Monday, June 21, 2010

Final Installment of "The Plight of Current Borrowers: An Appeal For Immediate Relief"

Advocates must remain focused on their area of interest and the people whom they're trying to help and encourage those individuals to get involved. It is a mistake to meander from specific types of advocacy work. When doing so, you leave a lot of people in the lurch. In addition, it's important to carry through with your work and criticism of a particular problem with sound solutions. The indentured educated class should not be abandoned. In fact, it's critical that individuals in this class become more involved. That's why it's important for advocates to stick to their course and serve as models for these individuals. That said, I'd like to thank several people for their continued support - Cameron, Nick, Gail, Liza, Michele, and Dustin. You are just a few of the many people who are fully committed to helping the cause, and I am grateful to all to you.

Now is not the time to broaden the scope of one's critique. The student lending crisis is complex and inextricably bound to larger U.S. problems (excessive deregulation, the sub-prime mortgage crisis, etc.). While it's perfectly acceptable as a researcher and advocate to incorporate these various themes, it's absolutely necessary - in my view - to remain committed to this cause and to providing solutions for ways in which to end the student lending crisis. There is no doubt this work, I've come to realize, is going to require a lifetime commitment on my end. I know the ins and outs of academia, and I appreciate its depth. Alas, education truly matters to me, and I think everyone ought to have access to it.

Below is the final installment to "The Plight of Current Borrowers," my paper that was delivered at the Rev. Jesse Jackson and the Rainbow PUSH Coalition's recent convention on student loan reform. If you wish to read the paper in its entirety, which includes all the footnotes, you can do so here). 

Part III: Providing Relief

There are a variety of ways by which the Administration, Congress, and the Department of Education could be helping current borrowers now and in the future. Short- and – long-term options are detailed below. Again, the complexity of the student lending industry and its relationship to the Federal Government means that hasty solutions aren’t the answer. In addition, student groups ought to be more involved in helping current borrowers. SAFRA has been passed and the next issue is the Department of Education’s attempt prospectively to limit borrowing at for-profits institutions through rulemaking. But that should not be the only focus. Although I applaud the consumer groups’ effort (POSD, PIRG, USSA, NACAC, etc.), their strategy is not as direct as it could be.  They should have said the next big priority is to help current borrowers who have been saddled with debt, drawn attention to the lives currently being ruined, and from that moved on to prospective solutions armed with survey data and case studies showing how bad the debt/default situation is right now.  Instead, they have tried to buck the money and influence monster head-on without building a convincing case.[18]

Short-Term Solutions

The Department of Education has the power to set up hotlines immediately to help answer calls from current borrowers. I investigated the type of responses one receives when calling the general line, and also asked my readers to tell me what sorts of responses they received. Overall, the Department of Education was unhelpful and informed me, as well as other callers, to “get in touch with their lenders to find out information about deferment of loans, etc., etc., etc. (if the loans were issued by private lenders).”

But lenders’ customer support lines are invariably staffed with lightly trained people making modest wages who know little more than to read scripts in front of them (not to mention the obvious conflict of interest in seeking advice about your loans from your lender). If the Department of Education were to install hotlines for current borrowers, they could in the very least provide support to individuals who are not aware of the types of loans they have. At this juncture, most borrowers with whom I am in contact (and that numbers in the thousands now) feel that no one cares about their financial situation, and many are unaware to whom they owe their debt (that is why I always make a point to ask borrowers if they have Federal loans, private loans, or both). Moreover, Secretary Duncan has the power to intervene and do something for current borrowers.

Although IBR has been implemented to help current borrowers and it is a good start, it has fallen short in a number of ways: (a) it does not cover private loans; (b) if a married couple files their taxes jointly, and both have student loan debt, both incomes are considered as one, but only one’s person debt load is taken into account, resulting inflated payments that are impractical for these couples with high shared debt loads; most importantly, it does nothing to assist with people in default. The number of people who will default is expected to rise, so it is imperative that a program like IBR or something else will assist them in getting out of this devastating situation. If these shortcomings were to be addressed, this good program could become a major part of helping – most likely – millions of people recover from default and dramatically improve their lives.

Long-term Solutions

Most of the solutions I suggest also come with a number of questions about why the Obama Administration and Department of Education are failing to address the devastating effects of how the student lending industry is structured and operated. Instead of dealing with the crisis directly, the legislation that has recently been passed only addresses a few aspects of the problem. Most worrisome is how millions of current borrowers have been left out of these solutions. While restoring bankruptcy rights to student borrowers is crucial, that is not the best possible approach to helping the indentured educated class. Indeed, restoring consumer protection rights is important. However, declaring bankruptcy is not a simple task, and it also leaves the borrower in a problematic financial situation. Instead, it would be more beneficial if additional legislation were proposed to ease the burden of owing mountains of debt. For instance, Sen. Sherrod Brown drafted a bill called the “Private Debt Swap Proposal.” (This bill proposes that the Federal Government take on private loan debt – i.e., assumes ownership of it – and therefore allow borrowers more flexibility with the terms of repayment). So far, there has been no interest or traction on this bill, and yet it could be a productive way to help current borrowers.

