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Older people are giving up hope of paying off their student loans before they die

While commenting on Alan Collinge’s Student Loan Justice site about much of what is being revealed here, I pointed out the problem with interest, interest on top of interest, paying interest before principal, etc. .

It is a problem. You never touch principle. I am very happy to see the Student Loan Justice site and Alan get the attention it deserves with this article by the Insider.

It is unbelievable, people are accruing interest during forbearance and paying all of the interest before paying principle. This does not occur with regular loans. Late payments over a period of time are harshly penalized. Much of the interest accumulated is what students pay first before principle.

Most of the issues with Student Loans results from the efforts of one person who started the process of attacking students who were late. Joe Biden started the attack on students with their loans in the nineties. He has limited any type of forgiveness or escape from the loans and the oppressive penalties, the interest on the penalties, and the interest on the interest.

I can assure you former President Trump did not go through the same penalties with his many bankruptcies. Our young and older are.

Joe needs to fix the problem.

Education

These past few decades have been witness to great change. It is hard to imagine that the Covid Pandemic will not increase this rate of change; that the pace of change will be slowing down anytime soon. Looking back, the advent of the microprocessor and all that followed changed the world forever. Looking forward, the COVID-19 pandemic, too, will little doubt change the world forever. The one gave us the means to do things differently, the other, the desperate need to do things differently. The pandemic has forced us to rethink things like education, office work, retail, healthcare, work commutes, construction, … .

Education was already under great stress. Over the past several decades, as more and more mothers went to work, as poverty and drugs took their toll, as the social fabric become more tattered; schools k-12 were being asked to take on the additional role of being parent. Tasked to do more with less: money is needed. All sorts of schemes have arisen for schooling children for less. Privatization was the favorite of conservatives; surely there must be a way for the market to do all this that needed to be done that wouldn’t require their paying more taxes. For forty years and more now, education has been a victim of the Magic of the Market con. As with many another essential service, a great toll has been taken by this great ruse.

Alan Collinge of Student Loan Justice on CAP’s Current Efforts to Revamp Student Loans

It has been a while since I had last talked to Alan. I knew at the time he was at issue with a stance the Center for American Progress was taking on Student Loans which surprising are supported by some of our more popular consumer advocates. Kind of makes sense as we now see the Center for American Progress cuddling up with the Koch Brothers? Not what I would call a marriage made in heaven benefiting us and I wonder who will own whom in the end. Law and Order Koch Brothers suddenly concerned about the incarceration rate in the US? Yeah, right! Save that one for another post. Anyhow, Alan moved from Tacoma, Washington to Washington, D.C. to confront CAP on their stance.

Amongst loans, it is no secret student loans make money and make even more money in default from the Federal Family Education Loan Program (FFELP) student loan which comprises a majority of all outstanding student loans; the Department of Education can recover $1.22 (before collection costs, and the government’s “cost of money”) on every dollar loaned. Student loans are not a zero sum game as some critics might have you believe.

recovery-rate-graph

On refinancing student loans, one venture capitalist pointed out: It’s a trillion-dollar opportunity. You don’t get a lot of those,” gushes Brian Hirsch, cofounder of Tribeca Venture Partners, an early investor in CommonBond. (He sits on its board.)

Well, maybe not a trillion, but hundreds of billions. About 75% of the $1.2 trillion in outstanding student loan debt is eligible to be refinanced, and the creditworthy tranche of this debt–the part private investors are eyeing–totals at least $200 billion. So far Common Bond has made some $100 million in loans to current students and graduates of 109 M.B.A., J.D., M.D. and engineering programs at 50 brand-name schools. Another VC-backed company, three-year-old SoFi (for Social Finance), has refinanced more than $1 billion in student debt held by 13,500 graduates of 2,200 schools, making it the largest refinancer in the market. This leaves no doubt where some of the emphasis on refinancing student loans my be coming from today. I wonder if Moodys will rate it AAA as they did with tranched CDO/MBS and not care about the securty of the loan(s) in each tranche?

