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A Wake-Up Call for Students

Guest Author: Alan Collinge, StudentLoanJustice.Org,Both Alan and I have written various posts on the student loan crisis. Alan has been featured on Angry Bear Blog from time to time.

If you are in college and looking for something worthy to fight for today; as a student, you should consider the student loan issue. Student loans and how they are administered are the national injustice of our time reaching threatening proportions and impacting the livelihood of young adults going forward. While at first glance, the problem appears complicated, confusing, and overwhelming; it is actually quite simple and its debt genesis hearkens back to the creation of this country. This problem transcends partisan and cultural divides and could serve to bring together those on the left and right on campus.

George Washington, Thomas Jefferson, and others were in debt up to their eyeballs to British banks and merchants. They came to understand how a lending system could be used against the citizens. Of course it was not just the Founders who were being exploited, many early settlers were indebted to English banks as well. John Adams famously remarked;

“There are two ways to enslave and conquer a country. One is by the sword. The other is by debt”

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When the Founders created the Constitution, they made it a point to reflect on bankruptcy rights prominently. Few people realize that a uniform bankruptcy system is called for before the power to raise an army or a navy, ahead of the power to coin currency, and even ahead of the power to declare war in Article I, Section 8 of the Constitution.
Obviously, bankruptcy rights were very important to these men.

Free men are not forced into any type of behavior by the government that We The People established and ordained. The government is to serve the people – not to force them into servitude and obedience. The people are sovereign, as the people came before the government and the Constitution that gave rise to the government.

Adam Smith, the founder of free market economics provided the basis for western economic theory, was compelled to advocate for bankruptcy protection as a means to encourage entrepreneurship, risk taking, and also a means to compel good faith in a lending relationship.

When an individual or firm goes bankrupt, a legal process is instigated to discharge debts that cannot be repaid. In former times such debtors might have been put into a debtors’ prison and languished there for years. The process weighs assets against liabilities and allows the debts to be discharged at some fraction of their nominal value, leaving the debtor free of the burden, albeit subject to rules of financial behaviour and with a blemish on their credit record which can last for years.

Student loans violate longstanding economic principles and as such the beliefs of the Founders. Today, Congress has placed conditions on student loan bankruptcy so severe; that of 169,000 people with student loans who filed for bankruptcy in 2014, fewer than 20 received relief. When our legislators first restricted the right to student loan bankruptcy in the 70’s, some members warned that such a move had dire constitutional implications, but their concerns went unheeded. As one University of Connecticut expert Philip Schuhman testified to Congress:

” students should not be singled out for special and discriminatory treatment. I have the further very literal feeling that this is almost a denial of their right to equal protection of the law. Nor do I think any evidence has been presented that these people, these young people just beginning their years on the whole should be singled out for special, and as I view it, discriminatory treatment. I suggest to you that this may at least in spirit be a denial of their right to equal protection with the virtual pole star of our constitutional ambit.”

Today, student loans are the only type of loan in this country from which bankruptcy rights have been removed leading to consequences so severe as to result in a form of peonage. Despite peonage being made illegal after the civil war in 1867, it still flourished in the form of sharecropping with former slaves and poor farmers farming plots of land owned by others. Sharecroppers supposedly received a percentage of the profits from sale of grown crops. The sharecroppers were forced to take out relatively large loans just to get by and meet daily expenses, buy seed, rent land, and pay the interest rates imposed on them by landlords.

Also in the past African Americans could be accused of falsely owing money or trivial sums, given sham trials and quickly sold off by the courts into a privatized system of debt slavery to pay back debt. The peonage contracts contained enslaving terms and conditions, allowing the employer to trade, confine, whip and beat workers as long as the debt was deemed unpaid, which could practically last forever.

While not as severe as peonage, students in default are denied access to federal programs and unemployment benefits. Social Security and employment wages can be garnished leading to diminished lifetime earnings and poverty. All of these conditions have a severe impact upon the overall economy as younger workers do not achieve their full earning potential.

The student loan industry is willfully predatory and profitable for the banks who lobbied intensely for the removal of bankruptcy protections and work hard to keep their monetary advantage. As Mr. Potter would say; “The bank always get paid” and this comes no matter what the terms or conditions of the loan are.

