No Need to Default, Ever.

We have often argued in the past that the best offense is a good defense. Students should avoid over borrowing in order to avoid the possibility of having excessive debt obligations. But obviously many students find out that the premises upon which they made their decisions were faulty. Whenever that unfortunate circumstance occurs a few students seem to opt for the most painful option available to them; default. That is a big mistake. Default is very costly; its implications stay with you for practically a life time and it is not warranted. There are many other options available to crack that nut. The following is a recent article that appeared in Businessweek that makes this very same argument:

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The Needless Tragedy of Student Loan Defaults

By Peter Coy on November 28, 2012

http://www.businessweek.com/articles/2012-11-28/the-needless-tragedy-of-student-loan-defaults

For the first time on record, the delinquency rate on student loans has jumped above the rate for credit cards, car loans, or any other kind of consumer loan. The tragedy? Many of those loans will default, with stunningly harsh consequences, even though there are many good options for debt relief—deferment, forebearance, or reductions in monthly payments.

“There is actually no rational reason for a borrower to be delinquent or default on their loans,” says Mark Kantrowitz, president of MK Consulting in Cranberry Township, Pa., and operator of the FinAid.org website.

Borrowers who are unemployed, in the military, or back in school can ask for up to three years or full or partial deferment on repayment of a federal loan. For those who have a job but don’t earn enough to cover the monthly payment, there are six options: graduated repayment, extended repayment, income-based repayment, income-contingent repayment, income-sensitive repayment, and pay-as-you-earn repayment. In other words, the federal government will do just about anything to keep borrowers from giving up and walking away completely.

If that’s the carrot, here’s the stick: Defaulting is “like a trip through hell with no light at the end of tunnel,” says Kantrowitz. The federal government can garnish up to 15 percent of a borrower’s wages, Social Security disability, and Social Security retirement income without a court order. Unlike other debt, student loans can’t be discharged in bankruptcy. Collection charges of up to 20 percent can be skimmed off the top of payments—enough to turn a 10-year loan into a 19-year loan. To say nothing of the lasting damage to a borrower’s credit score, which will make it hard or impossible to get a credit card, auto loan, or mortgage.

And, oh, by the way, if you win the lottery, the first winner from your windfall is the Education Department.

With that kind of downside, why do so many people default on their student loans? Some may not understand their options, or put off dealing with the problem. Also, research shows that many borrowers consider their student loans illegitimate and don’t feel they should have to pay them back. In fact, default rates are four times as high for dropouts, who presumably feel they didn’t get their money’s worth.

There’s a cyclical factor, too. The Federal Reserve Bank of New York reported on Nov. 27 that the percentage of student loan balances that were 90 or more days delinquent rose to 11 percent in the July-September quarter, higher than the delinquency rate on credit cards since the survey began in 2003. The spike comes at a time when youth unemployment remains historically high. Even for those with jobs, people are paying ever more money for educations that don’t equip them for jobs that pay them enough to cover their debts, as I wrote earlier this year in “Debt for Life.”

At the same time, delinquency rates on credit cards, auto loans, and mortgages have been falling because bad credit has been washed out of the system. There’s no such cleansing mechanism for student debt, which now totals $956 billion in outstanding loans, according to the New York Fed. The federal Consumer Financial Protection Bureau, using different methodologies, says student loan debt passed the $1 trillion mark sometime last winter.

Then there’s the fact that some of these student borrowers were probably lousy bets for repayment in the first place. The federal government, which holds 85 percent of outstanding student debt, doesn’t make loans to students based on their ability to repay them. That may sound crazy, but it is designed to ensure that students of all backgrounds and income levels get a shot at a college degree.

That willful blindness also sets up the government for huge losses. The purpose of the draconian punishment for defaulters is to make up for the lack of sound underwriting on the original lending. Clearly, though, the threats aren’t working—and neither are the multiple repayment options the government offers.

Various Repayment Options

Default is a rare case for Pace graduates. Over the past 3 years only 4.8% of those that had initiated payment have defaulted  i.e. stopped payment within 270 days of their first repayment.That might not sound high statistically but it does represent 117 students whose financial life has been dealt a serious blow that will be very difficult to overcome.
I know that no one defaults unless they are at a dead end and they have no other choice. If that is the case then one must accept the consequences and adjust as best as possible to the tough conditions. But this is rarely the case. Many of those that default are not aware of the variety of options available to them.The students themselves are to blame for not being totally informed but the blame is also to be shared by the lending institutions that fail to keep the borrowers abreast of all the new developments as well as the educational institutions themselves who have also failed to keep their former students up to date.

The following example might help shed light on why is it that I feel strongly that no student should ever default: Let us assume that Jane is single, owes #50,000 in Federal Student Loans, has an AGI of $30,000 and that the loans carry a 6.8%. Let us also assume that Jane received her first loan after Sept30, 2007 and that she also received a loan after Sept. 30 2011.

