Department of Education executives pay themselves cash bonuses while federal student loan program goes to hell

At last the secret is out. The federal student loan program is out of control and millions of borrowers cannot pay back their loans. As the New York Times pointed out recently, student debtors are defaulting at an average rate of 3,000 a day--more than a million people went into default last year alone.

But the Department of Education hacks who oversee the student loan program have been paying themselves performance bonuses. James Runcie, Chief Operating Officer for DOE's student loan program, received $433,000 in bonuses; and then he resigned rather than testify before the House Oversight Committee about what the heck was going on in the student loan program.

And Runcie was not the only DOE executive to get bonuses. The National Association of Student Financial Aid Administrators (NASFAA) released a report earlier this month that provides some useful information about how DOE's bonus program works.

As the NASFAA report explains, the Federal Student Aid Office (FSA) set performance goals for the organization  and then basically assessed itself with regard to whether the office met those goals. According to NASFAA, "self-assessments are a common way to begin performance evaluations, but they are usually signed off on by a person or board with oversight responsibility."  The Federal Student Aid office, however, let its own evaluations stand "without pushback, oversight, or accountability, which often easily allows the organization to excuse away failure to meet goals and targets."

FSA's self-assessment program permitted senior executives to get bonuses if they excelled at their work. The program identified three categories of performance: "exceptional," "high results," or "results achieved." Note that there was not even a category for poor performance.

Senior people who scored "exceptional" or "high results" were eligible for bonuses; and not surprisingly, performance scores got higher and higher as the years went by. In FY 11,  "66 percent of  senior FSA leaders received an "exceptional" or "high results" performance rating that qualified them for bonuses. In FY 2015, 90 percent of senior administrators got those ratings.

Correspondingly, the percentage of eligible employees who only scored "results achieved," making them ineligible for bonuses, decreased from 34 percent to only 10 percent between FY 2011 and FY 2015.

Bottom line is this: In FY 2015, 89.8 percent of FSA senior administrators ranked high enough to get a cash bonus, and 89.8 percent of those administrators got cash bonuses. How big were the bonuses? I haven't seen a list showing bonus amounts and who got them. Huffington Post reported that that at least one bonus was $75,000.

No wonder Mr. Runcie resigned rather than answer questions before the House Oversight Committee. "I cannot in good conscience continue to be accountable as Chief Operating officer given the risk associated with the current environment at the Education Department," he is quoted as saying.

What the hell does that mean?  I have no idea. It must be one of those phrases Mr. Runcie learned when he was getting his MBA at Harvard.

James Runcie testifying about the student loan program

References  

Danielle Douglas-Gabriel. It's time to reform the financial arm of the Education Department, report says. Washington Post, May 16, 2017.

Adam Harris. Top Federal Student-Aid Official Resigns Over Congressional Testimony. Chronicle of Higher Education, May 24, 2017.

Shahien Nasiripour. Education Department Secretly Reappoints Top Official Accused of Harming Students. Huffington Post, May 7, 2016.

National Association of Student Financial Aid Administrators. Improving Oversight and Transparency at the U.S. Department of Education's Financial Aid: NASFAA's Recommendations. (May 2017).

The Wrong Move on Student Loans. New York Times, April 6, 2017.

James Runcie, Chief Administrator of DOE's Federal Student Aid Program, resigns rather than testify before Congress. Will he take his bonuses with him?

James Runcie, Chief Operating Officer for the Department of Education's Student Aid Office, resigned a few days ago rather than testify before the House Oversight Committee. Good riddance!

Runcie, who has an MBA from Harvard, was appointed to the COO's position by the Obama administration in 2011. In December 2015, Secretary of Education Arne Duncan secretly reappointed Runcie to the position just before  Duncan stepped down as Education Secretary. In fact, Runcie's reappointment was one of Duncan's last official acts.

The Runcie-supervised student aid program has come under severe criticism over the last several years.   Recently, the press reported that the program misspent a total of $6 billion in federal money in the Pell Grant program and the Direct Student Loan program. A Huffington Post article, published about a year ago, noted that "government investigators from other agencies routinely slammed Runcie's division for failing to aid distressed borrowers and protect students, or they unearthed evidence of mistreatment that Runcie's deputies missed."