(run75441) In my own discussion with a former University of Michigan lobbyist who was regaling me after I dared to make a statement to Michigan Senator Debbie Stabenow about what her stance and actions were with regard to student loans. “There is IBR and Repaye which are programs allowing payment back on student loans based upon income.” These programs are mostly failing because of one rule requiring the yearly application to the program rather than an automatic re-up into the program. The re-up is required to report income a factor which is automatically done for Medicare via computer systems. The manual yearly application for the programs was bound to be a failure just by this alone.

It was not just the banks cashing in on the removal of consumer protections. In 2012, the federal government booked over $50 billion in profit on the lending system and this has increased in more recent years. What is disturbing is White House Budget data showing a profit being made on defaults. Think about this: where a credit card company is thrilled to get back a dime on the dollar for their defaulted accounts; the federal government is actually getting back more than a dollar in return. This is a defining hallmark of a predatory lending system and unfortunately for the students, the Department of Education sits on top of it all doing everything it can to perpetuate this situation. Department of Education lawyers fight tooth-and-nail behind the scenes to deny legitimate bankruptcy. This form of government enforced peonage spans many presidents and Congresses and both political parties going back to the seventies.

In 1998, when Congress made bankruptcy permanently unavailable for the overwhelming majority of borrowers, the nation owed roughly $100 Billion in student loans. Today that has exploded to $1.5 Trillion. By the end of this year, nearly one in four borrowers will have defaulted on their loans. People’s lives are being devastated. Families are being torn apart, particularly where cosigners are put on the hook for their kid’s exploded loans. People are fleeing the country, and some are even committing suicide as a result of their student loan debt.

If you think you don’t need to worry because there are forgiveness programs in place, you are wrong. With 57% already kicked out of them income based repayment programs are failing misrably. Assuming the programs are not ended by Secretary of Education Betsy DeVos, I estimate only 10% will be successful and have their loans forgiven and still potentially taxed as income. The rest will be disqualified from the program and left owing far more than when they graduated.

Alan Collinge is the Founder of Student Loan Justice Org and author of “The Student Loan Scam” (Beacon Press).

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Republicans Can Seize a Political Opportunity by Backing Student Loan Reform

Allan Collinge is the founder of the Student Loan Justice Organization a grassroots citizen’s organization dedicated to returning standard consumer protections to student loans. The group was started in March of 2005 and has focused primarily on research, media outreach, and grassroots lobbying initiatives. located in Washington DC. From time to time Angry Bear has publicized Allan efforts to restore bankruptcy protection for student loan.

In a rare display of political courage and bipartisanship last week, Rep. John Katko (R-NY) filed the Discharge Student Loans in Bankruptcy Act with Rep. John Delaney (D-MD). This bill will return standard bankruptcy protections to all federal and private student loans. Katko is well ahead of the conservative curve on this issue and has a unique opportunity to revitalize the Republican Party in the current session by stepping up to lead the fight on this issue.

President Obama federalized the student loan system during his eight years in office and the nation’s student debt tab increased by $1 trillion. From these student loans, the federal government profits well over $50 billion annually from the student loan program, and also makes a profit on defaulted student loans. This is something no other lender of any loan in this country can claim. In fact, this is a defining hallmark of a predatory lending system. During the same time period, the price of college rose far faster than any other commodity, including healthcare, and this trend is continuing to accelerate today.

The student loan program is a structurally predatory lending system and Uncle Sam sits atop the hornet’s nest. What has caused this hyper-inflationary lending behemoth and its consequences is the fact that the Department of Education is not constrained by standard free-market protections like bankruptcy rights, statutes of limitations, and other standard protections existing for every other type of loan. Congress stripped these protections from student loans and in the end greatly destabilized the entire loan system.

Make no mistake: The Department of Education loves this freedom from free-market protections and fights tooth and nail behind the scenes to keep bankruptcy gone from its source of income. Since Trump was elected, the student loan swamp of unelected bureaucrats in and around the Department of Education have made bold moves to make this lending system harsher and more profitable.

Some true conservatives have noticed this problem and have begun to speak out. Jeb Bush, for example, put the return of bankruptcy protections to student loans as a plank in his presidential platform. Pundits and think tanks such as David Brooks and the Cato Institute have also publicly called for the return of bankruptcy protections to student loans. The issue screams out to conservatives for justice by sponsoring the Discharge Student Loans in Bankruptcy Act. By his actions, Congressman Katko is demonstrating to his colleagues that it’s fine, in fact,it is a great political benefit to stand up for the citizens, fight for free-market mechanisms, and against big government.

Sponsoring this bill will endear Katko to tens of thousands of Democratic voters who would have otherwise voted against him next year. There are roughly 100,000 people in his district with student loans, of which 63,000 are currently unable to pay down their loans.