In particular the former statistic of payback after default refutes the arguments of student loan critics the likes of Jason Delisle (New America) and Brookings Beth Akers and Matt Chingos who advocate Fair Market Valuation of Student Loans to assess risk. It might make sense to do so, if a student loan was the same as a home mortgage or a piece of machinery in a factory; but, student loans are not the same. By a student’s signature, a student loan becomes a roach motel as there is no way out through bankruptcy. You can wait 20-25 years and get out of it on an IBP plan, die, become disabled, or do public service to get out of potions of it. If you default, the Government will garnish your wages, SS, Disability to collect their money besides disqualify you from any federal programs.

CAP’s How Qualified Student Loans Could Protect Borrowers and Taxpayers proposes returning bankruptcy protections to student loans. A closer examination of the plan reveals this program would disqualify many federal and private loans from having access to bankruptcy. Instead what is seen are alternatives to bankruptcy such as gainful employment, income based payment, service loan forgiveness, payment on tim interest reductions, etc. most plans of which are teasers with only a low percentage of applicants being accepted and successful. CAP and other liberal advocates push for these repayment programs which in the end result in the majority of people who try for the benefit being kicked out before anything is forgiven. CAP has recruited a former director of the Department of Education lending program David Bergeron who does not appear to have brought anything new to the discussion other than repayment programs which may cause more damage in the end. The issue still remains of bankruptcy protection in the form of what was given to big business and TBTF by Congress and in the end walked away from $billions in responsibility over the decades. Guess students do not get a benefit of the doubt.

Another proposal by David Bergeron and CAP is a federal refinancing plan for private loans. The plan would refinance private loans at lower interest rates, taking them over from private banks at book value and offering a better deal than what was offered to investment firms (made into banks by Geithner and given access to Fed money). Nonperforming loans would be included in this plan also as a bailout and makes the government a private industry bill collector for loans which more than likely should not have been made. The impact of this plan would help a few borrowers and in the end may hurt them as they lose protection under the statutes of limitations.

While Democrats favor the two aforementioned plans, Republicans are still stuck in the past of no bankruptcy protection for student loan holders, complaining of the high cost of repayment programs and the lending system, and suggesting private banks for student loans as subsidized by the Feds can do a better job. Students and parents would be at the mercy of the banks. Republicans would resurrect a taxpayer subsidized banking system such as what our venture capitalist would love and was put to its grave by Obama who stopped short of revamping the entire student loan system. There is no serious accommodation for middle and low income students coming from Republicans. Republicans have abandoned their free-market attitude by not affording students the same protection afforded TBTF and big business under bankruptcy and Democrats have embraced the past with people such as Bergeron from the Department of Education who help create today’s student loan and repayment environment.

What mostly brought the nation to today’s bad student loan environment is a Congress dead set against “supposed” lazy students escaping any responsibility for something they signed up for as 18 year-olds, a student loan system fraught with a profit motive forcing young people and their parents into an indentured servitude to banks with the Gov as the bill collector, nonprofit and for-profit colleges not having any responsibility for the loans offered to their students, uncontrolled college employee expenses due to the addition of staff beyond teaching staff, decreased state funding for colleges, federal grants and scholarships which have not kept up with inflation, etc. The only cost to have exceeded healthcare cost increases is that of the higher cost of education.

In the end, what many young college graduates earned in a living well beyond what could be made with just a high school education is far less when compared to decreased high school income and years previous. While the percentage difference may be the same, the actual income for college grads has decreased. Young couples with little or no student loan debt have accumulated higher levels of assets in comparison.

Fair Market Valuation; CBO, Student Loans, Food Stamps, Etc.

Earlier in 2013, CBO’s Douglas Elmendorf’s forecasted return on Student Loan’s resulting in a positive return for the Government. Later Elmendorf reversed the forecast claiming student loans would cost the government and the taxpayers by generating a negative return. Using one cost model (FCRA) to estimate the return, the government will make $184 billion on student loans in the next 10 years. Using another cost model (Fair Market Valuation ) to estimate return, the government will lose $95 billion over the same period. So why the difference? Utilizing the Fair Market Valuation methodology would necessitate additional compensation for investors to accept the risk that losses may exceed those already reflected in the cash flows. A premium for the possibility that debtors will default in large numbers is added into the calculation. Wait a minute, these are students locked in by signature to these loans which can not be discharged through bankruptcy. So why?

