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.

Indentured Servitude

The following long article appeared on the AAUP web site. It is very relevant and informative.

Academic Freedom and Indentured Students

Escalating student debt is a kind of bondage.

By Jeffrey J. Williams

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Discussion of academic freedom usually focuses on faculty, and it usually refers to speech. That is the gist of the 1915 General Report of the Committee on Academic Freedom and Academic Tenure, appearing in the inaugural AAUP Bulletin as a kind of mission statement. The report invokes the ideals of the German tradition, “Lehrfreiheit and Lernfreiheit,” or freedom of teachers and freedom of students, in the first sentence, but the remainder of the document talks about the freedom of professors. That is because its authors were responding to their particular situation, notably the firing of Professor Edward A. Ross from Stanford University for his statements about railroad monopolies, as well as to the position of US college students, who were not subject to state control as they were in the German system. Given the conditions of the American system of higher education— decentralized and meeting diverse needs, with liberal admissions requirements and relatively low tuition, and subject to ordinary speech protections—it was assumed that students had a good deal of freedom.
That assumption has persisted through most of the century, as higher education has opened to an expanding body of students. However, over the past thirty years, students’ freedom has been progressively curtailed—not in their immediate rights to speech but in their material circumstances. Now, two-thirds of American college students graduate with substantial debt, averaging nearly $30,000 (if one includes charge cards) in 2008 and rising, according to data from the National Center for Education Statistics and other sources.
In my view, the growth in debt has ushered in a system of bondage similar in practical terms, as well as in principle, to indentured servitude. The analogy to indenture might seem exaggerated but actually has a great deal of resonance. Student debt binds individuals for a significant part of their future work lives. It encumbers job and life choices, and it permeates everyday experience with concern over the monthly chit. It also takes a page from indenture in the extensive brokerage system it has bred, from which more than four thousand banks take profit (even when the loans originate with the federal government, they are still serviced by banks, and banks service an escalating number of private loans). At its core, student debt is a labor issue, just as colonial indenture was, subsisting off the desire of those less privileged to gain better opportunities in exchange for their future labor. One of the goals of the planners of the US university system after World War II was to displace what they saw as an aristocracy; instead, they promoted equal opportunity in order to build America through its best talent. The new tide of student debt reinforces rather than dissolves the discriminations of class. Finally, it violates the spirit of American freedom in leading those less wealthy to bind their futures.
Here are some ways that college student loan debt revives indentured servitude.
Prevalence. Contrary to the usual image of freedom-seeking Puritans in New England, between one-half and two-thirds of all white immigrants to the British colonies arrived under indenture, according to the economic historian David W. Galenson, totaling 300,000 to 400,000 people. Similarly, college student loan debt is now a prevalent mode of financing higher education, resorted to by two-thirds of students who attend. If upwards of 70 percent of Americans attend college at some point, it thus shackles not an unfortunate few but half the rising population.
Amounts. Indenture was a common practice in seventeenth-century England, but its terms were relatively short, typically a year, and closely regulated by law. The innovation of the Virginia Company, to garner cheap labor in the colonies, extended the practice of indenture to America, but at a much higher obligation of four to seven years, because of the added cost of passage and boarding immigrants, and also the added cost of the brokerage system that arose around it.
Student debt has similarly morphed from relatively small amounts to sizeable ones. The average federal loan debt of a graduating senior in 2008 was $24,000. That was a marked rise from ten years before, but even more tellingly, it was an astronomical rise from twenty-five years ago, when average federal loan debt was less than $2,000. Also consider that many people have significantly more than the average debt—25 percent of federal borrowers had more than $30,000 in student loans, and 14 percent owed more than $40,000 in 2008. Added to federal loans are charge cards, which averaged $4,100 for graduating seniors in 2008, and private loans, which by 2008 were taken by 14 percent of students (up from 1 percent in 1996) and totaled $17.1 billion, a disturbingly large amount in addition to the $68.6 billion for federal loans. Finally, for more than 60 percent of those continuing their education, graduate student debt more than doubled in the past decade, to a 2008 median of about $25,000 for master’s degrees, $52,000 for doctorates, and $80,000 for professional degrees. That is on top of undergraduate debt.