While few of these voters would ultimately file for bankruptcy, all of them feel the predatory weight of the lending system on their backs, and all will appreciate having this constitutionally mandated power back on their side. I suspect that a large majority of these voters — regardless of party — will be strongly compelled to vote for him based upon this issue alone because it is that strongly held by these borrowers.

What is most interesting is that even if his Democratic challengers’ parrot Katko on this issue, his being a Republican makes the chances for success of the bill go up dramatically. No Democrat with the same position can claim this, and indeed we have seen similar Democrat bills flounder and fail in years past.

This is one of the hottest issues today in Congress and Congressman Katko is in the forefront of it with his bill. Other Republicans in Congress could benefit and capitalize on it to reduce the strong headwinds from Democrats in next year’s election. Republicans could do well in supporting this bill and avoid a crushing defeat.

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UVA Slushfund just the tip of the Iceberg

In July, the former Rector at the University of Virginia, Helen Dragas, accused the school of having created a $2.3 Billion “slush fund” during a period when the university had raised tuition on students by 74%, and cut grant aid to poor students. While this is an astounding story in itself, the fact of the matter is that there is much, much more to this story than meets the eye.

In 2013, it was discovered the University of Wisconsin had similarly amassed between $400 million and $1 Billion in reserves, built largely from excess tuition income. Members of the state legislature, furious that the college had been stockpiling cash while using stories about their dire financial straits to convince the state to allow them to raise their tuition, actually demanded that the president of the university resign. However, the president ultimately was able to hang on to his job by using, essentially, a“but everyone’s doing it” defense.

The university compiled a list of similar cash stockpiles their peer institutions had accumulated, roughly during the same time. As the table below shows, the numbers are staggering.

slush fund

While the University of Wisconsin had built up assets exceeding $1 Billion, they were correct about their peer institutions engaging in similar hoarding activities and some to a far greater degree. The University of Texas, for example, had amassed $9.5 Billion in restricted assets, and another $3.5 Billion in unrestricted assets. The University of Michigan had stockpiled $3.3 Billion in restricted assets and $2.5 Billion in unrestricted assets. Even relatively small, private schools like Temple University had managed to squirrel away billions in expendable assets! A couple of years ago, I was at a meeting where the president of a smallish community college in central Illinois bragged that the school had managed to amass some $80 million in reserves. I held my tongue at the time; but, the time for silence on this issue is over.

These revelations scream out for further scrutiny. If ever there were a worthy subject for investigative journalist teams to examine, the growth of college/university slush funds is ready for sunlight. Remember, these mountains of cash are over and above the endowments of these schools and only came into being over the past ten years. The universities are claiming that this is prudent fiscal management, but the facts of the matter speak for themselves. These pots of money barely existed ten years ago. Now they are everywhere and they are everywhere HUGE.

If these numbers are at all representative of Academia broadly, it is quite safe to say that the cumulative total of these stockpiles could easily exceed the combined value of all college endowments (about $630 billion), and could even match the size of all student loan debt in this country (roughly $1.4 Trillion).

Colleges and universities in this country have raised their tuition at record rates over the past ten years. All have also given administrative staff massive increases in pay, and most have undertaken massive capital improvement projects. They justified their tuition hikes by citing state cuts in funding. This is a complete fiction. In fact (but for a slight dip in the wake of the financial crisis of 2008), the states have consistently increased their funding to colleges, in real dollars, roughly with the rate of inflation. These cuts the colleges claim to have happened, never happened and are really only college officials pointing to the fact that the states “slice of the budget pie” is now smaller due to the colleges skyrocketing operating budgets. This blatant dis-ingenuity of the higher education complex must end.

While Helen Dragas is undoubtedly being vilified by her colleagues, she should be given a medal for demonstrating that at least one college official as the moral compass to point to what is obviously wrong, and demand that the universities be held accountable for their greed, and their gross neglect of the community purpose that they claim to serve.

run75441: The slush fund build is going on at the same time cuts in funding for minority and low income students is occurring. Much of the funding for tuition for lower income and minority students is going to higher income students.

Alan Collinge is Founder of StudentLoanJustice.Org, and author of The Student Loan Scam (Beacon Press). Alan Collinge has been featured at Angry Bear over the years.

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US Federal Marshals Picking Up Student Loan Defaulters . . .

Alan Collinge of the Student Loan Justice Org sent me an email yesterday.

Bad Stuff from Texas . . .