I happened upon a New America Foundation article by a former senior analyst in the Republican staff of the U.S. Senate Budget Committee Jason Delisle, who proclaims much the same as the CBO’s Douglas Elmendorf positing the Fair Market Valuation methodology being a fairer and more accurate way to assign risk to student loans. Beneath Jason’s article and within the comments section associated with the article by Jason were comments by Alan Collinge of the Student Loan Justice Org disputing Jason’s assumptions on Fair Market Valuation (The New America Foundation agreed to a discussion with Alan and reneged. Alan has gone unanswered by Jason and The New America Foundation).  Alan’s argument is the Fair Market Valuation methodology uses the less abundant commercial data to evaluate the return on student loans as opposed to the more readily available and abundant Department of Education student loan data (which has been used in the past by the CBO). The difference between the two databases is the Fair Market Valuation uses commercial loan data reflecting riskier loans than what occurs from the Federal Direct Loans program. While there exists a level of default within the student loan program administered by the Federal Direct Loans program; remember too, Federal Direct Loans can not be discharged through bankruptcy proceedings. Additionally, the collection percentage on Federal Direct Loans is much higher than commercial credit collections which can be disposed of via bankruptcy proceedings. Griffith and Caperton of the Center for American Progress add to the criticism of using Fair Market Valuation stating government loans of all types has cost taxpayers 94 cents for every $100 loaned over the last 20 years. While the FHA took a huge hit when Wall Street crashed, it still performed better than the commercial counterparts. Government programs appear to be on pretty stable ground in their projections yet The New America Foundation and the CBO arbitrarily claim otherwise. Reviewing the history of government lending over the last 20 years shows it has overestimated the total costs to government by $3 billion. For those who may not know, Federal Student loans are like a Roach Motel, checking in by loan signature is near to impossible to negate or check out except to die, become disabled, or pay it off . . . a bankers dream. CBO’s Douglas Elmendorf is showing a partisan preference for the Fair Market Valuation of Student Loan which in the end favors commercial interests over students and the Direct Loan program.

Most recently, another supporter of the Fair Market Valuation methodology of loans, Jason Richwine formerly of the Heritage Foundation and the AEI, wrote an article at the National Review on Farm Subsidies. Myself, I am not a big fan of farm subsidies; but if it comes to eating, I would prefer my food to be homegrown rather than controlled by an out-of-country food cartel the way oil is today. ~ 50% of the US food base is imported today, so why more? There is a need to control subsidies to food manufacturing farms which differ from the family farms as many know them; but to throw the baby out with the wash, I am not sure is necessary. The SNAP program has been heavily contested in Congress with the Repubs looking to balance the budget on the back of the poor. One comment by Jason Richwine within his Farm Subsidy article challenges the ~$4.50/day food stamp recipients get daily and its correlation to health:

“Henry Olsen criticized House Republicans for seeking to cut food stamps but not crop-insurance subsidies in the recently passed ‘farm bill.’ Point taken. But personally I think he is being too hard on conservative activists. To say that cutting the food-stamp budget by a small percentage is ‘the taking of food from the mouths of the genuinely hungry’ and will ‘cut back on your dinner’ is a bit overblown. In fact, I would guess that a randomized controlled study, were it done, would show that food stamp recipients are no healthier than non-food stamp recipients in the long run.”

Well Jason Richwine is correct on one thing, the Food Stamp recipients would be no healthier than the poor non Food Stamp recipients not on SNAP. Consider the SNAP ~$4.50/ day could not buy a one time saltier and higher fat content Quarter pounder meal (soda + fries) at McDonalds. So why quibble over 5 or 10 cents? The true issue is ~$4.50 per day does not go far in many sections of town or in the suburbs and at the store as it now stands. If health is truly the issue here, maybe the program should be expanded to include others and increased in daily dollars? Health is not so much the issue as being hungry or hungrier and then being expected to work while hungry in order to gain the Food Stamps as expected by many states. Or perhaps they can eat cake?