In fact, reports from multiple sources make clear that the Federal Student Aid office is a mess. The Government Accountability Office reported in December that DOE had underestimated the cost of its income-driven repayment programs. GAO concluded that the true cost was about double what DOE estimated.

And in Price v. U.S. Department of Education, decided recently by a Texas federal court, we got a glimpse of how poorly DOE responds to student complaints. Phyllis Price, filed an administrative complaint seeking to have her student loans discharged because the University of Phoenix, the school she attended, had falsely certified that she had a high school diploma.  DOE took six years to resolve Price's claim, and then it got it wrong. Price had to sue the Department to obtain the relief to which she was clearly entitled under federal law.

But sloppy administration did not prevent James Runcie and his close cronies from getting big salaries and handsome performance bonuses. As the Huffington Post reported, the typical Federal Student Aid employee makes more than $100,000, about a third more than typical federal employees are paid.

Runcie himself got a lot of bonus money. Just a few days ago, U.S. Congressman Jim Jordan (R-Ohio), accused Jordan of receiving $433,000 in performance bonuses while working for DOE!

Just think how big his bonuses would have been had he performed his job competently?

I hope the House Oversight Committee orders Runcie to appear under subpoena and explain what the hell he was doing while he was in charge of the Federal Student Aid program.

It is probably impossible to get Runcie's bonus money back, but surely Congress can stop the Department of Education's practice of giving cash bonuses to people overseeing the federal student loan program--a program that has brought so much misery to millions of Americans.

Will Mr. Runcie return his bonus money?

References

Sabrina Eaton. Rep. Jim Jordan blasts student loan official's $433,000 in bonuses despite failing grades. Cleveland.com, May 25, 2017.

Andrew Kreigbaum. GAO Report finds costs of loan programs outpace estimates and department methodology flawed. Inside Higher Ed, December 1, 2016.

Christopher Maynard. Education Department blasted over $6 billion in improper student aid payments. consumeraffairs.com, May 26, 2017.

Price v. U.S. Dep't of Education, 209 Fed. Supp. 3d 925 (S.D. Tex. 2016).

Shahien Nasiripour. Education Department Secretly Reappoints Top Official Accused of Harming Students. Huffington Post, May 7, 2016.

Top Federal Student-Aid Official Resigns Over Congressional Testimony. Chronicle of Higher Education, May 24, 2017.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.

Bankruptcy Relief Bill H.R. 2366, "Discharge Student Loans in Bankruptcy Act of 2017": Does it have a prayer of becoming law?

Earlier this month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill in the House of Representatives that would eliminate the "undue hardship" rule contained in 11 U.S.C sec. 523(a)(8). H.R. 2366, if adopted into law, would put student loans on par with credit card debt and other consumer debt, making student loans more easily dischargeable in bankruptcy. As Congressman Delaney put it, "It doesn’t make sense for students with heavy debt burdens to be worse off than someone with credit card debt or mortgage debt."

How many student borrowers would qualify for bankruptcy relief if the Delaney-Katko bill becomes law?

This could be a very big deal. If "the undue hardship" rule is struck from the Bankruptcy Code, millions of student borrowers could seek relief from their student loans.  How many millions?

We know from looking at a 2015 Brookings Institution report that nearly half the people from a recent cohort of borrowers who took out student loans to attend for-profit colleges defaulted within five years.  Clearly, a great many of these people would qualify for bankruptcy relief.

And the Federal Reserve Bank of New York reported recently that a third of student borrowers who owed $5,000 or less defaulted in five years, while 18 percent of the people who borrowed $100,000 or more defaulted.  Assuming these defaulters are insolvent, nearly all them would be eligible for bankruptcy relief if the Delaney-Katko bill becomes law.

Who will opposed this legislation?

Obviously, most of the 44 million people weighed down by student-loan debt will support this bill. Who will opposed it?

The bill would give bankruptcy relief for people who took out both federal student loans and private student loans. Private lenders who are heavily invested in the student-loan business--Wells Fargo, Sallie Mae, etc.--will oppose this bill fiercely; and their lobbyists are probably already at work.