Hey Bill!

This is a scary story. They are arresting people en masse in Texas over student loan debt.

I got on the Thom Hartmann show to talk about it: https://youtu.be/a1OBJGs2PeE

There’s no direct tie-in with the for-profit prison thing, but for some reason the one reminds me of the other!!!

Anyhow, I hope all is well on your end!

Alan

If you go out on the internet, you are going to see a lot about this with the Washington Post blowing it off and Tyler Durden at Zero Hedge treating this incident as more than just a single occurrence. Did some Googling and ended up with “Sputnik News” and the Washington Post. Tossed Sputnik News and read the Washington Post article. Here is what the WP had to say:

“If you’ve defaulted on federal student loans, you can breathe more easily. You won’t be arrested for simply failing to make payments.”

More to the story:

“Marshals had made several attempts to contact Aker to appear in federal court, according to Hunter. Notices were sent to numerous known addresses. Marshals spoke with Aker by phone and requested that he appear in court, but Aker refused, a statement from officials said. So a federal judge issued a warrant for Aker’s arrest for failing to appear at a December 2012 hearing.”

The sum we are talking about here is $1500 before collection agency fees and the costs of federal Marshals contacting the debtor and dragging Paul Akers away to jail. What the WP’s Michelle Singletary misses in this is the case is in federal court with federal Marshals dispatched to pick up Mr. Akers for a debt of $1500. If this is not unusual to the WP columnist as she notes, it is highly unusual to me and I too have been involved with student loans for years. So what gives?

29th District Texas Congressman Gene Green: “the federal government has been contracting out student-loan collections to private debt collectors, who are allowed to deploy the U.S. marshals as their enforcement arm.

There’s bound to be a better way to collect on a student loan debt,’ said the congressman. Around Houston, that “better way” involves 1,200 to 1,500 arrest warrants. Student debt is at an all time high in the U.S., where students hold an average of $35,000 in federal debt, according to an analysis of government data on “Edvisors.”.”

This appears to be over reach by the US Department of Education if this is really happening; but a closer look revealed, judges are going after people who do not show up in court. You can be held in contempt for this and also if the judge believes you are deliberately failing to pay. Both occurrences will get you a place in prison. The bigger question is why does a private collection agency get to use federal court and federal marshals to collect $1500? And yes I already know the US Department of Education is a federal being.

Even so, seven armed US Marshals? What if the Justice Department treated bankers and investment firm gamblers in a similar manner? Something is awry when the US Department of Education allows debt collectors to resort to Federal Court (which already has a lack of Federal judges due to Republican legislators blocking Pres. Obama nominations). I wonder how this will play into the gov., the pres., the Koch Bros, CAP and other supposedly lib and prog. think tanks wanting to let prisoners out of prisons due to harsh sentencing. But wait a minute, these are past and present students and they do not count. There is so much wrong here, it is difficult to know where to begin.

So is this just one “toss-away” to scare students or maybe a federal judge exercising his judicial moxy or as the WP columnist says this is not a precursor of more arrests to come? According to the WP article:

“’If anyone out there thinks that it is the top priority of the U.S. Marshal’s Service to arrest student-loan violators, they are sadly mistaken,’ Richard Hunter, chief deputy U.S. marshal for the southern district of Texas, told me (WP columnist) in an interview.”

29th District Texas Congressman Gene Green says more to come as the US Dept. of Education cracks down on student loan defaulters in Texas (for now).

At Zero Hedge, Tyler Durden confirms the Congressman’s belief;

“Our reliable source with the US Marshals in Houston say Aker isn’t the first and won’t be the last.

They have to serve anywhere from 1200 to 1500 warrants to people who have failed to pay their federal student loans.”

This just goes to confirm my belief of the present effort by the Koch Bros, CAP and other liberal think tanks in addition to the conservative/libertarian think tanks on changing sentencing guidelines and releasing thousands from prison due to harsh sentencing. This has nothing to do with having sympathy for those caught up in preordained sentencing guidelines for repeat offenders and druggies as much as it has to do with changing the law to keep corporate management out of jail for violating EPA laws, banking laws, etc. In this instance, the ploy is to shift “mens rea” on to the prosecution alleviating the need of corporations having to prove they and their management did not know the law (in such cases you ask for jury trials now). We are again being hoodwinked by the Koch Bros who wish to piggy back this shift on present legislation sponsored in part by Congressman John Conyers who sees African Americans getting out of prison now incarcerated due to harsh sentencing guidelines. A noble effort; but, it should not give Corporate America and its heads a free get-out-of-jail card.