Length of term. Student debt is a long-term commitment— standard Stafford Loans amortize over fifteen years. With consolidation or refinancing, the term frequently extends to thirty years—in other words, for many returning students or graduate students, until retirement age. It is not a brief, transitory bond, say, of a year for those indentured in England, or of 1980s student debtors, who might have owed $2,000.
Transport to work. Student indebtedness is premised on the idea of transport to a job—now the figurative transport over the seas of higher education to attain the shores of credentials deemed necessary for a middle-class job. The cost of transport is borne by the laborer, so, in effect, an individual has to pay for the opportunity to work. If you add the daunting number of hours that students work, one twist of the current system is that servitude begins on ship. Undergraduates at state universities work more than twenty hours a week, according to Marc Bousquet’s work. Tom Mortenson, an education policy analyst, provides a telling comparison of hours a week required at minimum wage to pay tuition, which have grown roughly from twenty hours a week before 1980 to more than fifty hours a week now at public universities and colleges, and from about forty hours to a stunning 130 at private institutions.
Personal contracts. “Indenture” designates a practice of making contracts before signatures were common (they were torn, the tear analogous to the unique shape of a person’s bite, and each party held half, so they could be verified by their match); student debt reinstitutes a system of contracts that bind a rising majority of Americans. Like indenture, the debt is secured not by property, as most loans such as those for cars or houses are, but by the person. Student loan debt “financializes” the person, in the phrase of social critic Randy Martin, who diagnoses this strategy as a central one of contemporary venture capital, displacing risk to individuals rather than employers or society. It was also a strategy of colonial indenture.
Limited recourse. Contracts for federal student loans stipulate severe penalties and are virtually unbreakable, forgiven not in bankruptcy but only in death, and they are enforced by severe measures, such as garnishing wages and other legal sanctions, with little recourse. In England, indenture was regulated by law and servants had recourse in court, but one of the pernicious aspects of colonial indenture was that there was little recourse in the new colonies. Alan Collinge, founder of the grassroots organization Student Loan Justice and author of The Student Loan Scam, has proposed that student debt be forgiven in bankruptcy as any other personal loan would be.
Class. Student debt primarily bears on those with less family wealth, just as indenture drew on the less-privileged classes. That this would be a practice in early modern Britain, before modern democracy, is not entirely surprising; it is more disturbing in the United States, where we eschew the determining force of class. The one-third of students without student debt face much different futures, and are far more likely to pursue graduate and professional degrees (for example, three-quarters of those receiving doctorates in 2004 had no undergraduate debt, and, according to a 2002 Nellie Mae survey, 40 percent of those not pursuing graduate school attributed their choice to debt).
Youth. Student debt applies primarily to younger people, as indenture did. One of the more troubling aspects of student debt is that it is not an isolated hurdle but often the first step down a slope of debt and difficulty, as Tamara Draut, vice president of policy and programs at Demos, shows in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead. Added to that burden are shrinking job prospects and historically higher housing payments. The American dream, and specifically the post–World War II dream of equal opportunity opened by higher education, has been curtailed for many of the rising generation.
Brokers. Colonial indenture prompted a system in which merchants or brokers in England’s ports signed prospective workers, then sold the contracts to shippers or colonial landowners, who in turn could resell the contracts. Student debt similarly has fueled an extensive financial services system. The lender pays the fare to the college, and thereafter the contracts are circulated among Sallie Mae, Nellie Mae, and others. Sallie Mae was created as a federal nonprofit corporation, but it became an entirely private (and highly profitable) corporation in 2004.
State policy. The British Crown gave authority to the Virginia Company; the US federal government authorizes current lending enterprises and, even more lucratively for banks, underwrites their risk in guaranteeing the loans (the Virginia Company received no such largesse and went bankrupt). Since the 1990s, federal aid has funneled more to student loans than any other form of aid. Loans might be helpful, but they are a rather ambivalent form of “aid.”
