THE STRANGE CASE OF STUDENT LOAN DEBT

The Obama administration has a multifaceted approach to the student debt crisis. It’s time for a policy consistency checkup.

— The President says he wants all young people to pursue higher education and he hopes parents will encourage their kids to do so.

— The President says he wants to hold colleges and vocational schools accountable financially for graduates’ poor outcomes. At many schools, those outcomes include stunning rates of attrition and dismal employment results for graduates.

— The President says he wants to end soaring tuition that creates enormous student debt.

— And the President says students should avail themselves of income-based repayment (IBR) and loan forgiveness, even though those programs will produce large long-term hits to the federal treasury.

— But when students and their parents find themselves swamped in educational debt because graduates can’t find jobs offering a realistic shot at repaying their loans, the President’s Department of Education jumps to the schools’ defense. In its vigorous resistance to discharging school loans in bankruptcy, the administration provides another layer of protection to marginal schools that remain unaccountable for their students’ poor outcomes.

A Case in Point

In 2012, Republican presidential candidate Mitt Romney suggested famously that, if necessary, students should borrow from their parents to attend college. It’s not Mitt’s fault, but two years before he become governor of Massachusetts and continuing through 2007, one of his constituents, Robert Murphy, took out a loans totaling $221,000 to do exactly that for his three kids.

Unfortunately, when Murphy’s manufacturing company closed and moved overseas in 2002, he lost his job as its president. Since then, he hasn’t found work. He’s now 65 years old.

To cover living expenses, Murphy’s IRA retirement account valued at $250,000 in 2002 is now gone. He and his wife live on $13,000 a year that she earns as a teacher’s aide. In 2014, their $500,000 home was worth $200,000 less than the mortgage on it — and was in foreclosure.

As interest accrued, the balance due on Murphy’s educational loans for his kids increased to more than $240,000 by 2014. He now represents himself in a bankruptcy case that has reached the United States Court of Appeals for the First Circuit. The issue is how the court should interpret and apply the “undue hardship” requirement for discharging educational debt. The statute doesn’t define the phrase and the federal appeals courts have adopted differing standards. All are difficult for debtors.

Enter the Department of Education

In this and other cases, the government’s primary educational debt servicing contractor, Educational Credit Management Corporation (ECMC), has urged courts to apply the toughest possible rule in deciding whether to grant relief to student loan debtors. At the request of the court hearing Murphy’s appeal, the U.S. Department of Education intervened on October 12.

Murphy calculates that if he found a job paying $50,000 a year and worked until he was 77, the student debt he owes would actually increase — to $500,000. His government doesn’t care. The Department of Education spares no adjective in describing the parade of horribles that would follow upon discharging Murphy’s debt.

For example, allowing him off the hook would “impair the fiscal stability of the loan program…” Repaying the loans may require “that he remain employed at or past normal retirement age,” it argues, even though “his income may top out or decrease” and “further employment opportunities may be limited.” The government regards retirement account contributions, fast-food dinners, cell-phone plans, and nutritional supplements as “luxury expenses.”

Absent showing a “certainty of hopelessness,” the government urges, no debtor should get relief from student loans: “[A] debtor must specifically prove a total incapacity in the future to repay the debt for reasons not within his control.”

Welcome to America’s 21st century version of debtors’ prison.

Confused Priorities

What matters most, the government urges, is “protecting the solvency of the student loan program.” But if solvency is a function of how much the United States receives in return for the money it lends, aren’t income-based repayment and loan forgiveness greater long-run threats to the solvency of the program? Oh, I forgot. The long run is always someone else’s problem.

Even more to the point, debtors in Robert Murphy’s position will never be able to repay their loans anyway. Simply put, the government’s failure to write off Murphy’s bad loan — and others like his — just means that its accounting methods haven’t caught up with reality.

When that reality hits, some may look back and ask why today’s policymakers ignored the bad behavior of marginal schools at the front end. In fact, government policies encourage misbehavior. As the President delivers his “get more education” message to students and parents, marginal schools beat the bushes for enrollees who represent revenue streams of federally insured loans. Why isn’t the ability of those students to repay their loans the focus of efforts aimed at preserving the student loan program’s solvency?

Ask the Right Questions

Currently, schools have no financial stake in student outcomes and marginal schools have exploited the resulting market dysfunction. Did students complete degrees? Did graduates find decent jobs?

Anyone looking for a true picture of the “solvency of the student loan program” might consider those questions, along with this one: How many students are repaying their loans? Last month, the Obama administration released a new report providing some troubling answers to that one.

Three years after their loans had become due, more than one-third of all student loan borrowers had made no progress toward repaying their educational debt. None. And the bar for “progress” was as low as it could be: one dollar.

Profiting from Market Failure

At 347 colleges, more than half of borrowers had failed to pay down a single dollar of their principal loan balance after seven years. Of that group, almost 300 are for-profit schools. Through the federally insured student loan program that relieves them of any debt collection responsibility, some for-profit schools and their investors are making a lot of money off the rest of us.

Many of those same investors decry government intervention in anything. Like Mitt Romney — a vocal supporter of for-profit colleges during his 2012 campaign — they embrace competitive markets as the only proper way to produce correct decisions. But they’re delighted to exploit a student loan market that doesn’t work at all. Romney’s running mate, Paul Ryan, divided the country into “takers” and “makers.” A lot of those for-profit college investors feeding off government student loan largesse sure look like “takers” — albeit in nicely tailored clothing.

So much for the probative value of divisive partisan labels.