We will stick it to present and former students who typically have little money to pay back aggressively formatted loans, fight back against debt collectors in court, and send multiples of federal marshals to their homes to drag them to court while giving heads of Corporate America a lenient alternative. Who thought of this???

“If justice means a prison sentence for a teenager who steals a car, (or for that matter defaults on a student loan [myself]) but it means nothing more than a sideways glance at a CEO who quietly engineers the theft of billions of dollars, then the promise of equal justice under the law has turned into a lie. The failure to prosecute big, visible crimes has a corrosive effect on the fabric of democracy and our shared belief that we are all equal in the eyes of the law.” Senator Elizabeth Warren; “Rigged Justice: 2016 How Weak Enforcement Lets Corporate Offenders Off Easy>”

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For Profit College, Student Loan Default, and the Economic Impact of Student Loans

For Profit Goes on Probation

The University of Phoenix has been placed on probation by the Department of Defense preventing the university from recruiting on military bases. The probation comes after the Federal Trade Commission and the California Attorney General’s investigation into the University of Phoenix recruiting methods, its high costs, and the resulting poor student performance.

This is not the first time Phoenix-U has been in trouble. In 2013 the University of Phoenix was threatened with probation by the accreditation board for a lack of “‘autonomy’ from its corporate parent -– a development that prevented the university from achieving its ‘mission and successful operation.'” In other words, the for-profit university #1 priority by its owners was to turn a profit at the expense of teaching, retaining, and graduating its students. This is precisely what I had alluded to previously on higher rates of defaults.

Student Loan Defaults

An interesting analysis by the NY Fed suggests students with lower amounts of student loan debt are more likely to default than those students with higher amounts. This is a new take on student loan debt and associated default as it was always thought the higher the debt the greater risk of default. Student Loan Debt has increased as more attend college, costs to attain an undergraduate degree have increased, even higher costs are sustained for Masters and Doctorate degrees, and students have been staying in school longer. Coming out of college the study finds amongst students loan debt is distributed rather evenly over time with one third being held by those in the 20s, one third held by those in the thirties, and one third held by those forty years of age and older. A large percentage of those borrowers or ~39% of them have loans of less than $10,000 and it is the holders of debt who have been defaulting at a higher percentage. The study goes on to break it down as to why they might be defaulting more frequently than tose with higher amounts of debt.

Using Equifax credit data, the NY Fed broke down the data into loan origination cohorts of student loan borrowers and using the same Equifax data, developed default rates for each cohort. Taking the origination date information for each academic year, the Fed was able to assign borrowers to loan-origination-completion-cohorts. The analysis did not reveal dropout or graduation information; however by using loan origination data, the methodology used does approximate whether students left school finished their education or just left school.

invisible hand

As shown on the graph and nine years out for the 2005 and the 2007 cohorts 24% of the students and greater had defaulted on their student loans by the 4th quarter of 2014. While the data for the 2009 cohort is incomplete and depicts five years as opposed to nine years, the data depicts a worsening default rate at 5 years then what can be found with the 2005 and 2007 cohorts at 9 years. Typically what we read and hear about is a 3-year window as reported by the Department of Education and is discussed by the news media. The 3-year window default rate is much less for each of the cohorts with the 2005 cohort being ~1/2 or 13% of what it is in 2014 as shown by the Fed study.

As I mentioned above, a large percentage of those who defaulted had student loan debt of less than $10,000. 34% of those borrowers in that group who defaulted on their student loans had balances of less than $5,000. 21% of the 2009 cohort were in this category of < $5,000 in student loans five years out which depicts a worsening trend when compared. A closer examination of the 34% also reveals this group to be made up of students who attended community college, did not finish, perhaps discovered this is not what they wanted to do, or the curriculum did not fit their needs. What the NY Fed concludes is the default rate worsens when a much longer period of time is taken into consideration as opposed to the 3 year window the Department of Education looks at and which the public hears about in the news. The longer the period, the higher the default and it continues through years 4 through nine for the first two cohorts. As shown the default rate for the 2009 cohort is already higher. Those who had lower amounts of student debt in the end may have defaulted due to a worsening economy or potentially did not get the payback expected from a two year degree at a community college or for-profit school. The study also revealed those who are current today with their student loans did experience stress in making payments and 63% of those student loan borrowers appear to have avoided delinquency and default over the last decade. On the other side of the coin, student loan borrowers with $100,000 of debt had a default rate of 18% which has been attributed to their being higher earners after graduation.

