Student debt protests planned after armed marshals arrest man for old loans

[kscarbel2]

U.S. to Forgive at Least $108 Billion in Student Debt in Coming Years

The Wall Street Journal  /  November 30, 2016

GAO report offers first full cost estimate of debt-relief programs, berates Education Department over accounting methods

The federal government is on track to forgive at least $108 billion in student debt in coming years [at the taxpayer’s expense], as more and more borrowers seek help in paying down their loans, leading to lower revenues for the nation’s program to finance higher education.

The Government Accountability Office disclosed the sum Wednesday in a report to Congress which for the first time projected the full costs of programs that set borrowers’ monthly payments as a share of their earnings and eventually forgive portions of their debt.

The GAO report also sharply criticized the government’s accounting methods for its $1.26 trillion student-loan portfolio, pointing to flaws that have led it to alter projected revenues significantly over the years. The government says it still expects the program to generate a profit over the long term, but it has repeatedly trimmed expectations for revenues.

President Barack Obama has promoted income-driven repayment plans—passed by Congress in the 1990s and 2000s—to stem a sharp rise in borrowers defaulting on their loans since the recession. Enrollment in such plans has more than tripled over the past three years to 5.3 million borrowers, who owe roughly $355 billion.

Ted Mitchell, undersecretary at the Education Department, said such programs “are helping millions of borrowers successfully manage loan repayment, particularly those for whom standard repayment may prove challenging.”

He added that the administration has proposed changes to reduce costs. Mr. Obama, for example, has called for capping how much debt public-service workers can have forgiven.

The most generous version of income-driven repayments caps a borrower’s monthly payment at 10% of discretionary income, which is defined as adjusted gross income above 150% of the poverty level.

That formula typically lowers monthly payments of borrowers by hundreds of dollars. Public-service workers—those employed by a government agency or at most nonprofits—have balances forgiven after 10 years, tax-free. Private-sector workers have balances forgiven in 20 or 25 years, with the forgiven amount taxed as ordinary income.

President-elect Donald Trump said during his campaign he supported the idea of helping student-loan borrowers. He has proposed setting payments at 12.5% of income and forgiving balances after 15 years [rewarding irresponsibility]. He has also suggested winding down the federal student loan program and shifting lending to the private sector.

Growing evidence suggests many of the most hard-pressed borrowers—college dropouts who owe less than $10,000—aren’t taking advantage of the programs, while workers with graduate degrees, such as doctors and lawyers who don’t necessarily need help, are.

GAO figures suggest the average balance of borrowers in income-driven repayment plans stands at $67,000. That sum suggests a disproportionate share of those benefiting from the plans are graduate-degree holders, since the government caps lifetime borrowing from federal programs for undergraduates at $57,500. It doesn’t limit how much grad students can borrow. And graduate-degree holders typically have higher incomes and have low rates of unemployment, Labor Department data show.

There are still about 8 million Americans in default on their student loans, and the number of defaults among borrowers who recently left school has come down only slowly.

Meanwhile, Senate Budget Committee Chairman Mike Enzi (R., Wyo.), who ordered the GAO study, has criticized the Obama administration’s use of executive authority to sweeten terms of the repayment plans, which he said would add to the national debt.

“This Administration has been manipulating the terms of the student loan program without the consent of Congress, while shirking its statutory duty to carefully assess the cost impact of those changes,” said Enzi, adding that he was considering legislation to force changes in the government’s accounting methods.

In addition to debt forgiveness under income-driven repayment programs, the administration is also moving to forgive loans for borrowers who can show they were lured to enroll at schools—mostly for-profit colleges—that used deceptive advertising.

Income-driven repayment plans are also causing concern that as more students become aware of the benefits, they will become less sensitive to tuition increases, enabling universities continually to raise tuition ultimately at taxpayer expense. Higher education costs have increased by an average of 5.2% a year in the past decade, far faster than inflation, which has been running at under 2%.

And some borrowers with graduate-school loans are refinancing their debt at lower interest rates with private lenders such as SoFi. Congress, through legislation, has set higher interest rates for grad students than undergrads, to ensure the programs don’t lose money. When private lenders pick off those borrowers, the surpluses dwindle.

The GAO estimates that $137 billion of the roughly $355 billion owed under income-driven repayments won’t be repaid. Most of it—the $108 billion disclosed Wednesday—would be forgiven because of borrowers fulfilling their obligations under the plans. The other $29 billion will be written off because of disability or death, the GAO projects, the only other circumstances under which the government takes a loan off its books. The government can garnish wages and Social Security checks for those in default.

And that $108 billion only covers loans made through the current school year. The overall sum could continue to grow alongside enrollment increases. The GAO said it could take 40 years to know the full costs of the programs.

