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.
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.