Economic Impact of Student Loan Debt

invisible hand

One aspect of the fall-out resulting from increased student loan debt as suggested by the Fed study is decreased home ownership. From 2008 onward the study depicts a steady decrease in the numbers of graduates burdened by student loans investing in homes. Dropping from a high of ~34% in 2008, the percentage of homeowners and having student loan debt has declined to ~23% in 2014. What has occurred, those 27-30 year old having no student loan debt have surpassed those with student loan debt in home ownership. While both groups experienced a decrease in home ownership during bad economic times, the decrease for those having student loans was far more severe. The decrease in home ownership still continues for both groups with those having less debt owning homes at a higher level.

invisible hand

A similar situation holds true for new auto ownership. The numbers of 25-year old college graduates purchasing automobiles and with student loan debt retreated from the market place at a faster pace than those without student loan debt. It is only recently have increased numbers of both groups returned to the market place to buy automobiles. While the purchase of automobiles has increased for all 25 year old people, the numbers of college grads with student loan debt no longer surpass those without student loan debt and at best are at the same level as those without student loan debt. Student loan debt is a burden and more of a burden in harsher economic times.

Much of the retreat from the market place is due to large loan and higher interest rates on undergraduate student loans, even higher interest rates and balances on graduate and doctorate student loans, higher balances due to the increased costs of colleges across the board, and longevity in paying back student loans. There are no controls on colleges and universities to rein in costs and it is the only cost to increase at a faster rate than healthcare. The higher costs play out in student loan debt as states do not subsidize colleges to the same ratio as they did 20 years ago, Pell Grants have not kept up with the costs of colleges, and parents can not afford the increased cost out of pocket either.

For the purchases of homes, cars, appliances; the bank assesses your ability to repay the loan as these loans can be discharged in bankruptcy unlike student loans which can not be discharged. Many college graduate households today consist of two married adults both of which are burdened with having student loans to pay off making the situation even more precarious. The result is increased risk.

invisible handUsing the same data, the NY Fed reviewed the risk rates of 25 and 30 year olds with and without student loan debt. As can be expected, those households with student loan debt were deemed a higher risk due to student loan balances and higher interest rates and a decrease of potential income over time. Those students would be less likely to obtain a loan or a loan with lower interest rates. A higher interest rate adds to an already high financial burden.

There are probably many other reasons why young households may have retreated from the market place; cultural changes in how younger households view home ownership, automobiles, and other purchases; higher costs of financing; lowered expectations of future earnings; unwillingness to take on more debt, etc. The fact of the matter is, not only does the market place view them as a higher risk; but, these college-educated young buyers are not buying homes, autos, etc. or making large investments at the same level that once existed and it does not bode well for the economy.

It also never ceases to amaze me the number of anti-educational opinions which flare up when the discussion of student loan default arises. There are always those who will prophesize there is no need to attain a higher level of education as anyone could be something else and be successful and not require a higher level of education. Or they come forth with the explanation on how young 18 year-olds and those already struggling should be able to ascertain the risk of higher debt when the cards are already stacked against them legally. In any case during a poor economy, those with more education appear to be employed at a higher rate than those with less education. The issue for those pursuing an education is the ever increasing burden and danger of student loans and associated interest rates which prevent younger people from moving into the economy successfully after graduation, the failure of the government to support higher education and protect students from for-profit fraud, the increased risk of default and becoming indentured to the government, and the increased cost of an education which has surpassed healthcare in rising costs.

There does not appear to be much movement on the part of Congress to reconcile the issues in favor of students as opposed to the non-profit and for profit institutes.

References:
The Race Between Education and Technology

Just Released: Young Student Loan Borrowers Remained on the Sidelines of the Housing Market in 2013

University of Phoenix Accreditation Hits Snag As Panel Recommends Probation

For-profit college banned from recruiting military students

The Student Loan Landscape

Looking at Student Loan Defaults through a Larger Window

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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.

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Rolling Jubilee: A Wolf in Sheep’s Clothing?

authored by Alan Collinge of the Student Loan Justice Organization, a grass roots group seeking the swift return of standard bankruptcy protections and other consumer protections to all student loans in the U.S.