In my opinion, the biggest mistake the White House and the Department of Education are making is tackling the debt crisis on a prospective basis. Individuals in tax trouble are not being told to wait for new legislation so future generations of taxpayers are helped; rather, the IRS is trying to help current taxpayers resolve their debts.  Likewise, homeowners facing foreclosure are not told to wait for legislation to help a future generation, but are being provided with assistance now.  Why are student loan borrowers, who do not even have the same consumer protections to start with, being treated so differently?

It is more than possible to work out programs to help borrowers get back into repayment and allow them the opportunity to become productive citizens. If borrowers are expected to pay their loans back, which most of them wish to do, why can’t the interest rates be abolished, along with as the huge penalties people must pay in order get out of default? How do those fines and penalties help someone who is struggling financially to get back on their feet?


Substantial evidence supports the claim that the student lending crisis is real and devastating. All of the testimonials I’ve collected over the past year and a half illustrate that the lending crisis is far-reaching and affects millions of U.S. citizens. Indeed, it’s not just the borrowers who are suffering, but those who co-signed on their loans, their children, and so forth. As an inter-generational problem, it has the potential for long-term devastating impacts. While Japan has its “lost generation,” it is no exaggeration to say we risk losing many generations. Indeed, at this point they have no legal recourse, which could be used as leverage against their lenders. Current borrowers should not have to wait for future solutions. A two-part approach that includes both dramatic short- and long-term solutions could help millions of current borrowers get back on their feet and allow them to once again to become productive U.S. citizens. It’s time to listen to these voices and consider taking an approach that will affect their lives in a powerful way – they have been punished long enough.

President Obama said in his State of the Union Address, “‘in the United States of America, no one should go broke because they chose to go to college.’” Unfortunately, this reality has to come to pass for millions of Americans. While we need to continue to innovate, and reform education and education financing for future generations, we also owe it to current debtors, who have unfairly funded an unregulated industry, to help them pay back their debt in a reasonable, non-punitive way. It is time to move beyond high-flown rhetoric; it is time to act.

Instead of evacuating from areas like the Midwest for California, student loan refugees are fleeing the country for opportunities in South Korea and elsewhere (it's a strange thing that I'm now teaching The Grapes of Wrath here in South Korea. It's oddly similar to the current crises affecting the U.S., and it's a tale that's uncannily similar to my grandmother's upbringing in Kansas). Moreover, I had to evacuate my home in D.C. I sold everything, gave mementos away much like Ma Joad did, also said painful goodbyes to my family and friends, and fled to Asia. Even the simplest idea of the American dream is over.


Ken said...

how did "excessive deregulation" effect the student lending crises?

"hasty solutions aren’t the answer." but you recomend a bill called the “Private Debt Swap Proposal". If borrowers can't pay the debt to one lender, what makes you think they will pay it back to the government? This IS a hasty solution. A private student loan debt cannot be discharged because unlike a car or house loan, there is no underlying asset. Someone has to pay the piper.

The enemy here is the bloated education sector, that employs and provides benefits to tons of little old ladies that are ignorant of the internet, and professors that cannot genuinely train young people to become productive citizens. Their Hubris stinks to high heaven. The advent of the internet should cut the costs of college in half, and eliminate the need for students to buy books because of knowledge being reproduced on the internet. Instead we see the cost of college continue to sky rocket and professors signing book deals so they can teach a class that forces the students to buy the book that they literally wrote. And who pays for it? Every student that gets a guaranteed loan from the fed because it does not require a credit check. The money gets laid out on the table and the schools just take it, what else would you expect. Strangely similar to the guaranteed loans in the sub-prine mortgage crises.......

C. Cryn Johannsen said...

Ken, have you investigated the Private Debt Swap Proposal? Just curious. I appreciate your comments, but if you look into what's happened on Wall Street with regard to excessive deregulation, you'll see that student loans are being bought and sold in the same way as mortgage backed securities were. Sure, the history is different, but the correlation between the housing collapse and the student lending crisis is the same. Also, this claim about professors making students buy their books is more than just a bit problematic, not to mention irrelevant. It has not bearing on this problem.

Anonymous said...

