NYT Thinks Student Loan Poverty Is Good for the Economy

Natalie Kitroeff, “Loan Monitor Is Accused of Ruthless Tactics on Student Debt,” New York Times, January 1, 2014.

Regular readers of the LSTB might know the Education Credit Management Corporation as the creditor in student loan bankruptcy adversary proceedings (and their inevitable appeals) that demands bankruptcy courts order aged, unemployable debtors to sign on to Income-Based Repayment instead of discharging their loans. In an article about ECMC’s abuses of federal student loan debtors, the Times barfs up this howler.

There is $1 trillion in federal student debt today, and the possibility of default on those taxpayer-backed loans poses an acute risk to the economy’s recovery.

Holy crap there’s a lot wrong with this line.

(1)  Not all $1 trillion in federal student loans will be defaulted on. (Okay, the proportion of balances in default is 11 percent, but that’s because the loans aren’t dischargeable, not because they’re threats to the economy).

(2)  Defaulting on these loans would do the opposite of endanger the real economy for a few reasons. One, poor people who default on their loans will spend money on real goods and services instead of debt. Two, the loans are owed to the government or banks whose loans are guaranteed by the government. The bank bailout is either already in place or the loans are self-bailing out (I prefer “auto-TARPing”).

(3)  If defaults are a problem, then the Times should tell us why IBR is such a great idea. There are many people whose loans are so large that we know ex ante to repayment that they’ll never be paid off, especially law school debt. I guess the economy of 2030 can handle IBR loan cancelations better than it would today.

Then a law prof weighs in:

[Stanford University law professor G. Marcus Cole] added that if it were easy to discharge student loans in bankruptcy, lenders would simply not lend money to students without clear assets or prospects. “We need a standard like that to be able to allow students who can’t afford an education to be able to borrow,” he said.

Why should the government be loaning money to people who don’t have clear assets or prospects?

[In 1990] Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security, and appropriate their tax rebates.

The changes helped cut default rates from a high of 22 percent in 1990 to around 10 percent in the 2011 fiscal year.

As stated above, the 10 percent default rates are not a benchmark for success.

10.5 Delinquencies Up

Here are some questions to keep in your head for the next couple of decades as the government procrastinates on the federal student debt bubble:

(1)  How much federal student loan debt will have to be written-down because it’s unpayable?

(2)  How much will student debt interfere with people’s living standards and retirement saving?

(3)  How will the write-down come about?

(4)  When will it come about?

(5) Who will pay for it?

(6)  Just how acrimonious will it be?

I can tell you right now that so long as the Times thinks it’s bad for the economy when the government isn’t grinding people into poverty with predatory loans, the procrastination will continue.

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24 Responses

  1. Matt, the end to PAYE will likely come when some Republican with power in Washington looks under the curtain and discovers that the program has hemmoraged far more then the two billion dollars (over 10 years) that was projected at its inception. We then see a crude cynical reaction that will probably leave students worse off, rather then one which gradually remediates the problem of unlimited graduate school loans regardless of outcome.

    • Tom Petri (R-Wis.) has proposed the ExCEL Loan Act, which would eliminate all repayment plans but IBR, restore PAYE’s features to the old IBR’s (e.g. monthly payments based on 15 percent of discretionary income instead of 10 percent), and get rid of the 20/25-year loan cancelation feature. It would greatly reduce needless defaults, but unpayable debts that would last a lifetime would in fact be unpayable debts that last for a lifetime.

  2. While that’s not as vindictive as it could be, it obviously does not deal with the central problem which is a lack of price controls on the educational institution that can determine the cost of its tuition. It also preserves a status of perpetual soft default. When the person who takes out the loan dies, then the loan will finally terminate with huge paper losses.

    Here in an interesting question for our readers. Lets suppose we have a couple X and Y. X is a lawyer who has a huge debt. He/She avoided having their spouse’s income counted towards their own by filing separate income taxes. Thirty years go by, their spouse dies, and their $700,000 home passes to the X by right of survivorship. Is the Fed’s collection agency able to collect 15% of the value of this house and the rest of the estate which passes as income at the time the estate is probated.

