating in income-based repayment plans.

Among borrowers in the repayment phase (which constitute a smaller denominator), almost one third are in delinquency. This figure should alarm everyone in the higher education community.

Furthermore, the percentage of borrowers transitioning into delinquency on a quarterly basis is going up. The FRBNY report found that 6 percent of non-delinquent borrowers transitioned into delinquency in 2005. "By 2012, that rate had increased to 9 percent." Thus, there has been "an increasing trend of borrowers becoming newly delinquent over time"(Brown, et al., 2014, p. 12).

So what's the bottom line? In 2012, almost a third of student-loan borrowers who are in the repayment phase on their loans are delinquent on their monthly payments.  And that doesn't include millions of people who have economic-hardship deferments that excuse them from making payments. And when we add in all those people in income-based repayment plans who are making monthly payments that are so low that their loan balances are not going down, we can see that the percentage of people who are not paying off their student loans is quite high.

In short , the evidence is all around us. The federal student loan program is in real trouble.

References

Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw. Measuring Student Debt and Its Performance. Federal Reserve Bank of New York, April 2014. Accessible at: http://www.newyorkfed.org/research/staff_reports/sr668.pdf

Now We're Getting Somewhere: Jason Delisle and Clare McCann Published A Very Useful Essay on Student-Loan Defaults in Forbes.Com

As almost everyone knows, the Department of Education's annual report on student-loan defaults is not very useful.  Every autumn, DOE reports on the percentage of student-loan debtors from the most recent cohort of borrowers who default on their loans within three years of beginning repayment.  Last September, DOE reported a composite default rate of 13.7 percent, down a full percentage point from the previous year.

But of course, DOE's report does not tell us how many borrowers default on their student loans after the three-year period that DOE measures.   Nor does DOE's report gives us any information about the number of people who are not counted as defaulters because they received economic hardship deferments, even though those people aren't paying on their loans.

In short, DOE's annual reports don't tell us what we really want to know, which is this: How many people are not paying back their student loans?

Fortunately, Jason Delisle and Clare McCann published an article recently for Forbes.com that gives us some very useful information about what the student-loan default rates really are. Here are some of the things they found:

First, Delisle and McCann report that cumulative cohort default rates for recent cohorts of borrowers are disturbingly high.  Among students who attended two-year public and nonprofit colleges who began repayment in 2007, about one out of four is in default. Among students who attended two-year for-profit institutions and began repayment in 2007, more than one out of three (36 percent) is in default.

Delisle and McCann also looked at the federal government's budget lifetime default rate, which estimates default rates for cohorts of borrowers over a period of 20 years. "Across all school types," Delisle and McCann wrote, "the Department of Education reported that a little over one in five loans for undergraduate educations will default within two decades."

DOE is encouraging student-loan borrowers to enroll in one of several income-based repayment plans that DOE offers. These plans can lower borrowers' monthly loan payments because these payments are determined based on a percentage of borrowers' income and not the amount they borrowed.  Delisle and McCann wrote that the percentage of borrowers who participate in these plans has grown from 5 percent to 10 percent of people who are making payments on their loans.

But of course, many people in these income-based repayment plans are making payments that are so low that their payments are not covering the interest that is accruing. Thus, many borrowers who are making loan payments based on their income will see their loan balances go up and not down due to negative amortization.

Borrowers in income-based repayment plans may not care if their loan balances are growing because whatever they owe at the end of their repayment period (20 or 25 years) is forgiven. But taxpayers should care.

Delisle and McCann wrote "that the U.S. Department estimates that of about a quarter of borrowers in the most generous of these [income-based repayment] plans will walk away from $41,000 in unpaid loans under a loan forgiveness benefit, based on initial balances of $39,500."

In other words, a significant percentage of people who are enrolled in long-term income-based repayment plans will never pay off the principal of their loans, even if they faithfully make loan payments for 20 years.

The picture that Delisle and McCann have sketched for us regarding student-loan default rates is pretty sobering, and it is based on the federal government's own data. When we consider that the Feds' estimates of lifetime default rates and negative amortization rates are probably overly optimistic, we have real reason to worry.

Of course, we can kick this can down the road, so to speak, as the Obama administration is presently doing. By encouraging borrowers to sign up for long-term income-based repayment plans, the Department of Education is reducing borrowers' monthly payments, which may help keep default rates down. But if people in these plans are not paying off their loan balances, which many of them are not, taxpayers will ultimately wind up paying the bill for a student loan program that is out of control.