These points show the troubling overlap of indentured servitude and student indebtedness. While indenture was more direct and severe, akin to placing someone in stocks, it was the product of a rigidly classed, semifeudal world that predated modern democracies. Student debt is more flexible, varied in application, and amorphous in effects—a product of the postmodern world—but it revives the spirit of indenture in promulgating class privilege and class subservience. What is most troubling is that it represents a shift in basic political principle. It turns away from the democratic impetus of modern American society, which promoted equality through higher education, especially after World War II. The 1947 Report of the President’s Commission on Education, which ushered in the vast expansion of our colleges and universities, emphasized that “free and universal access to education must be a major goal in American education.” Otherwise, the commission warned, “if the ladder of educational opportunity rises high at the doors of some youth and scarcely rises at the doors of others, while at the same time formal education is made a prerequisite to occupational and social advance, then education may become the means, not of eliminating race and class distinctions, but of deepening them.”
The commission’s goal was not only to promote equality but also to strengthen the United States—and, by all accounts, American society prospered. Current student debt, encumbering so many of the rising generation, has built a roadblock to the American ideal, squanders the resource of those impeded from pursuing degrees who otherwise would make excellent doctors or professors or engineers, and creates a culture of debt and constraint.
The arguments for the rightness of student loan debt are similar to the arguments for the benefits of indenture. One holds that it is a question of supply and demand—many people want higher education, thus driving up the price. This view doesn’t hold water because the demand for higher education in the years following World War II through the 1970s was proportionately the highest of any time, as student enrollments doubled and tripled, but the supply was cheap and largely state funded. Then, higher education was much more substantially funded through public sources, both state and federal; now the expense has been privatized, transferred to students and their families.
University of Chicago economist David Galenson argues in his work on colonial servitude that “long terms did not imply exploitation” because those terms were only fitting for the high cost of transport; because more productive servants, or those placed in undesirable areas, could lessen their terms; and because some servants went on to prosper. He does not mention the high rate of death, the many cases of abuse, the draconian extension of contracts by unethical planters, or simply what term would be an appropriate maximum for any person in a free society to be bound, even if he or she agreed to the contract. Galenson also ignores the underlying political questions: Is it appropriate that people, especially those entering the adult world, might take on such a longterm constraint? Can people make a rational choice for a term they might not realistically imagine? Even if one doesn’t question the principle of indenture, what is an appropriate cap for its amounts and term? One of the more haunting findings of the 2002 Nellie Mae survey was that 54 percent said that they would have borrowed less if they had to do it again, up from 31 percent ten years before, which is still substantial (and, one can extrapolate, increased from 1980). The percentage of borrowers making this informed judgment will surely climb as debt continues to rise.
Some economists justify college student loan debt in terms similar to Galenson’s. One prominent argument holds that because college graduates have averaged roughly $1 million more in salary over the course of their careers than those with less education, it is rational and right that they accumulate substantial debt to start their careers. However, while many graduates make statistically high salaries, the experiences of those who have taken on debt vary a great deal: some accrue debt but don’t graduate; some graduate but, with degrees in the humanities or education, for example, are unlikely to make a high salary; more and more students are having difficulty finding a high-paying job; and the amount that people who have a college degree make over a lifetime has been declining. A degree is no longer the guaranteed ticket to wealth that it once was. An economic balance sheet also ignores the fundamental question of the ethics of requiring debt of those who desire higher education, as well as the fairness of its distribution to those often younger and less privileged.
Over the past few years, there has been more attention to the problem of student loan debt, but most of the solutions, such as Income-Based Repayment, or IBR, are stopgaps that don’t impinge on the basic terms of the system. The system needs wholesale change.
College student loan debt perverts the aims of higher education, whether those aims are to grant freedom of intellectual exploration, to cultivate merit and thereby mitigate the inequitable effects of class, or, in the most utilitarian scheme, to provide students with a head start into the adult work world. In practice, debt shackles students with long-term loan payments, constraining their freedom of choice of jobs and career. It also constrains their everyday lives after graduating, as they bear the weight of the monthly tab that stays with them long after their college days. The AAUP should consider student debt a major threat to academic freedom and make the abolition of student debt one of its major policy platforms.