    Lets suppose that X then dies owning this $700,000 house and some other assets. Is Fed Cred then entitled to collect 15% from the probate court, or the full face value of the loan from the probate estate now that X has passed into the great hereafter. If questions like these keep you warm at night, congradulations, you are a lawyer.

    If Excel becomes law, these questions will become particularly relevant.

  3. The utterly self-serving comments of Professor G. Marcus Cole show how deeply into the scam the law professoriate is.

    What about need-based scholarships? What about LOWER TUITION?

    Why does all the risk have to go on a young person whose life may well be wrecked by the non-dischargable loans he took out?

    Why can’t the professor see one inch beyond his nose?

    Greed, arrogance and dishonesty are why.

  4. Possibly X could arrange, before the death of either Y, or themselves to have real property or other assets transferred to a trust as a way of avoiding such payments.

    I have no idea whether the proposed legislation would prevent such a work around.

    • Interesting questions. I’m not an income tax expert, but I think a real estate transfer doesn’t count towards adjusted gross income. It might count towards inheritance or gift taxes, but that’s different.

      As to the death of the debtor, I think the testator’s estate would be liquidated to satisfy federal education creditors, so I think you’re right that there will be plenty of artful ways of ducking the ExCEL Loan Act death tax.

      Dying penniless to benefit one’s kin handsomely is a time-honored American tradition.

  5. “Why should the government be loaning money to people who don’t have clear assets or prospects?”

    Because 1/2 the U.S. Congress is convinced that there’s no other way for the poor to not be poor, and the 1/2 that actually understands economics kind of want the poor to stay that way.

    It’s madness. If the government was lending $160k unsecured to poor people to start unresearched, dead-end businesses, there would/should be an uproar. Yet they regularly give what are basically unsecured business loans to people who have almost no prospects because they cloak it in “education.”

  6. I don’t think we will have to wait decades. This fucker is going to blow in the next 5-7 years when, coincidentally, student loan debt will likely hit $2 Trillion. I truly believe that people are just going to start defaulting en masse, under the general line of reasoning that “my credit’s shot, I can’t repay this debt by any stretch of the imagination, so fuck it, I’m not paying.”

    Those of us who are among the first wave to get caught up in the post-1991 craziness are now in our 40′s and 50′s. We are closer than further to retirement age, with years of collection agency harassment, payments already made one way or another totaling 100%, 200% or more of what we originally borrowed, with an equal amount still “owed.” In addition to the car industry and the housing industry, another area/entity that should start taking notice of the student debt bomb any time now is the AARP. And the retirement industry. Every dollar spent repaying decades-old student loan debt is a dollar not put into a 401k or IRA.

    It will be acrimonious as shit, given that lots of people are begrudging long-term unemployed a few hundred bucks in emergency unemployment assistance. The NASCAR demographic is going to go apeshit when the inevitable mass forgiveness for student loan debt starts taking place. This is why conservatives like Jason Delisle at the New America Foundation are beside themselves with hatred for IBR — it’s the first major foot in the door.

    I, for one, am actually looking forward to the fireworks. Hopefully, there will be some entertainment value when the Department of Justice starts prosecuting corrupt officials from ED/Federal Student Aid.

    • Loan forgiveness is not necessary – just make student loans (including loans already made) dischargable in bankruptcy like, say, gambling debts and the problem will largely go away. Once the loans are dischargable people will either go ahead and go bankrupt, or be able to use the threat of bankruptcy to negotiate acceptable settlements with their creditors.

      And while purist fiscal conservatives may make some noise, as the incredible toll of destruction becomes clearer, I don’t think the NASCAR/conservative crowd will man the trenches over this.

      It’s not like law schools and debt collectors are things they like. And the NYT’s blase attitude towards policies and practices one would think a theoretically progressive, compassionate, caring, leftist newspaper would abhor shows the NYT realizes this. NASCAR does not love the NYT, but law professors do. And the NYT knows this and plays accordingly, innocents lives destroyed be d*mned.

      • I don’t disagree with you, Maxx. The fact that people like my brother- and sister-in-law, for a real-life example, can go out and buy tens of thousands of dollars in shit (iPads, high-end watches, etc.) and then bankrupt the credit card bills, even with the supposed “tougher” bankruptcy laws, is a glaring example of the idiocy of law and public policy on this matter. Same thing with people who go to Vegas and lose their shirts. Or small (and big) business owners who use their companies as personal piggy banks and suck them dry until (quoting the movie “Goodfellas”) they “bust the joint out. You light a match.”