The nation's colleges and universities will also oppose this bill, but they won't be vocal about it. It is hard for universities to insist on getting billions of dollars in federal student-aid money every year while publicly opposing relief to people who went broke because they borrowed too much money to attend college.

But make no mistake: the colleges and universities understand that the Delaney-Katko bill, if it becomes law, will unleash a floodgate of bankruptcy filings; and this deluge will force Congress to clean up the student-loan scandal.  The colleges want the party to last a little while longer; and this legislation will help bring the party to an end if it ever gets enacted.

In the past, beneficiaries of the student-loan boondoggle  have used lobbyists and campaign contributions very effectively  to protect their interests, while student debtors suffered in silence. But the tables may be about to turn. More than 40 million people are burdened by student-loan debt, and these people vote.

Will the Delaney-Katko bill become law?

What are the chances that the Delaney-Katko bill will become law? It is hard to say. A bill was introduced several years ago to stop the government from garnishing Social Security checks of student-loan defaulters and that bill never made it out of committee.

So it is possible, that this bill will go nowhere.  Nevertheless, I am impressed by the fact that the Delaney-Katko bill has been framed as a bipartisan initiative. So far, it has at least ten co-sponsors:

Debbie Dingell (D-Michigan)
Paul Tonko (D-New York)
Kyrsten Lea Sinema (D-Arizona)
Zoe Lofgren (D-California)
*John Delaney (D-Maryland)
*John Katko (R-New York)
Edwin Perlmutter (D-Colorado)
Alan Lowenthal (D-California)
Catherine Castor (D-Florida)
Marc Veasy (D-Texas)

Let's all write our elected representatives and express our support for the Delaney-Katko bill.

The Delaney-Katko bill, if it becomes law, will afford relief to millions of people who have been pushed out of the economy by student loans. Let's watch this bill closely and give it all the support we can.

Every student-loan debtor should write his or her Senator and Congressperson to express support for the Delaney-Katko bill. They should stress that this proposed legislation is not radical. In fact, scholars and policy makers have advocated for years that distressed student-loan debtors should have easier access to the bankruptcy courts.

And let's take a moment to salute the political courage of Representative John Katko of New York--the first Republican to support this legislation.

Rep. John Katko (R-New York): Profile in Courage

References

Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.

Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.

Parents should NEVER co-sign a child's student loans: Don't throw your life away!

For pity's sake, Christine, say no! Don't throw your life away for my sake!

Raoul De Chagny

Phantom of the Opera 

If you are a parent of a college student and are thinking about co-signing your child's student loan, you should read an article posted recently on Moneytips.com and re-posted on Personal Finance Syndication Network.

Moneytips reported on a survey by LendEdu that asked parents to rate their experiences as co-signers of their children's student loans. The survey findings are harrowing:

• 34 percent reported that their child failed to make a payment on time.
• 34 percent reported that a co-signed loan hurt their ability to apply for financing.
• 35 percent of survey takers regretted co-signing a loan for their child.
• 57 percent said that a co-signed loan had hurt their own credit rating.

And contemplate this sobering statistic: More than half (51.2 percent) of the respondents believed that co-signing a student loan had put their own retirement in jeopardy!

Parents often fail to understand the catastrophic consequences that can result from co-signing student loans with their children:

First of all, co-signing parents are 100 percent liable for paying back the loan if their child fails to make loan payments.

Second, a parent will find it very difficult to discharge a co-signed student loan in bankruptcy. Like student borrowers, parent co-signers cannot discharge student-loan debt in a bankruptcy court unless they can demonstrate "undue hardship"--a very difficult standard to meet.

Third, if a co-signed loan goes into default, penalties will be assessed to the amount borrowed, and the parent's credit will be adversely affected.

There are exceptions for almost every rule, but there are no exceptions to this one: NEVER CO-SIGN A STUDENT LOAN FOR A CHILD.  If your darling child's college plans require you to co-sign a student loan, then your child needs to make another plan--a plan that doesn't put your financial future at risk.