What are some of her repayment option?

A Standard Repayment plans:           $575.40 / month for 120 payments
                                                         347.04 / month for 300 payments

B IBR (Income Based Repayment) $166.00 / month for 300 payments

C Pay-As-You-Earn                             $110.00/ month capped at 10% of Income and forgivness of 
                                                                      the balance after 300 payments.

There are a few other options but as the above example illustrates very clearly it is very difficult to justify default given all these repayment options.  

Default rates: National vs Pace University

That there is a student loan problem is not debatable.  The overall sum of Student Loans is increasing at an unsustainable rate while the ability of borrowers to service this debt is becoming more difficult every day. The most common yardstick to measure the above is called CDR, Cohort Default Rate, which is a measure of the proportion of Federal Student borrowers who default on their obligations within a specific time after the repayment process begins. The 2 year CDR used to be the most common standard until the passage of the High Education Opportunity Act of 2008 which recommended the adoption of a 3 year CDR as a better measure of the default problem.

Default is defined to be a time period of 9 months of nonpayments. The most recent data shows that the problem of default is becoming more acute. The two year CDR has registered an increase to 9.1 % while the three year CDR has risen nationally to13.4%. It must be noted that almost half of the defaults; 47%; are recorded against for -profit-colleges whose total student enrollment accounts only to 13% of the national student body. The record of the not-for-profit institutions ; such as Pace University; is much better. As a group the not-for-profit have 15% of the students and account for 13% of the defaults

The record for Pace students is one of the best in the nation. The last three 2 year CDR for Pace students shows a CDR of 3.4% for those students who started repayments in 2010. That unfortunately is slightly higher than the 2 year CDR for those who started their repayment in 2009 and who had a default rate of only 2.4%.

A high CDR reflects bad on the institution as well. The availability of funds for its students will be affected negatively. The rationale being that the institution is not exercising enough caution in its admission policies and is allowing  its students to carry loan levels that are beyond their capabilities.

Pace University students have an enviable 3 year CDR of only 4.8%. Yet even that low level represents 117 students out of 2399 who have defaulted within 270 days of when they started repayment. The consequences for the student can be rather severe and so must be avoided at all costs , whenever possible. A default will create a bad credit report for life, it could trigger garnished wages and might even affect Income Tax refunds and Social Security benefits.

What is sad about the above situation in which these 117 students find themselves is the possibility that they have not been properly informed of all the options available to them.It is very high likely that each of these students is eligible for the Income Based Repayment program, IBR, which has been available since 2009. Under IBR, loan repayments are caped at a manageble proportion of income  and the balance is forgiven after 25 years of payment. If only one of the 117 Pace students who is in default was not properly informed of his/her options then that is a travesty.

From The Lions Mouth

Debt Déjà Vu For Students

 

We have all heard and even read the news release by Mr. Chopra, the Dodd-Frank created student ombudsman at the CFPB. The following is an article written by him in which he explains the differences between the Republican approach to the evolving crisis and that followed by the Democratic party. In a sense the difference is, as expected, due to the different lens through which each of the two parties sees the world. One wants to place impoe regulations and place limits while the other one shows its faith in market solutions.

By Rohit Chopra
Financial institutions expect borrowers to hold up their end of the bargain when it comes to mortgages and student loans. Shouldn't we expect the same of them?
Before this year's mortgage settlement between regulators and large banks, there were reports of mismanagement by mortgage servicers caused great harm. Improper foreclosures reportedly wreaked havoc on families - including members of the military, hundreds of whom faced illegal foreclosures, many while they were deployed.
Student borrowers whose cases are mishandled can also suffer significant damage. A young borrower facing default and the resulting scar on her credit record could find her dreams further out of reach. Many distressed borrowers worry that they will never be able to buy a home or save enough to start a family. Some have a hard time getting work because prospective employers check their credit.
Last week, I presented a report to Congress on shoddy loan servicing practices that may not be limited to the mortgage market. Student borrowers have reported servicing detours and dead ends that bear an uncanny resemblance to the problems homeowners have faced. And as with the mortgage market, there are reports that military families also got the runaround.
The parallels run deep. As in the mortgage market, student borrowers report that some lenders engaged in aggressive marketing and risky underwriting. Now many borrowers have finished school and find that they can't pay the bills.
Based on the complaints of borrowers, it appears that many servicers depend on being able to extract loan repayment quickly and cheaply, which works when everyone can pay. Although even struggling borrowers tend to look for ways to meet their obligations, too many feel trapped by terms and conditions that servicers won't change.
In tough times, consumers need clarity, not confusion. While loan servicers can't just let borrowers off the hook, they should be able to help them understand their options. But too many borrowers say they can't get consistent answers to simple questions. Instead, they find themselves ping-ponged around departments and talking to multiple people to no avail.
Like mortgages, many student loans were packaged, sliced, and diced into securities. Sometimes consumers are the collateral damage when transfers among servicers don't go smoothly. While consumers can't avoid paying up by claiming they lost paperwork, it seems some servicers are using that excuse to justify poor service.
So why can't the market solve this? When consumers get bad service at, say, a restaurant, they don't go back. But if loan servicing is bad, consumers have to grin and bear it. They rarely get a say on whether a lender outsources its servicing, and servicers are more accountable to lenders. With few viable options for refinancing, ordinary market forces don't apply.
Last year, total outstanding student debt crossed the $1 trillion mark, with private loans comprising $150 billion of that. With more than 850,000 private student loans in default and even more in delinquency, there is a lot of work to be done to make sure these borrowers aren't sentenced to a lifetime of permanent financial distress.
Our student debt problem didn't start overnight, and it won't disappear quickly, either. But the U.S. Consumer Financial Protection Bureau has recommended reforms to assure that past risky practices aren't repeated in the next generation.
While parents might be struggling with mortgages, let's not forget the others caught up in the crisis. They're entering the labor market more burdened than any generation before. That burden shouldn't be compounded by a system that shortchanges them on basic customer service, like making sure payments are processed and records aren't lost. We must keep an eye on the student-loan market to prevent lasting harm to a generation of borrowers and to the economy.