Even now, there are things we can do to avert disaster, but we won't begin thinking about these things so long as we are lulled into believing that the student-loan default rate is under control. But it is not under control, and we can thank Jason Delisle and Clare McCann for helping making the true state of affairs a little clearer.

References

Jason Delisle and Clare McCann. Who's Not Repaying Student Loans? More People Than You Think. Forbes.com, September 26, 2014. Accessible at: http://www.forbes.com/sites/jasondelisle/2014/09/26/whos-not-repaying-student-loans-more-people-than-you-think/?utm_content=buffer1e0e0&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

Occasionally, The New York Times Says Something Sensible About the Student Loan Crisis: Bankruptcy Relief for Private Student Loan Borrowers

Last month, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB)issued a report highlighting the hardships experienced by students who took out private loans to attend college. Unlike the federal student loan program, which offers income-based repayment plans and economic hardship deferments to student-loan borrowers who run into financial trouble, private lenders generally do not offer any type of relief for distressed student-loan borrowers.

What the CFPB did not say in its report is that private student-loan borrowers, like borrowers in the federal student loan program, cannot discharge their student loans in bankruptcy unless they can show "undue hardship," a very difficult standard to meet.
All the CFPB report offered as a remedy to this problem was a form letter that student-loan borrowers could modify and send to their private lenders to beg for relief.  That is really not much of a solution.

Yesterday, however, the New York Times commented on the CFPB report and made a sensible suggestion. The Times proposed that Congress repeal the 2005 "undue hardship" provision that makes it almost impossible for private student-loan borrowers to discharge their loans in bankruptcy. In the alternative, the Times added, legislation should be passed that requires private lenders to modify loan terms for distressed student-loan borrowers. "Now it's time for Congress to fix [the error it made when it passed the 2005 law]," the Times editorialized, "by rescinding the bankruptcy provision or requiring lenders to create clearly advertised flexible payment plans in exchange for retaining it."

Respected commentators have recommended rescinding the 2005 Bankruptcy Code provision for years. In 2009, Rafael Pardo, a law professor and noted researcher on the student-loan crisis, testified before a Congressional committee on the special hardships suffered by individuals who took out private student loans to finance their college studies.  Here is what Professor Pardo said:

Because the costs of private student loans can quickly spiral out of control, and because there exist limited nonbankruptcy options for mitigating the financial distress imposed by such costs, borrowers of private student loans are particularly vulnerable to the negative effects of undue-hardship discharge litigation.  If they end up seeking relief through the bankruptcy system and subsequently fail to prevail in their claim of undue hardship, they will find themselves struggling interminably under an oppressive amount of educational debt with little to no other options for relief.

In short, Professor Pardo told the Congressional committee:

By stripping away the one social safety net that existed for borrowers of private student loans--that is, the automatic discharge of such loans in bankruptcy--Congress has likely condemned certain student-loan debtors to the Sisyphean task of repaying obligations that will never be extinguished. [Emphasis supplied.]

In his testimony, Professor Pardo stated unequivocally that Congress should repeal the 2005 "undue hardship" provision that has made it almost impossible for individuals to discharge their private student-loan debts in bankruptcy.  Pardo testified as follows:

I respectfully urge Congress to restrike the balance between student-loan debtors and lenders of private student loans by restoring the automatically dischargeable status of private student loans in bankruptcy.

Without a doubt, repeal of the 2005 Bankruptcy Code provision is essential to providing relief to distressed college borrowers who took out private student loans.  It is refreshing to see that the New York Times essentially agrees with Professor Pardo on this issue, although the Times equivocated a bit by saying that Congress might pass a law requiring private student-loan lenders to offer flexible payment terms as an alternative to repealing the 2005 Bankruptcy Code provision.

Everyone in higher education should be clamoring for repeal of the Bankruptcy Code's "undue hardship provision for all student-loan borrowers, whether they borrowed from the federal student loan program or borrowed from private lenders.  Literally millions of distressed student-loan borrowers are suffering  because they cannot repay their loans and have no real means of relief in the bankruptcy courts.

But if across-the-board reform cannot be achieved politically, at least Congress should repeal the "undue hardship" provision as it applies to people who took out student loans from the private banks. Even the New York Times, which at times seems almost clueless about the student-loan crisis, has figured that out.

References

Editorial. Driving Student Borrowers Into Default. New York Times, November 3, 2014.

Rafael Pardo. ABI Members Testify on Discharging Student Loan Debt in Bankruptcy. ABI Journal, November 2009, p. 10. Accessible at: http://www.abiworld.org/AM/Template.cfm?Section=Home&CONTENTID=59097&TEMPLATE=/CM/ContentDisplay.cfm

Rohit Chopra and Rich Cordray Should Be Ashamed of Themselves: The Consumer Financial Protection Bureau's Timid Report on Distressed Private Student-Loan Borrowers

Rohit Chopra should be ashamed of himself.

Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB), issued a report earlier this month on the status of distressed private student-loan borrowers.  The report is so timid, so tepid, so lacking in real recommendations for reform that Chopra and Chopra's boss, CFPB Director Richard Cordray, should be ashamed of themselves.

Basically, Ombudsman Chopra's  report analyzed more than 5,000 student loan complaints directed at private lenders.  The report documents that many students who borrowed money from banks to attend college have been driven into default.  Chopra's reported identified these problems:

• Borrowers who have trouble paying back their private loans receive little information from the banks about their options for modifying their loan terms.

• People who borrow from the banks often find that there are no loan-modification options available.  

• Private lenders are sometimes willing to offer borrowers a temporary forbearance from making their loan payments, but these forbearances often only delay default. Moreover, borrowers sometimes have to pay enrollment fees or experience processing delays in order to get nothing more than temporary relief. 

Chopra's report ends on a pathetic note. Although it professes to offer "new tools to help borrowers take action when they run into trouble [with private student loans]," the report offers nothing more than a sample letter "that consumers can edit and send to their student loan servicer to request lower monthly payments and information on available repayment plans."  That's all the CFPB has to offer--a crummy form letter!

Chopra and the CFPB Understate the Harm Caused by the Private Student Loan Industry

Chopra and the CFPB vastly understate the harm done to student borrowers who take out loans from private lenders to finance their college educations.

First of all, many students are ignorant of the difference between private loans and loans obtained through the federal student-loan program. Federal loans give distressed borrowers access to economic hardship deferments, income-based repayment plans, and loan consolidation options.  For the most part, these options are not available to people who borrow money from private lenders to finance their college studies. Moreover, federal student loans generally offer lower interest rates than private student loans.

Many students are so unsophisticated that they do not realize that they are taking out loans from private lenders rather than participating in the federal student loan program. Thus, students often pass up the opportunity to participate in the federal student loan program and fall into the clutches of private banks.

Second, unlike most federal student loan programs, private lenders generally require students to obtain co-signers for their student loans.  In most cases, the co-signer is a student's parent or other relative. Parents who co-sign their children's private student loans become personally liable for the debt--all of it.

Third, students and their parents may not realize that private student loans,like federal student loans, cannot be discharged in bankruptcy absent a showing of undue hardship, which is very hard to establish in a bankruptcy court. Students who take out private loans and are unable to pay them back may see their parents dragged down into financial ruin if their parents are not able pay back the debt. In most cases, the parents will have no recourse to the bankruptcy courts. 

The Federal Government Should Shut Down the Private Student-Loan Industry

The CFPB report is pathetic in terms of its advice to students and their families who find themselves unable to pay back their private student loans.  All Cordray and Chopra could think to do about the rapacious private student-loan industry was draft a form letter that students can use to beg for mercy when they find themselves unable to make their loan payments.

Students don't need sample letters to deal with the private student-loan industry; they need effective relief from private student-loans that many students did not fully understand when they signed the loan documents.

What needs to be done?

Congress needs to repeal the 2005 amendment to the Bankruptcy Code that has made it almost impossible for student borrowers and their co-signers (usually parents) to discharge their private loans in bankruptcy.  

If Congress would take this simple step, the private student-loan industry would almost immediately shut down, which would be a good thing.  The banks are happy to loan students money so long as students' parents co-sign the loans and bankruptcy relief is unavailable.  But if private student loans could be discharged in bankruptcy like any other unsecured debt, the banks would get out of the student-loan business in a hurry.

In the meantime, Rohit Chopra, Rich Cordray and the CFPB need to issue dire warnings to college students and their families not to take out private loans to attend college.  Such loans may make sense for people who are enrolling in expensive but high-quality professional programs in law or medicine. But low-income students have no business taking out student loans from banks and other private lenders.  Too often, taking out a private student loan leads to financial disaster not only for the student but for the student's parents as well.

Mr. Chopra and Mr. Cordray are fully aware of the harm being caused by private student-loan financiers.  “Struggling private student loan borrowers are finding themselves out of luck and out of options," Mr. Cordray acknowledged.  Unfortunately, Mr. Chopra, Mr. Cordray, and the CFPB do not have the courage to propose effective reforms.

Mr. Cordray should be ashamed of himself too.

References

CFPB Report Finds Distressed Private Student Loan Borrowers Driven Into Default. Consumer Financial Protection Bureau, October 16, 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

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