Jason Richwine claims the Fair Market Valuation methodology (based upon commercial data) will give a more accurate picture for the farm subsidies which he also asserts are also less risky than the Food Stamp and the Student Loan Programs. Jason may have a point here since the economic growth of recent has been driven by wild swings on Wall Street and Repubs always look to the poor to make up the difference. I would want to look to past projects to determine what the historical difference has been before making radical changes resulting in phantom deficits. This seems to have been throw to the side with the push to use Fair Market Valuation for relatively stable programs with good returns.  The Food Stamp program is but one area for Fair Market Valuation to come from Jason Richwine.

“Right now, the cost of almost every government credit or insurance program – from crop insurance, to student loans, to public pensions – is underestimated. The movement for ‘fair value’ accounting is intended to fix that problem.”

What Alan Collinge points out does makes sense. Jasons Delisle and Richwine and CBO Director Douglas Elmendorf scrapped decades of data on student loans and other programs which show a return even after historical cost. In place they assume higher risk as taken from commercial loan data, a riskier environment which is not reflective of degree of risk within these programs. We are not talking MBS or CDOs here and the end game are students locked into these loans whether they default or not. The long arm of the government extends much further for students than it does for AIG, Lehman, or Goldman’s Executives to the extent it will garnish Social Security or Disability benefits and future wages. The risk of default Delisle and Richwine, which is so prevalent in commercial loans, is mitigated substantially in Student Loans.  The wild swing seen in the CBO’s projection of Student Loan Return was caused by using the riskier data of FMV and assuming the interest rate charged no longer covers the cost of the Student Loan program. Commercial Investors would demand a higher interest rate to cover losses in case Wall Street blows up the economy again or risk as taken from commercial data (Fair Market Value) rather than the historical data (FRCA) of the US Department of Education. In the end, this will drive interest rates higher for student loans and other loan programs to cover projected potential phantom deficits or costs. This makes sense on Wall Street and for TBTF who failed to mark down investments when they defaulted; but, it does not make much sense for student loan borrowers who are locked into it. there are other things to consider.

An Invitation to Jason Delisle of The New America Foundation by email on September 25, 2013:

from: run75441 aka Bill H
To: delisle@newamerica.net

Good morning Jason:

I write on Angry Bear Blog and I have also helped many soon-to-be college students apply for grants and loans.

I have been reading and watching the discussion going back and forth on Fair Market Valuation of student loans and the resulting change in return as projected by Douglas Elmendorf’s CBO. This change in valuation establishes a basis for a dramatic change in how student loans rates are calculated for risk and return which in most cases does not exist in the same manner as what exists for commercial loans when using commercial loan data. There is no bankruptcy for student loans which would mitigate the risk factor and is also reflected by the collection rate as opposed to lets say credit cards?

Allan Collinge has rasied several points challenging Douglas Elmendorf and your conclusions on the utilization of Fair Market Valuation in determining the return on student loans. Reviewing all of the posts, I have not come across a response to Allan’s points arise from The New America Foundation. His points go unchallenged and I would offer you an opportunity to respond in dilogue to Allan on Angry Bear Blog in your own and unaltered words. Is this a possibility?

Please let me know. Thank you for your time and consideration.

Regards,

Bill

1. Deseret News; August 14, 2013 “Making a Killing or Getting Fleeced?”

2. The New America Foundation; March 23, 2012, “Fair Values Accounting Shows Switch to Guaranteed Student Loans Costs $102 Billion”

3.  Student Loan Justice Org

4. Forbes, July 11, 2013 “Interview with Student Loan Activist Alan Collinge – Fair Value In An Unfair System?”

5. The Center for American Progress, May 2012 , “Managing Taxpayer Risk”

6  National Review, September 23, 2013;  “Farm Subsidies, Even Worst Than You Think”

7. The Center for American Progress, April 26, 2006,  “Understanding Mobility in America

8. The Heritage Foundation; May, 2012 “The Real Cost of Pensions”