student loans

GAO Report: RIP High-Income IBR Deadbeats

We are alerted to the U.S. Government Accountability Office’s latest report, “Education [Department] Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options” (here). The report asks one of the questions I’ve always had of income-based repayment plans: How much are people on them earning?

The answer, as of September 2014, is squat—even less than I would’ve guessed.

(I suspect the GAO chose September because it’s the end of the fiscal year.)

GAO Report--Figure 4 (Income)

Out of 11.2 million borrowers in repayment, 13 percent were in IBR and 2 percent were in PAYE (1.46 million plus 0.22 million). If you play with the numbers right that means about 2 percent of all IBR-plus-PAYE borrowers earned more than $80,000 annually. That’s about 30,000 people. By contrast 72 percent (1.2 million) earned $20,000 or less.

Other fun facts: One, about two-thirds of all IBR/PAYE borrowers are women, so we can predict that the REPAYE plan of the future, which will essentially require debtors’ spouses to pay their debts, will be an anti-dowry. Two, within the IBR group, 13 percent were paying the equivalent of a 10-year repayment plan, and for the PAYE people, it was only 5 percent, implying that perhaps some high-income debtors are not going to require loan forgiveness anyway. Three, only one-third of IBR borrowers went to grad school; for PAYE it was only a fifth.

The low-income finding is important because there have been some articles about how IBR and the changes to it confer vastly unfair benefits to high-income deadbeats who could repay their loans if loopholes were closed. For example, earlier in September, The Wall Street Journal shrieked about studies showing how IBR and PAYE are sops to doctors and lawyers (not M.D.s and J.D.s apparently), and my personal favorite occurred last February when The Washington Post ran an op-ed by the New America Foundation’s Jason Delisle and Alexander Holt, who argued against PAYE based on a lopsided hypothetical of a law grad who made $70,000. Thanks to the GAO study, this person was not only lucky as law grads go but also totally unrepresentative of IBR/PAYE borrowers.

So going forward, I fully expect media outlets and the NAF to report on how the changes to IBR broadly favor low-income debtors, and that there aren’t so many high-income debtors taking advantage of the system.

But what did the NAF actually say about the study? It appears to be shifting its focus away from IBR deadbeats to graduate debtors on PSLF specifically. That’s not really a topic I’m interested in exploring today, but those hoping the authors would apologize for wasting so much of our public-policy mental bandwidth up until now will have to wait. The IBR deadbeat might be dead, but I’m sure they’ll resurrect it fairly soon.

In the meantime, the NAF attacks IBR by blaming students for earning too little money. I’m not kidding. Consider their closing line:

Given that borrowers in IBR and PAYE have such low incomes and high debt levels, the plans look much more like very long-term programs for borrowers, not sources of temporary relief.

What does the NAF expect? The economy is still depressed. It won’t really recover without fiscal, trade, and labor reforms. It’s not the borrowers’ faults they don’t have high-paying jobs, nor is it IBR/PAYE’s. So what’s the solution? Making them pay more? It’s unclear where the NAF will go from here, but more debt, more education, and tougher repayment plans aren’t going to work. Given that the NAF took a wide swing and missed over the IBR deadbeats, I discourage optimism.

Speaking of pessimism for college grads, the Census Bureau has updated its “Income, Poverty and Health Insurance Coverage” data for 2014. As with last year, I won’t delve too deeply into the analysis, but here are median earnings by education level for the 25-34 bracket.

Median Earnings by Education (25 - 34)

Okay, the median college grad earned $1,000 more in 2014, but it’s still way below the peak in 2000.

Meanwhile, the percent of college grads who weren’t working is still 3 points higher than in 2008, and 6 points higher than 1997. That amounts to more than half a million college grads who could be working. Moreover, it’s noisier, but there’s been an upward trend since the 1990s in professional-degree holders who don’t work.

Percent of 25-to-34-Year-Olds With Zero Earnings by Education

The best we can say is that things didn’t get worse last year, but it’s much too soon to say things are getting better.

Why Debtors With the Smallest Incomes Have the Larger Problem

…Is how The New York Times meant to title Susan Dynarski’s Upshot piece, which was instead titled, “Why Students With Smallest Debts Have the Larger Problem.”

The article makes other odd or incorrect statements. For example, it says that 7 million borrowers are in default, but looking at its sources that probably includes some debtors who have both direct student loans and guaranteed student loans. (The link in the article doesn’t help.)

It then claims that debtors with high debts are less likely to default because they tend to be high-income professionals. In fact, those debtors are more likely to be sophisticated enough to sign on to a hardship deferment when trouble arises, or more commonly use IBR and its friends.

The statement also commits what’s rapidly becoming the cardinal sin of student debt reporting: using debt as the independent variable and not income. People can’t decide how much money they make, so if they have high debts, then they’re hosed. It’s not all sunshine and roses for high-income, high-debt workers either, as the interviewees from The Wall Street Journal illustrated a couple weeks ago. debtors with small balances and high incomes don’t default on their loans.

I won’t beat up on the piece too much. Its main point is that the average defaulted balance is fairly low, and given that I regularly report on that as the student debt crisis, I acknowledge that the NYT has gotten to the right place despite some staggering. It’s also correct to say that reducing balances won’t reduce defaults, as the author states.

One thing that will reduce defaults is increasing borrowers’ incomes and discouraging people who have little chance of completing college from attending. The latter policy, of course, contravenes the well-established view that everyone can get ahead of everyone else simultaneously thanks to credentials. Instead, the author argues for extended, income-based repayment, which essentially normalizes default—but we won’t call it that.

Someday the media will discover that job creation and higher pay will reduce defaults, but that day is still a long way off.