“We started by going after Sallie Mae debt because Sallie Mae is for my generation sort of the Voldemort, this cosmic level of evil out there,” Gokey said. But after suggesting that Sallie Mae typically sells those debts for 15 cents on the dollar, St. Peters abruptly changed course and refused to deal with Gokey and Debt Collective, he said. (St. Peters did not return a call seeking comment.) Think Progress, “Debt Activists Just Canceled $4 Million In Student Debt. For Their Next Trick, They Need Your Help”

In recent weeks, much media attention has been focused on a project dubbed the “Rolling Jubilee”- an action whereby people’s defaulted student loans are purchased for “pennies on the dollar” with donated money, and the debt is extinguished. To date, the Jubilee claims to have forgiven some $4 million in defaulted student loan debt at a cost of about $100,000.

Sounds like a great idea, right? After all, who would not want their student loan debt to be paid off for them? Looking at the board members for the Rolling Jubilee (which includes Occupy Wall Street pioneer David Graeber), one could only assume this would be a slam dunk for the 99%. Further evidence that they may be onto something: Sallie Mae’s Douglas St. Peters has criticized the project, and the concept of loan forgiveness generally (if the banks oppose it, its got to be good, right?). Surprisingly however, it turns out that this project is, I am sorry to report a terrible idea with troubling implications. Consider the following and see if you don’t agree:

Putting aside the obvious criticisms- that the project only applies to private loans and does nothing to address the rising cost of college, skyrocketing debt loads, or the uniquely predatory nature of the debt due to the removal of fundamental consumer protections (like bankruptcy) that exist for all other loans, the most troubling aspect of this project lies in the systemic effect of the project- who it helps, and who it really doesn’t. Upon examination from this perspective, the project reveals itself to be, frankly, suspicious.

Think about it. The RJ, by purchasing defaulted debt, only “feeds the beast”, and in fact makes defaulted debt more valuable on the market. This rewards the horribly predatory behaviors that the absence of bankruptcy protections and other factors have enabled in the private student loan industry. Since, after exhausting all existing opportunities for collection of these loans, the debt holders know there is a buyer for the “worst of the worst”, this only encourages the lenders and loan holders to inflate this debt as much as possible, with the knowledge that there is a willing buyer for even the worst performing loans! So that is quite a red flag,

Being a long time Zucotti Park resident myself, I’d almost be willing to overlook this distasteful aspect of the project, and instead focus on the suffering that this transaction eased…but there again, we get an unpleasant shock: The loans that the project buys are almost certainly at or past their statutes of limitations(private student loans still have these), and/or were likely never paid on by the borrower much if at all. So while it is impressive to hear of the large amounts of debt being forgiven, the fact is that the people who are finding their debts erased more than likely won’t care much because they are either no longer under any legal obligation to pay the note and have long since forgotten about it, or never intended to pay the note in the first place, and never would! So these borrowers won’t likely be gushing with praise and thanks, and frankly won’t be helped much if at all by the repurchase of the debt. I suspect that people learning of their debt being purchased and erased were, instead of relieved and grateful, were more perplexed as to why anyone would go to the trouble of clearing up debt that they themselves had forgotten about long ago! By far, the happiest participant in these transactions, are the banks/collection companies who are thrilled to get anything for the loans! People with cosigners for their loans (about 90% of private loan borrowers), and people who have been paying at least something for their debts should not hold their breath if they are hoping to one of the lucky few to get their loans absolved- it simply won’t happen.

So this project does very little for the borrowers it affects, and nothing but encourage and exacerbate the predatory underpinnings of the lending system by rewarding instead of resisting it (Resistance being an oft-repeated theme by the folks running this program, and its affiliated organization, dubbed Strike Debt). There is no resistance, here, only paying into a predatory lending system for almost no real benefit. I wouldn’t go so far as to call bullshit on this project, but it is really, extremely tempting to.

Unless there were grand plans to somehow buy off ALL student loans in the country- and I’ve been told that there isn’t, there is almost nothing good to say about this project, and a lot of troubling questions that cry out for answering.

It is surprising to me that the well regarded people (David Graeber, Andrew Ross, and Astra Taylor) who sit on the board for this project would let their names be attached to it upon reflection.

Notes and References:

Debt Activists Just Canceled $4 Million In Student Debt. For Their Next Trick, They Need Your Help Alan Pyke, “Think Progress”

“The Argument” Alan Collinge, Student Loan Justice Org.

Strike Debt is a nationwide movement of debt resisters fighting for economic justice and democratic freedom. You are not a loan.

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Alan Collinge (Student Loan Justice Org.) briefly points out some of the Issues with the Brookings Institution Study as Written by Beth Akers and Matt Chingos

There are what I perceived as problems with the Brookings Study.