References

Why Co-Signing a Loan Could Delay Your Retirement, Moneytips.com April 28, 2017. Re-posted on  Personal Finance Syndication Network, pfsyn.com

The White House wants to kill the Public Service Loan Forgiveness Program: But who can stop a tidal wave?

President Trump's White House proposes to eliminate the Public Service Loan Forgiveness Program (PSLF), which has triggered howls of protest. Jordan Weissmann, writing for Slate, described the proposal as a "sick joke" perpetuated by an out-of-touch President and an out-of-touch Secretary of Education:

A billionaire president and billionaire education secretary, neither of whom spent a single day of their lives in public service before stumbling their way into positions of immense power, are targeting a program that's basically meant to make life in underpaid government work a little more tenable. 

The Public Service Loan Forgiveness Program: A Very Generous Student Loan Program 

But in fact the issue of whether the PSLF program should be eliminated is a little more complicated than Weissmann described.  To get a clear understanding of what is at stake, people should read Jason Delisle's brief report on PSLF (only 5 pages of text) prepared for the Brookings Institution.

As Delisle explains,Congress initiated the PSLF program in 2007 along with the Income-Based Repayment Plan. (IBR). Student-loan borrowers who take public-service jobs are eligible to have their student loans forgiven after 10 years of loan payments. Furthermore, under IBR, student-loan borrowers' monthly payments were initially set at 15 percent of their gross adjusted income.

The PSLF program defines eligible public service broadly to include employment with a nonprofit agency or any federal, state, or local government. In fact, as Delisle points out, 25 percent of the American workforce qualify for PSLF under this definition of public service (p. 3).

As generous as the PSLF program was in 2007, the program became significantly more generous when the Obama administration introduced PAYE and REPAYE--two repayment plans that required borrowers to  make monthly loan payments totally only 10 percent of their adjusted gross income rather than 15 percent. As Delisle explains, "Had the [Obama] administration left the original IBR program in place, borrowers would have paid 50 percent more before having their remaining debt forgiven under PSLF" (p. 3).

PSLF: Distorted Incentives to Borrow Heavily for Graduate School

Significantly, the PSLF program set no cap on the amount students can borrow for their studies. Apparently, Congress did not anticipate that a high percentage of PSLF participants would be graduate students who would rack up six-figure student-loan debt to enroll in expensive graduate programs: law school, MBA programs, etc.

As Delisle explains, policy makers "who thought PSLF would be a small-scale program likely did not foresee that borrowers enrolled in PSLF would have some of the highest loan balances in the federal student loan program. In fact,  "[t]he median debt load of those enrolled in PSLF exceeds $60,000, and nearly 30 percent of PSLF enrollees borrowed over $100,000."

In essence, the PSLF program and the IBR program (including PAYE and REPAYE) act together to create a perverse incentive for graduate students to borrow excessive amounts of money because their monthly payments will not be affected. As Delisle explained:

Thanks to PSLF, [an already indebted graduate] student . . . who is faced with the choice of borrowing $10,000 to live frugally while enrolled in graduate school or $20,000 to support a more comfortable lifestyle is probably more inclined to choose the latter. (p. 6)

In short, as Delisle accurately summarizes, "[t]he high loan balances among enrollees helps to expose that PSLF is really a de facto loan forgiveness program for graduate students, who can borrow without limit" (p. 4, emphasis and italics supplied).

The Obama Administration Recognized that the PSLF Program Needed to Be Revised

To its credit, the Obama administration recognized that the PSLF program would soon be hemorrhaging money and needed to be revised to reduce the program's enormous costs. The administration proposed a cap of $57,000 on the amount that can be forgiven under PSLF and removing the cap on the amount of monthly payments. The Congressional Budge Office originally estimated these reforms would save the government about $400 million and then revised that estimate to $12 billion.

But the Obama reforms were never implemented, and the Trump administration inherited a program that is basically  providing free graduation education to most PSLF participants.

What will PSLF cost American taxpayers? No one knows

 How much will PSLF cost American taxpayers? No one knows. Approximately 432,000 people were officially certified to participate in PSLF according to government data Delisle reviewed in his 2016 paper. An article in the New York Times, published less than two months ago, reported a figure of 550,000 certified PSLF participants--25 percent higher than the number Delisle's paper reported.