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Rohit Chopra is the Consumer Financial Protection Bureau's student loan ombudsman.

Obama vs Romney

The presidential elections is less than two weeks away. The voters are told , every presidential cycle, that the difference between the candidates has never been this great and that this election is the most important that we have seen in a long time. Well what did you expect them to say? The two parties are essentially copies of each other and it makes no difference who is elected!!! :-)
Ralph Nader never tired of telling us that the two political parties are a duopoly i.e. a market controlled by two firms/organizations. Obviously many  think that the Nader analysis is faulty and that we do have a fairly competitive electoral system that presents us with a real choice.
Whether you believe in the Nader hypothesis or its opposite is not important for this post. If you are a student who is carrying the financial burden created by a Student Loan then each of the two major parties has a rather different plan to deal with the over $1 Trillion student debt problem.
I do not intend to do your thinking for you. You look at the major items that each of the two candidates supports and decide which of the two plans suits you and the country best. Do not forget to vote.

                                                         Click on graphic to enlarge

Student Loan Servicing Complaints Rise

Here we go again. I sure hope that we prove Winston Churchill wrong this time by learning from history because if we do not then the potential outcome could be disasterous to all of us, maybe the repercussions could even go global. What is at stake is nothing short of the economic viability of the US economy and whether it could be dragged into another recession although it has not fully recovered yet from the close call of the previous one.

One of the major accomplishments of the previous Congress was the 2010 Dodd-Frank financial regulation bill which created, among other things, a student loan ombudsman at the Consumer Financial Protection Bureau, CFPB. This post is currently held by Rohit Chopra who issued a scathing report two days ago in which he warns of the "uncanny resemblance" between the mortgage problems that the economy witnessed 4 years ago and the current complaints by students about the way that their student loans are being serviced. Mr. Chopra has also asked Congress to consider passing a new set of regulations that will offer the students some more flexibility in modifying the conditions of their current student loans and in particular the the repayment arrangements. Many students have had to borrow large sums of money in order to attend institutions of higher learning with the hope that the increased earnings will allow them to pay back the obligations that they had undertaken. Obviously , in many cases, it has not worked out as planned. If we want to avoid another major financial debacle then we have no choice, as a nation, but to address this issue. The sooner the better.

IRS Must Get Its Pound Of Flesh

Many students accumulate student debt loans that cannot possibly paid back from their regular monthly wages. This is a serious problem since, as we have stated many times previously, these debts cannot be written off  through bankruptcy. So what is the solution, if any?


Their are a number of government options that limit the portion of income to be paid in debt service for these loans in addition to the fact that some public service would entitle the provider to a student loan write off after a certain period of service. The best alternative is contained in HR 7140 which has not become law yet. It is my sincere belief that every student must contact his/her representative in congress and lend support for this great bill. It will make student loan write offs easier especially after public service.

We have dealt with all the above previously so why the repetition? The only aim of this post is to stress that as good as write off are at times they are much less than they appear to be. This post is not going to deal with the specifics since each loan and each program is subject to slightly different provisions. Our aim however is to remind the student loan borrower that in many cases the IRS will treat a write-off as income. Yes, you heard it right. It might take you ten years to qualify to say a $40,000 right off but the IRS will consider that as income and will increase your taxes for that year accordingly. It is true, at least in this case, that no one can avoid death and taxes., especially those who carry student loans.