10 thoughts on “THE STRANGE CASE OF STUDENT LOAN DEBT

  1. I agree that the system is a mess and needs to be reformed, but I don’t see this discussed: Perhaps his children should be paying for their educations?

  2. Most student debt is securitized. If it can be discharged in bankruptcy, then the interest rate will be increased due to risk and less loans will be made. So the financial models will change. Why doesn’t anyone talk about this issue?

    • Because 30 years ago without student loans the market charged what it could bear. And that was roughly the price of a minimum wage summer job. People that went to law school 30 years ago didn’t just all die out, you can ask them. You can find this info if you look hard enough too.

      It was something like $1100 a year. You go back another 20 years before that and it was even cheaper.

      Most of the world has free or low cost education. It’s only America that has expensive education. WE are the outlier, OUR system is the one that is questionable. Why the heck do we need to come up with ridiculous interest rate theories peddled by student loan lenders for what would happen to the cost of education when we HAVE sources to look at that show us what actually happens? Just how stupid is the average American, really?

  3. There are three simple “D” rules to “managing” this student loan nut. Do not DEFAULT and DELAY AND DENY. I graduated law school twenty five years ago. I have been awarded all manner of Forebearances, Deferments, Hardships, continuances, delays. Delay and Deny. I am always truthful about it. Student Loan regulations and rules are as complex as our ridiculous tax code, ie many loop holes. What I truthfully tell the servicers is that our (my) law degrees are just like the Cadillac brand. Owning a Cadillac used to convey class, that you made it If you recently bought a new Caddy, you are perceived as either dumb or old. That brand is diluted due to cheap leases, rentals and you see them being driven at Walmart parking lots by toothless, smoking ladies. An 80K Caddy is just a gussied up Hyundai or Suburban with more chrome. Same thing with our law degrees. They have been diluted by the ABA accreditation of fifty more schools since 1987, pumping out 50K lawyers per year since 2004, diploma mills (failure factories) and law deans that have refused to limit enrollment and have dumbed down admission standards. I still have around 190K . I am now on IBR and it will all get forgiven in a few years. Don’t need to file BK or Default, I have managed this for years now and made peace with it in 1996. I have never once been denied a cheap auto loan, cheap credit card, HELOC or mortgage because of my huge student loan nut. It just requires a little bit of extra paper work to prove that my nut is 125 per month and not 1800. With the internets, that is fairly easy. There is no such thing as a BK based hardship when there are so many ways to just DELAY AND DENY.

  4. Another point of emphasis:

    If you review RDA and private development plans in almost any city in the country, you will notice that the vast majority of those jobs are in the following areas: convenience stores, gas stations, shopping centers/malls, movie theaters, fast food and dine-in restaurants, call centers, etc. These are low income jobs that do not require a Bachelor’s degree – and they also offer crap wages and no long term security. For $ome rea$on, this is not mentioned in local news segments covering the ceremonial groundbreaking ceremonies with businessmen and city officials.

    Policymakers and elected officials have droned on and on regarding these supposed glorious “jobs of the future.” Of course, they never offer any specifics as to what these positions will entail or skills that they will require. That is because they do not have a clue. However, it does not take a genius – or even a law school grad – to figure out that automation has decimated many industries and that it will likely continue. Frankly, it seems evident that this will increase in speed and volume.

    As an aside, when Deep Blue defeated Gary Kasparov in the 1997 chess rematch, it was major news at the time – even if Alan Turing’s vision of machines being able to “think” has not materialized. Now, fast forward 18 years and the best chess computers – if no time or material handicap is used – can easily crush the world’s top grandmasters. If these machines can perform this operation routinely, then it’s easy to see that many more jobs will continue to be outsourced or automated. And the people who run these companies will not decide to hire human workers – including those with families and children who get sick and will require health insurance – out of the goodness of their hearts.

    Of course, this does not dampen Mr. Obama’s optimism. He and his appointed education officials continue the clarion call that essentially everyone with an IQ above 70 SHOULD to go to college. Then again, they have no real plan as to how these students are supposed to repay such staggering amounts of student loans, in the face of stagnant wages and a dearth of good jobs. Apparently, none of these supposed experts has read the following analysis from Richard Vedder.

    http://chronicle.com/blogs/innovations/why-did-17-million-students-go-to-college/27634

  5. Something that bears pointing out: FFELP and Direct loans are two different creatures entirely. In the case of the latter program, the money the government lent to students was itself debt-financed by sovereign borrowing.

    So, the Department of Education is *allegedly* very, very concerned with the solvency of the student lending program… What does the Department of Education / Congress do with those student loan payments when students make them? Do they pay down the bond debt they took out in the name of us young people? NO, THEY DO NOT. They put the “profit” in the general coffers and they spend it on the spot, that year. ALL THAT BOND DEBT…WE ALL STILL OWE IT.

    The “solvency” of the student lending system is nothing other than the ability of the federal government to continue to borrow money.

    This is all bullshit, in short. If *this* federal government – which is overwhelmingly comprised of 50-80 year olds – thinks that the young people are going to live in poverty (largely caused by educational debt and the crashing of the global economy) and subject to scandalously unjust, discriminatory economic laws, they’re smoking crack. WE WON’T PAY.

    • As a 50 year old mouth breathing fax machine attorney, I wish I worked for the federal government. I have applied to dozens of positions at USA Jobs and have received tons of emails that my application was “forwarded” to the hiring official. I am still a solo with a 37K Schedule C. I guess I don’t have the “Knowledge, skills or abilities” to be a federal attorney.

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