        However, I would remind you that the insane stripping-away of all normal consumer protections from student debt started during the 1970′s era of Stagflation. All of the hard facts from the time showed that less than 1% of all bankruptcies had student loan debt as a major component. Nevertheless, the American Bankers’ Association, under siege from the budding Archie Bunker, “Reagan Democrat” demographic of the time due to said stagflation, needed a boogeyman to vilify. Hence, the fairytales put forth about mythical “welfare queens” — newly-minted doctors and lawyers traipsing straight from commencement to bankruptcy court.

        Also, it is my sad personal experience with student loan debt collectors that these people all seem to be located in economically-blighted, rust-belt type areas: Buffalo, New York; Fishers, Indiana; Wilkes-Barre, Pennsylvania. It’s as if there is a conscious strategy of hiring people with nothing to lose and nothing to win, and unleashing them and their resentment on those of us who are better-educated and — at least in theory — better situated to climb the rungs of what’s left of the middle class.

  7. I briefly reviewed the the ExCEL Loan Act. In its present proposed form it caps accumulated interest on the loan at 1/2 the principal of the loan itself. So take out $100,000 you pay another $50,000 in interest. Its a good way to prevent interest payments from spiraling out of control to a level where 1) they will never be paid off. or 2) Upon death, the person’s estate would get taxed a much lower figure rather then say a J.D. Painter amount. Say $500,000 in interest and fees.

    • I’d forgotten about that. For what it’s worth, under current IBR/PAYE, interest isn’t capitalized onto principal, so debts can’t balloon out of control.

  8. The truth is the government makes a lot of money on the student loan system. I think this year it was over 40 Billion. The reason is they make a ton of money off of people that pay back there debt over time. Someone that borrows 200k in student loans may easily end up paying the government 400k when it is all said and done.

  9. Sure, the NYT has its head up its a** – far from the first time.

    But, still, they can’t touch that hack Leiter, who goes on HuffPo (where better to troll for ignorant law school applicants) to pump out this idiotic lie,

    “Less familiar is that in 2005, Congress overhauled the bankruptcy laws to make them much harsher for debtors and much friendlier to creditors; among the changes, no student loans were dischargeable in bankruptcy any longer, except in extraordinary circumstances.”

    http://www.huffingtonpost.com/brian-leiter/american-law-schools_b_4508504.html

    Non-dischargeability *long* predated the 2005 Act – but that doesn’t fit in with Leiter’s huckster narrative -

    1) This whole “scamblogger movement” is a deceptive tempest in a teapot, born of the transient 2008 recession, soon to end in the sunlit uplands of soaring demand yadda yadda yadda…

    2) It is all George Bush’s fault (and dem ebil Repuglicans…).

    And Leiter thinks of himself as a qualified law professor…

    • Oh cas127, don’t you know that anyone who criticizes legal education and isn’t a law professor is just an enraged cyber-ranter no matter the merits of their arguments or Simkovic’s refusal to address them? (These aren’t ad hominems, by the way, because … THEY MEASURED A PREMIUM!)

      Keep trying, someday you’ll be a “bottom-feeder of cyberspace” like me.

      • I’m actually kind of surprised that Leiter’s double-header over at HuffPo hasn’t drawn more attention (judging by the low number of tweets/likes/comments).

        (Btw, I’m really not kidding about his trolling for applicants/suckers…a bit of a Journo-list like concerted effort seems to be a abornin’ over in law school land lately…a few other “2016 sunlit uplands” pieces have come out recently).

        Leiter is pretty well known and he lays out a couple of whoppers in the combined pieces – perhaps the seemingly schizo nature of the articles (“sure these are bad times-but they are somebody/anybody else’s fault-and…sunlit uplands) provides cover.

        Or maybe HuffPo is so far off daily scamblogger radar (why else *would* a high profile academic publish there, if *not* to rook the masses of the naive…) that the pieces haven’t registered yet.

      • I know OTLSS published a piece on them last week. The author liked the first post but not so much the second. I’m not interested in them as I’ve put in my hours discrediting the “Economic Value” paper. I consider every day I don’t write about it and its resultant discussion a blessing. No joke.