But the number of PSLF participants could be considerably higher than any number reported so far because, as Delisle pointed out, people are not required to be get pre-certified as a condition of participating in the program. That's right, borrowers can apply to the PSLF program retroactively.

Conclusion: A Tidal Wave of  Forgiven Student Loan Debt is Bearing Down on the Trump Administration

The PSLF program is now ten years old, and the first group of PSLF borrowers will be eligible to have their loans forgiven by the end of this year. As Delisle explained so cogently in his Brookings essay, PSLF has turned out to be a bonanza for people to borrow unlimited amounts of money to go to graduate school. Because participants are only required to make token payments equal to 10 percent of their adjusted gross income for ten years, most PSLF participants are making payments so low that their payments are less than accruing interest.

Basically, the PSLF program is a tidal wave bearing down on the Trump administration.The White House has responded by defunding the program in its proposed budget, but shutting down PSLF may be politically impossible.  After all, as Weissmann pointed out, a lot of people went to graduate school based on the reasonable assumption that they were entitled to enroll in PSLF. It would be unfair to shut down the PSLF program precipitously, leaving thousands of student borrowers in the lurch.

In any event, who can stop a tidal wave?

The brutal reality is this: No matter what this presidential administration does about the PSLF program, it is going to cost taxpayers tens of billions of dollars.

References

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be Invalid. New York Times, March 30, 2017. 

 Jason Delisle. The coming Public Service Loan Forgiveness bonanza. Brookings Institution Report, Vol 2(2), September 22, 2016.

Jordan Weissmann. Betsy DeVos Wants to Kill a Major Student Loan Forgiveness Program, Slate, May 17, 2017.

Manhattan Institute Report: State Pensions Costs Threaten Higher Education. Dancing on the Titanic

Earlier this month, Daniel DiSalvo and Jeffrey Kucik of the Manhattan Institute published a brief report (only 10 pages of text) that should scare the hell out of American higher education. In essence, the report made three main points:

• States are cutting contributions to higher education, something we already knew.

• Tuition costs are rising to deal with the shortfall, and tuition increases are not being matched by a rise in median family income. We already knew that as as well.

• State pension costs are out of control and will absorb a larger and larger share of most states' budgets.

This last point--the catastrophic rise in pension obligations--is also something we already knew, but DiSalvo and Kucik's report drives this point home with brutal clarity. 

As the authors explain in their introduction, the stock market crash of 2008 led to a sharp devaluation of pension fund assets--about a $1 trillion loss. In addition, persistent underfunding of pension funds "has led to a net deficit across all states of about $4 trillion, or one-third of total U.S. GDP." (p. 5, emphasis supplied).

All states have reformed their pension programs in some way to respond to the shortfall, but these reforms are not enough to bring pension fund liabilities in line with pension fund assets.

Meanwhile, the average number of pension beneficiaries per state has tripled from 500,000 to 1.5 million, while the number of active public employees paying into pension funds has stayed roughly constant. (p. 7). Clearly, state pension funds are rapidly moving toward collapse

Let's look at the numbers for a few states.

California's pension liabilities have increased by 41 percent over just seven years to $890 billion in 2015. That was two years ago. By now California's pension liabilities must be nearly $1 trillion.  

New York's pension liabilities were nearly half a trillion dollars in 2015, a 30 percent increase over 2008. And Governor Andrew Cuomo is offering free college tuition to New Yorkers!

Texas, where my pension fund is located, had about a quarter of a trillion dollars in pension obligations in 2015--a 42 percent increase from 2008.

How is higher education impacted by this looming train wreck? States have no other choice but to reduce expenditures for higher education even further if they have any hope of meeting their pension obligations. 

Thus, it is clear, students will be forced to borrow more and more money in coming years in order to pursue postsecondary education.

Is anyone in higher education worried about this? No, college leaders are absorbed with more pressing matters--trigger words, safe spaces, and controversial commencement speakers.