The GAO report also criticizes how the Education Department has produced budget estimates for the loan program. For example, it said the department has failed to account for inflation when estimating borrowers’ future earnings. And it said the agency failed to account for further increases in enrollment in income-driven repayment plans.

[kscarbel2]

The US college debt bubble is becoming dangerous

Rana Foroohar, The Financial Times  /  April 9, 2017

Student loans are now 90% public, in an eerie echo of the housing crisis

Rapid run-ups in debt are the single biggest predictor of market trouble. So it is worth noting that over the past 10 years the amount of student loan debt in the US has grown by 170 per cent, to a whopping $1.4 trillion — more than car loans, or credit card debt.

Indeed, as an expert at the Consumer Financial Protection Bureau recently pointed out to me, since 2008 we have basically swapped a housing debt bubble for a student loan bubble. No wonder New York Federal Reserve president Bill Dudley fretted last week that high levels of student debt and default are a “headwind to economic activity”.

In America, 44 million people have student debt. Eight million of those borrowers are in default. That’s a default rate which is still higher than pre-crisis levels — unlike the default rate for mortgages, credit cards or even car loans. Rising college education costs will not help shrink those numbers. While the headline consumer price index is 2.7 per cent, between 2016 and 2017 published tuition and fee prices rose by 9 per cent at four-year state institutions, and 13 per cent at posher private colleges.

A large chunk of the hike was due to schools hiring more administrators (who “brand build” and recruit wealthy donors) and building expensive facilities designed to lure wealthier, full-fee-paying students. This not only leads to excess borrowing on the part of universities — a number of them are caught up in dicey bond deals like the sort that sunk the city of Detroit — but higher tuition for students. The average debt load individual graduates carry is up 70 per cent over the past decade, to about $34,000.

Having just attended the first college preparation meeting at my daughter’s high school, where I was told to expect a $72,000 a year sticker fee for Ivy League and liberal arts colleges, I would feel lucky to get away with just that. This is clearly, as Mr Dudley observed, a headwind to stronger consumer spending.

Growing student debt has been linked to everything from decreased rates of first time home ownership, to higher rental prices, to lower purchases of white goods and all the things that people buy to fill homes. Indeed, given their debt loads, I wonder how much of the “rent not buy” spending habits of Millennials are a matter of choice. But there are even more worrisome links between high student debt loads and health issues like depression, and marital failures. The whole thing is compounded by the fact that a large chunk of those holding massive debt do not end up with degrees, having had to drop out from the stress of trying to study, work, and pay back massive loans at the same time. That means they will never even get the income boost that a college degree still provides — creating a snowball cycle of downward mobility in the country’s most vulnerable populations. How did we get here? Extreme politics played a role.

In the US, the Koch Brothers/Grover Norquist tax revolt camp of the Republican party has been waging a state by state war on public university funding for years now: states today provide about $2,000 less in higher education funding per student than before 2008, the lowest rate in 30 years. Meanwhile, the subprime crisis cut the ability of parents to use home equity loans to pay for their children’s education (previously a common practice). This left the bulk of the burden to students, at a time when the unemployment rates for young people of all skill levels were rising.

The trend is not limited to the US, of course. In the UK and beyond, completely free post-secondary education is a thing of the past. Beleaguered governments are pushing more and more of the responsibility for the things that make a person middle class — education, healthcare and pension — on to individuals. What are the fixes? For starters, we should look closely at the for-profit sector, where default rates are more than double those at average private colleges. These institutions receive federal subsidies but typically spend a minuscule part of their budgets on instruction; in the US, nearly 50 per cent goes on marketing to new students. It looks all too much like an educational Ponzi scheme.

Transparency is also key — the student loan market as a whole is hopelessly opaque. In one recent US study, only a quarter of first year college students could predict their own debt load to within 10 per cent of the correct amount. Truth in lending documents would help, as would loan counselling paid for by colleges. Sadly, the agency that is leading the fight on both — the CFPB — is under attack from Trump himself. But the administration will not be able to hide from the student debt bubble. In an eerie echo of the housing crisis, debt is already flowing out of the private sector, and into the public.

Before 2007, most student loans were underwritten by banks or other private sector financial institutions. Today, 90 per cent of new loans originate with the Department of Education. Socialisation of risk continues to be the way America deals with its debt bubbles. Would that we considered making college free, as Bernie Sanders suggested. Even Mr Dudley called this “a reasonable conversation”. That way we could socialise the benefits of education too.

[DailyDiesel]

Like it or not, their fault or not, a generation is saddled with monthly payments that rival many mortgages. They can't buy homes, cars, or other goods to help grow and sustain our consumer driven economy.