The reason why little can be done for current borrowers is relatively simple. Unfortunately current borrowers have a contract. The loan, or promissory note, is a binding contract, yes. To alter an existing contract requires compensation to the loan holder — if the change is economically negative towards the loan holder’s interests. This is why most borrower benefits in the federal student loan programs are only prospective — only for new loans.

Unless you are possibly talking about VA mortgages, the mortgage situation is completely unrelated. The government is required by a 1990 law to estimate the cost of a single year's new loans over the life of that loan cohort -- 20 to 30 years. Re-estimates occur, largely due to changes in economic assumptions, which are difficult to predict. Changing the borrower's terms, conditions and benefits after the fact would require the government to come up with the budget money somehow -- cutting future features of the student loan program, cutting other mandatory programs such as Medicare, or raising taxes.

When IBR was enacted, the law made existing borrowers eligible. In exchange, an unprecedented three-year interest subsidy program was implemented for loan holders. Otherwise the lenders would have had to eat the difference.

There are several ways to increase benefits to existing borrowers, but the colleges don’t like to focus on it, because it takes the focus off how the government can help them smoothly fill their classes next semester and the semester after that. There is only many new laws that can be implemented each year, and the colleges have a lot of influence in trying to ensure that the focus is on future and current students, not people who aren’t even in school anymore.

Anonymous said...

People keep asking why they can't refinance. (1) The focus of the federal loan program is access to a postsec education, i.e., getting new students in the door, and the organizations (postsec institutions) that lobby for the federal programs care very little about what happens after students leave (drop out or graduate). (2) Who's gonna pay? When you refinance a mortgage you pay huge closing costs; you may not feel it, because it is rolled into your new payment, but you pay, believe me. This helps defray some of the costs (and risks) for the lender. While student and parent loans have had up-front fees since 1981, consolidation loans have never had a fee.

As long as most of the loans were FFEL rather than DL, the cost was a major obstacle for changing the laws on re-consolidation. Most of the FFEL consolidation loans are 20, 25 or 30 years, and the govt must immediately appropriate the net cost of subsidizing those loans on the books of the lenders and guarantors for all of those future decades. Even for loans that do not default, there are substantial costs in providing a guaranteed rate-of-return to loan holders.

Now, however, there will be no new FFEL loans after July 1 2010. It is a different ballgame as far as costs. Direct loan consolidations make money for the Treasury. There is still the obstacle that the schools and their lobbying associations do not want the legislative focus shifted to "students who are no longer even in school." A new obstacle to changing the law is that, without the ability to make new loans, the FFEL lenders most like will want to hang on to those loan assets rather than see them consolidate into DL. Even the lenders who want to get out of the business may want to try to sell at a premium rather than simply having the borrowers consolidate those assets into DL. After all, if you sell those loans you can try to negotiate a deal that includes all the interest that the new holder will receive over the next 30 years. With a consolidation or reconsolidation, the current holder only gets par plus whatever accrued interest is currently there.

One reason why schools have cared so little about what happens after disbursement of the original loans is that there is little to fear from the default rate sanctions. Now that the fed will be looking at defaults three years out rather than two years, this may possibly change. The schools may have to focus more on ex-students than they have in nearly two decades. This probably won't help people struggling now with repayment but it may force some changes down the road.

Anonymous said...

There is no relation or comparison of federally-guaranteed student loans to subprime mortgages. Most subprime mortgages were backed only by the faith of those who originated them. (A minority of them were backed by Fannie/Freddie, which were not federal agencies and which had, at best, only a vaguely-implied taxpayer backstop.)

The federally-guaranteed student loans (FFELPs), made by banks, nonbank lenders, state lending agencies and nonprofit foundations, however, were guaranteed 99% against default by guaranty agencies' federal government funds, which, in turn, had those loans guaranteed 95% by the actual U.S. Education Dept. After 6/30/10, there will not be any more of these loans issued, at least, and all newly-originated loans starting July 1 will be federal direct loans.

FFELPs were/are among the safest investments in the world. Defaults are very low, and, if the borrower defaults, sure the investor doesn't get the 20 years of future interest, but at least principal (including capitalized interest) is protected. In addition, the quarterly return is guaranteed by the taxpayer to be at a certain level, and U.S. Ed Dept covers it with quarterly payments to the loan holder. For the certain types of loans ("subs") where the borrower doesn't owe interest during school, the U.S. Ed Dept reimburses the loan holder for that interest.

The problem with U.S. and international "sophisticated" investors is that apparently they aren't so sophisticated. Three years ago they thought any type of loan imaginable was as safe as Fort Knox. By spring 2008, they thought all types of loans were as risky as an unsecured payday loan. Stupid. They missed the boat. While the investment "masters of the universe" can definitely do something about unfreezing the secondary and securitization markets of FFELPs issued prior to 7/1/10, there will be no new FFELPs issued.