In short, everyone in higher education--students, professors, and administrators--are behaving very much like the romantic couple in the movie Titanic--dancing in steerage while their ship steams closer and closer to a lethal iceberg.

Dancing on the Titanic

References

Daniel DiSalvo and Jeffrey Kucik. On the Chopping Block: Rising State Pension Costs Lead to Cuts in Higher Education. Manhattan Institute Report, May 2017.

Will the Student Loan Crisis Bring Down the Economy? My Pessimistic View

Mike Krieger recently posted a blog on Liberty Blitzkrieg in which he argued that two issues will dominate American politics in the coming years: health care and student loans.

"Going forward," Krieger wrote,  "I believe two issues will define the future of American politics: student loans and healthcare. Both these things . . .  have crushed the youth and are prevent[ing] a generation from buying homes and starting families. The youth will eventually revolt, and student loans and healthcare will have to be dealt with in a very major way, not with tinkering around the edges."

Krieger concluded his essay with this pessimistic observation:

Student loans and healthcare are both ticking time bombs and I see no real effort underway to tackle them at the macro level where they need to be addressed. Watch these two issues closely going forward, as I think fury at both will be the main driver behind the next populist wave.

Krieger's dismal projection regarding student loans is supported by recent reports from the Federal Reserve Bank of New York.  The Fed reported that more than 44 million people are now burdened by student loans. About 4.7 million borrowers are in default and another 2.4 million are delinquent.

Moreover, a lot of this debt is carried by older Americans. According to Fed data, $216 billion is owed by people who are 50 years old or older. And we know from other sources that student loan debt is following people into their retirement years. In fact, about 170,000 people are having their Social Security checks garnished due to student loans that are in default.

Borrowers carry debt levels of varying amounts, but the Fed reported that 2 million people owe $100,000 or more on student loans. Interestingly, people with small levels of debt are more likely to default than people who have high levels of indebtedness. In the 2009 cohort, 34 percent of people who owed $5,000 or less had defaulted within five years. Among people owing $100,000 or more, only 18 percent defaulted during this same period.

And of course default rates don't tell the full story. Almost 6 million people have signed up for income-driven repayment plans, and most are making payments so low they will never pay off their loans. Millions more have loans in deferment or forbearance; and these people aren't even making token loan payments. Meanwhile, interest is accruing on their loans, making it more difficult for borrowers to pay them off once they resume making payments.

Surely, this rising level of student-loan indebtedness has an impact on the American economy. According to the New York Times, student loans now constitutes 11 percent of total household indebtedness--up from just 5 percent in 2008.  Obviously, Americans with burdensome levels of student-loan debt are finding it more difficult to buy homes, start families, save for retirement or even purchase basic consumer items.  No wonder sales at brick-and-mortar retail stores are down and the casual dining industry is on the skids.

So far, as Krieger pointed out, our government is tinkering around the edges of the student loan crisis, making ineffective efforts to rein in the for-profit college industry and urging students to sign up for long-term income-driven repayment plans.

But this strategy is not working. According to the General Accounting Office, about half the people who sign up for income-driven repayment plans are kicked out for noncompliance with the plans' terms. The for-profit colleges, beaten back a bit by reform efforts during President Obama's administration, have come roaring back, advertising their overpriced programs on television.

All this will end badly, but our government is doing everything it can to forestall the day of judgment. In Price v. U.S. Department of Education, a case I wrote about earlier this week, the Department of Education took six years to make the erroneous decision that a University of Phoenix graduate was not entitled to have her loans forgiven. DOE's ruling clearly violated federal law, and the Phoenix grad finally won relief in federal court.

But DOE isn't concerned about following the law. It just wants to stall for time--knowing that a student-loan apocalypse is not too far away.

The Student Loan Apocalypse

References

Michael Corkery and Stacy Cowley. Household Debt Makes a Comeback in the U.S. New York Times, May 17, 2017.

Mike Krieger. Student Loans and Healthcare--Two Issues that Will Define American Politics Going Forward. Liberty Blitzkrieg, May 4, 2017.

Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw. Looking at Student Loan Defaults through a Larger Window. Liberty Street Economics (Federal Reserve Bank of New York. February 19, 2015.