Just one example: they base much of their analyses upon “lifetime earnings associated with earning a bachelor’s degree”. The average lifetimes earnings of degree holders is certainly skewed significantly upwards by the top 10% of earners (who account for over 40% of all earnings, and whose earnings have accelerated much faster than the rest of the population since 1989). Remove this group from the data, and average earnings increase is much smaller.

There are many similar instances of cherry picking data too numerous to mention here; but in general terms, the study appears to be doing everything to show that borrowers are not having problems. Yet, the study completely and totally ignores what are probably the best indicators of the borrower’s ability to manage their student loans: the default rates, and the deferment/forbearance statistics. The most recent data (which the lenders go to great lengths to decrease through various “default management” techniques during these temporary windows) show a 3- year default rate of almost 15% (the two-year rate is 10%). The lifetime default rate, which was certainly over 20% for people leaving school in 1995, is certainly well over 30% currently, and could easily surpass 50% for people leaving school more recently. Regarding deferment/forbearance over 40% of all loans are either in default, deferment, or forbearance.

It is very disappointing to see the Brookings people turn into cheerleaders for this structurally predatory lending system. They are not serving the public interest with studies like this, they are actively working against it.

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Student Debt is Challenging the Reason for Getting that Long Sought After College Degree

What has changed for many of the college educated is finding themselves in debt longer than their parents were after college, being penalized for having student debt when going to buy homes, cars, etc., and in the end having less wealth and a lower salary when compared to those without a college education.

One reader’s comment. “I’ve been meaning to write back, but a large number of days on the road takes precedence. I disagree about the relevance of my experience working endless shit jobs while living in crappy apartments and eating pb&j to pay back my loans. That said, I do respect your opinion, and I hope you continue to share your thoughts about how entirely fucked up our priorities are as a Nation when it comes to education.

As my father who is in his late sixties recently said to me “sorry your generation got screwed”, something I’m quite cognizant of as I lose twenty grand selling a home to pursue a career. In the meantime, time to bust some ass and take care of what is in our power to affect. Patrick “Ripping Off College Students Economic Future”

The argument for a college education has always been the earning potential the 4-year degree holder has as opposed to those without a 4-year college degree. As more and more students have trouble buying into the Middle Class with the degree they have earned because of the overwhelming debt, the value of a college education has come into question considering the debt load carried by college graduates. What has changed in the last decade is tuition increases outstripping the cost of healthcare, the decline in state support for colleges, and the increased use of credit cards, home equity, and retirement account borrowing to fund college education. What remains after the piece of paper is passed out at graduation day is debt remaining with the student into his thirties and sometimes well into their forties.

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Ripping Off College Students’ Economic Future

Previously, I had written on Fair Market Value and its use by the CBO’s Douglas Elmendorf to rate the risk of Student Loans as advocated by both The New America Foundation and the Heritage Foundation. A rebuttal answer to a partisan CBO, the right-leaning New America Foundation, and the conservative Heritage Foundation on the usage of Fair Market Valuation methodology in the same manner as what I would have used it for to rate the return on a piece of capital equipment is simple. It is inappropriate for student Loans as there is little or no risk to loaning students money which can not be discharged through bankruptcy. The news media has been pandering to students promoting  a generational war by advocating the theft of student’s futures by such programs as Social Security, Medicare, Medicaid, etc. The Tom Friedmans, James Freemans, and others suggest baby boomers are ripping-off the X, Y, and Z generations with these programs.  From the well-heeled segment and do not have to work anymore 1-percenter population, we find Stan Druckenmiller, Pete Peterson, the Koch brothers, etc. spending portions of their $billions advocating the discontinuance of Social Security to save the country, students, and themselves. Some are taking to college campuses with false data and advising students to protest the rip-off of their futures in a Days of Rage manner. All tend to ignore the real threat to students and their future. The threat is not likely to come from Social Security, Medicare, etc.

What is threatening the future wealth and income of college students is the increasing debt taken on by students seeking the education necessary to have a chance in a global economy where investments are seeking fewer Labor intensive opportunities.  The increased funding necessary to go to college is the result of decreased governmental funding of schools, declining or stagnant household incomes, financial strategies delineating the increased risk of student loans  (CBO, The New America Foundation, Heritage Foundation, etc.), and the increased cost of attending colleges and universities (which as Alan Collinge of Student Loan Justice Org. states cost increases have outstripped CPI and even Healthcare) .

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