Prepare for the Return of Private Law School Loans

That’s what you should be inferring from Charles Lane’s WaPo op-ed, “How student loans help keep expensive schools in business.”

Lane argues that Grad PLUS loans are, “a de facto bailout, enabling many law schools to maintain capacity and delay reforms, or settle for modest ones, while continuing to charge more or less the same high tuition.” The author’s position, to say nothing of his article’s title, largely resembles my early forays into the subject, especially, “How Grad PLUS Loans Sustain Zombie Law Schools.” It’s always nice to see mainstream sources arrive at my conclusions.

It’s not so nice when they don’t fully understand the implications. If Congress gets rid of Grad PLUS loans, or scales graduate lending back dramatically, then some law schools will demand their students substitute the tuition difference with private loans. These loans won’t be easily discharged in bankruptcy, so it will be a strong reason to stay clear of law school, even more prestigious ones.

Before I go, I just wanted to editorialize on Lane’s opening: “Income inequality bedevils the United States, as does debt, of the public and private varieties.”

This is bad writing. One, “income inequality” doesn’t play any role in the editorial, so a good editor would’ve axed it. Two, public debt doesn’t bedevil the U.S. at all. Currently, 10-year treasuries are trading at 2.18%.

10-Year Treasuries

(Source: FRED)

Yes, I’m not the first to recognize that WaPo caters to people who insist public debt is the second evilest thing in the history of evil (no. 1 is inflation), but eliminating Grad PLUS loans won’t close the deficit. Does Lane write editorials against corporate welfare?

Still, there are many correct points in the article, and it suggests that our East Coast media elite are finally beginning to turn on student loans instead of debtors—but not totally.

WSJ More Afraid of IBR Than Student Loan Defaults

I woke up early today—and found that Google Alerts punked me!

Google Alert

Yep. People aren’t signing on to IBR … and they’re “surging” on to IBR.

Okay, the most charitable interpretation is that yes, the WSJ is right that big numerators over small denominators give you big percentages, and at the same time, MainStreet is correct that many more people who are eligible for IBR aren’t on it. MainStreet is referring to the large number of borrowers who are delinquent on their loans. In fact, the New York Fed tells us that as of mid-2015 the 90+-day delinquency rate hasn’t gone down since the age of delinquency began in 2013.

2015-08-21 Percent Balance 90+ Days Delinquent

So when the WSJ writes in its article’s subheader, “Taxpayers face risk of covering loans,” it needn’t scare its readers so much: It’s already happening.

WSJ: Grad Debts That Can’t Be Repaid … Can Be?

Josh Mitchell of The Wall Street Journal does some good reporting in, “Grad-School Loan Binge Fans Debt Worries.” There are, as one should expect, some errors.

One, after interviewing a handful of professionals with high incomes and unpayable debts, he writes:

But a number of recent studies show the benefits [of IBR] are largely going to people who need them the least—doctors and many lawyers who will end up making six-figure salaries. The benefits are less meaningful for undergraduate borrowers, because their average debt burden is roughly $30,000 and income-based repayment plans aren’t likely to lower their bills by much.

This is not true. There is no study that estimates the number of IBR freeloaders out there, otherwise the WSJ would’ve named it and cited the statistic. At best all we have is fear-mongering by the New America Foundation. Nor is there a study that estimates the total number of Grad PLUS loan debtors by course of study, median income, and proportion on an income-sensitive repayment plan. Such a study would probably find that the handful of people gaming the system are outweighed by professionals who aren’t earning much. This is the point of IBR.


Of the 5,686 hospitals in the U.S., 73% are nonprofits or government owned, according to the American Hospital Association, thus qualifying their employees to have loan balances forgiven after 10 years.

Do we have freeloading doctors? Response: No! It’s not their fault there are so few for-profit hospitals. If you want them to pay, charge them less. (By the way, one reason I like this article is that it doesn’t obsess over the handful of law grads who have spectacular earnings coming out of law school; it’s nice to beat up on the M.D.s for a change.)

I’ll close:

The collection of incentives—passed in separate measures over several years—weren’t intended to work together to help so many grad borrowers.

Very true, but the issue is what the harm is and where it’s coming from. IBR and its like are not the cause, Grad PLUS loans are. Without IBR, there would’ve been widespread graduate debtor defaults (or at best hardship deferments). This is how the WSJ can find real people who can’t repay their loans without IBR but then say there are studies somewhere out there finding that debtors are making cash sacks.

Or, to butcher Michael Hudson: Debts that can’t be repaid, can be.

ABA Task Force Dodges Student Debt Reform

Oh you knew I would not ignore the results of the ABA Task Force on the Financing of Legal Education. It was a long time in coming, but it required a careful read. My review is at The American Lawyer.

I would’ve told y’all sooner, but I just got back from vacation, which got an extension thanks to a thunderstorm in New York grounding planes in Chicago. Grr.

Office of Management and Budget: +$1.4 Trillion in Direct Loans by 2025

Projected Direct Loan Balances (OMB, Billions Current $)

(Source: OMB FY2016 Mid-Session Review (pdf))

…But we all knew it was going to say that. Also, that number includes other loan programs that aren’t student loans, but those aren’t nearly as big.

The good news, though, is that the actual amount of direct loans keeps coming in below the projections. Here’re the estimates from the mid-session reviews since FY2010 against the actual.

Direct Loan Balance Projections (OMB Billions Current $)

The FY2010 estimate was $161 billion more for 2014 than turned out to be the case. This variance implies that the government is overestimating future direct lending. It isn’t much, but it’s something to keep track of.

I should add that in general the OMB predicts that direct loan debt will even out at about 9 percent of GDP.