Today we have a commentary by Student Loan Justice Organization Founder Alan Collinge with support from an Angry Bear editor.
A key Republican Education Department official and Trump Appointee, A. Wayne Johnson, recently resigned his position at the Department and later made a radical call for student loan cancellation. Johnson noted the lending system was “fundamentally broken” and called for loan cancellation for all loan holders up to $50,000. He also called for a tax credit of the same amount for those who have already repaid their loans. Interestingly, Johnson’s plan sounds very similar- and even more generous- than what presidential candidate Elizabeth Warren is proposing.
The proposal is strong stuff coming from a Republican and his comments could indicate the problem is far worse than the Department of Education has said publicly on student loans. He noted that he came to this conclusion after having a “firsthand look” at defaults, which we already know are running at about 40% for 2004 borrowers, who had borrowed a third of what is being borrowed currently. One can only wonder how bad the internal projections are for more recent students.
Johnson is to be applauded for calling out this big-government lending monstrosity, and even, perhaps, for his call to get the government out of the lending business altogether. In the absence of both bankruptcy protections and statutes of limitations, the Department of Education has become one of the largest lenders on earth and a viciously predatory one at that. In his commentary, Johnson is correct in pointing out the various forgiveness programs run by the Department are failing badly.
Dependent upon which manner of accounting is used, student loans can be considered to be profitable or unprofitable. Using the Federal Credit Reform Act (FCRA) accounting methodology, student loans are profitable. Regardless, student loans have no escape unless one dies or becomes disabled. Student Loan Bankruptcy was effectively thwarted by Senator Joe Biden’s efforts since the nineties. If in default, the government will garnish wages, Social Security, and whatever else they can in order to get back their funds.
Others such as Jason Delisle of New America advocate using the Fair Market Value methodology of accounting to assess the risk of default for student loans. Delisle claims the interest rate of a student loan should be set at 12% as there is risk and yearly losses with making low interest rate student loans that do not cover risk of default which is not assessed in the beginning.
Disputing Jason Delisle’s commentary; Malcolm Harris pointed out on Twitter, it’s worth noting that the CBO’s fair-value accounting analysis finds no subsidy for PLUS loans and unsubsidized Stafford loans, but a big one for subsidized Stafford loans, where rates are rising. Overall, there’s a negative subsidy – profit. That’s a way the government could be making a profit even under other accounting specifications, though obviously skeptics like Delisle dispute that.
Outside of student loans, a student could walk into a car dealership, purchase a $30,000+ automobile, which is about the cost of an education, have little down payment and maybe a second signature, and both people could still escape through declaring bankruptcy. This is something major businesses and people such as President Trump have been doing for decades without having wages and benefits garnished for a lifetime.
Some of the $50+ billion the Department books in profit every year is being used to fund unrelated social programs. In 1965, President Lyndon B. Johnson declared that these loans would be “free of interest.” The former should not be the case and the later has not happened.
However previously, there were problems with Warren’s plan of student loan relief and these have not gone away under Johnson’s current proposal.
For example: while it is clear that the default rate is screaming upwards and this is crushing many borrowers, many are doing fine, and there is no particularly good reason to cancel their debt. Conversely, there are many borrowers who owe far more than $50,000, who have seen their debt explode with penalties, fees, and interest, such that writing them down by $50,000 really wouldn’t make much of a dent. So this “one-size-fits-all” approach makes little sense. And at an estimated $925 billion, it’s expensive.
What is clear to me is people complaining “what about.” Those who paid their loans have little idea of what has been happening in the student loan industry which is profit driven. There are any number of stories being told of hucksters signing up students into for profit schools which sadly go bankrupt or steer students into course curriculums which will not lead to employment in a job to which they were trained. The system protects the servicer and the loan originator until that loan is paid off.
Does it make sense for people to be entrapped in a loan which can not be paid off thereby keeping them as an economic burden rather than a productive, taxpaying member of society? What about-isms and false equivalencies offers no solution other than indenture.
Also, any cancellation program would be administered by the Department of Education, which has a well-documented history of bungling such programs, as Johnson rightly points out. For example, of the roughly 40,000 people who thought they were getting cancellation this year through the Public Service Loan Forgiveness Program, fewer than 100 (less than 1%) actually will. Similarly, a whopping 57% of people in the Income Based Repayment Program (IBR) were disqualified for administrative reasons. So the borrowers are cruelly left owing far more than had they never tried!
The Department of Education cannot be trusted to administer yet another loan cancellation program. As they have done before, they will surely find ways to disqualify the vast majority of borrowers so that the agency captures the wealth rather than those who it was intended.
The Department of Education has always been troublesome in administering programs impacting students. The public service program has been haphazardly run and has left many who have paid back loans over ten years in service to the nation without forgiveness of part or the rest of their loan. The current Secretary of Education is a ditz who did not understand the training leading to gainful employment rule was for both nonprofit and for-profit schools and not just about for-profits as she claimed. I too would look for someone else to administer programs given the circumstance.
A more efficient solution to this problem is simply returning standard bankruptcy protections to these loans. The Founders called for uniform bankruptcy laws ahead of the power to raise an army, and declare war, and this lending system proves their wisdom. Borrowers must have bankruptcy on their side in order for the lending system to be fair. It is only with this threat that the lenders will act with a modicum of good faith.
Bankruptcy is also a far less expensive solution. While there would be an unavoidable spike in filings initially, bankruptcy scholar Robert Lawless estimated that in the “steady-state,” annual discharges would come to less than $3 Billion per year. Even if it turned out to be double or triple this rate, that is still far less than the proposal in question. Not to mention, no tax hikes would be required. This could be achieved by simply repealing the one line of federal code that exempts student loans.
There is legislation in Congress that would achieve this: HR. 2648, a bipartisan bill, and its Senate companion, S. 1414. Alternatively, President Trump could simply direct the Department of Education to stop opposing student loan borrowers in court. Either way, we would get a much more efficient and well suited outcome.
And the Founders? They would agree with returning bankruptcy capability for student loans.
Alan Collinge is Founder of StudentLoanJustice.Org, and author of The Student Loan Scam (Beacon Press)
Angry Bear: Thank you Alan . . .