  10. Re: the percentage of federal student loans in default. The number skews artificially low, because about half of all student loans are currently in forbearance or deferral, by which they obviously CANNOT be delinquent. Last spring, the Liberty Street Blog of the Federal Reserve Bank of New York ran a separate tabulation on the delinquency rate on the student loans that have actually entered repayment. Their conclusion? 31%. By way of comparison, the peak subprime delinquency during the housing crash was 44% or thereabouts.

    • Hi Unemployed Northeastern,

      Actually, we can now do better than that Liberty Street report as ED puts up the loan status by type.

      As of Q4FY2013, out of $1,032.1 billion in FFEL and DL loans:

    • $94.6 billion are in forbearance.
    • $128 billion are in deferment
    • $93.5 billion are in default.
    • That’s $316.1 billion (31 percent of the total).

      I think the Liberty Street people were counting loans that were growing as not in repayment, which would’ve included in-school debtors.

    • $163.2 billion were in-school.
    • $54.3 billion were in grace.
    • $489.7 billion were in active repayment.
    • $8.8 billion were in “other.”
    • Out of the $371.9 billion in direct loans that were in repayment, deferment, or forbearance, $79.1 billion were in some kind of income-sensitive repayment plan. ED doesn’t say how many FFEL loans are in IBR/ICR/PAYE.

      I think there are about 4.4-6.6 million people out of 39.6 million who have defaulted on their federal student loans. At least 9.7 million people are either in default, forbearance, or deferment on their federal loans. The potential ceiling is 15.8 million.

      I’d love to know how that compares to mortgages, auto loans, and credit cards. It’s certainly more than 25 percent.

  • “I’d love to know how that compares to mortgages, auto loans, and credit cards. It’s certainly more than 25 percent.”

    ML,

    I’ll fish around – I’m pretty sure the Fed tracks historical default rates for mortgages, auto loans, and credit cards too.

    I’m also pretty sure that even at their worst, none of these have actual/potential default rates anywhere near student loan rates (which are the product of systemic institutional abuse, divorced from any financial/legal consequence).

  • Liberty Street was absolutely counting people who were still in school – by the very nature of being in school, their loans CANNOT become delinquent or in default, so why should they be tallied? It would only serve to artificially lower the default rate.

    Incidentally, $316 billion was about the sum total of outstanding student loans a decade ago.

    And cas127 is correct in that the DOE games the hell out of the official default rate. I think it no coincidence that the erstwhile two year default cohort, now three years, is easily conquered by the three years’ worth of forbearance/deferral periods afforded to federal loans. And of course, since one can go on IBR/PAYE even if they are unemployed, I fully expect the future default rate to fall quite a bit, at which point the politicians will say “Everything’s solved!” even if no one can make an actual payment.

  • Here we go – comparative loan delinquency rates -

    http://static.cdn-seekingalpha.com/uploads/2013/1/9/984857-13577532829213448-Colin-Lokey_origin.jpg

    http://seekingalpha.com/article/1105261-student-debt-a-trillion-dollar-bubble

    Looks like I was off concerning comparative delinquency rates (credit cards have been worse…although the trend is in my “favor”…).

    But…

    I also suspect that the abundance of deferral techniques available to student loan debtors (relative to almost all other kinds of debtors) seriously skews the delinquency/default data.

    What we *really* need is life-of-loan default rates.

    (On a semi-related note, the Feds game the f*ck out of student loan default rates as well – using a laughable two or three year initial period as the heavily publicized default “rate” period…as opposed to a rational life-of-loan approach).

    • Argh…just realized I essentially reposted the same *delinquency* data that you already had posted (as opposed to *default* data) – apologies…still fishing for *default* data…

      My guess is that default data is much harder to come by because (unlike delinquency, in most cases) the definition of “final” default gets fuzzy.

      Not to mention the fact that most interested parties (student debtors, government creditors) are mostly incentivized to obscure the true default rate (see two/three year “cohort” default rates reported by Feds, etc.)

      • Cas,

        I know that the Chronicle of Higher Education estimated the lifetime default rate a while ago – probably in the early to mid 2000′s, and concluded it was around or a bit north of 20%. The article may or may not be behind a firewall, though.

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