A Note on Sources
The major source of data on student debt is the Digest of Education Statistics for postsecondary education published by the National Center for Education Statistics of the US Department of Education. The center conducts the National Postsecondary Student Aid Study every four years; the most recent data are from 2007–08. The Project on Student Debt publishes useful reports digesting and processing information related to key aspects of student debt. The loan industry also collects a good deal of information—for example, Sallie Mae’s How Undergraduates Use Credit Cards (2009)—about the contiguous issue of charge-card debt.

Jeffrey J. Williams writes on contemporary fiction, modern criticism and theory, and the university. He is a coeditor of the Norton Anthology of Theory and Criticism and was editor of the minnesota review from 1992 to 2010. He is professor of English and of literary and cultural studies at Carnegie Mellon University. His e-mail address is jwill@andrew.cmu.edu.

HR 4170 Deserves Your Support

We are all aware of how difficult it has been for college and university students to acquire their college education; it has become a must; and find ways to pay for it that do not commit them to an indentured life and that does not threaten society with a meltdown similar in magnitude to that of the mortgage collapse of 2008. Yet all is not grim. President Obama has made some very welcome moves that will result in making the burden of student loans easier to handle. But what is even better than that is HR 4170 the Student Loan Forgiveness Act of 2012.
This proposed law will do wonders to all students who are carrying student loans. Unfortunately most students are. 70% of Pace graduates are in debt. Nationally, as we have mentioned in an earlier post, 1.4 million borrowers owe over $100,000 each. That is unconscionable. Currently 11.8% of all US consumers have at least two open student loans on their credit cards. Don't despair. You have lots of company.
There is currently an effort in Congress to deal constructively with the potential ramifications of the inevitability of student debt . HR 4170 is a bill that has been making its way through the halls of Congress but that has not become law yet.Every single student who has a student loan owes it to herself as well as other students to sign a petition in support of this bill whose aim is to make it easier for students to carry the burden associated with their student debt.
HR 4170 makes four worthy proposals:

(1) 10/10
 Student monthly payments would be capped at 10% of discretionary income for 120 monthly payments after which the remaining balance will be forgiven

(2)Interest Rates
The interest rates for Federal student loans are currently set at 6.8%. The proposed law would cap these interest rates at 3.4%, a great win for student borrowers.

(3)Public Service Forgiveness
Loans will be subject to forgiveness when the borrower makes only 60 monthly payments instead of the current 120 payments that is required for Public Service Loan forgiveness.

(4) Refinance The proposed bill would allow students to seek consolidating private educational loans under a single Federal loan.

As should be obvious from the above 4 provisions HR 4170 is arguably the single most realistic bill to lessen the pain of carrying student loans and thus it is worthy of your support. To do so go to

http://signon.org/sign/support-the-student-loan

Are Universities Active Participants In The Student Loan Debacle?

The most recent report about student loans in the US is alarming. It reinforces what we already know that student loan debt in the nation has already surpassed the $ 1 trillion. That sum is larger than all of credit card debt put together.  This by itself is a cause for concern not only because of the implications on the individual student loan debtors but also because of the macro implications of dealing with such a high level of debt.  Whenever a nation is faced with the fact that tens of millions of its households will have difficulty meeting their financial obligations then one of the most important issues becomes that of the financial ramifications of this debt burden. Student loans are typically held by individuals in their twenties and increasingly in their thirties. If these individuals are to spend the next 10-25 years of their life paying back the loans that they had borrowed for their education then when are they going to save for their own retirement, purchasing a home, saving for their children’s’ college expenses…

One of the most distressing facts of the most recent report is the fact that 1.4 million student loan borrowers are already over $100,000 in debt. Such figures are mindboggling especially if we recall that most general affordability models suggest that total student loans should never exceed the expected first year earnings after graduation. This extraordinarily important issue ; debt in excess of what the quantitative models suggest is affordable, is an indictment of the current system that seems to be interested only in recruiting college students, arranging for them loans but never explaining in full and clear details what such obligations mean. The inevitable conclusion, based on the above, is to suggest that the financial institutions have no interest in reducing the flows of these loans since they are guaranteed by the federal government and that the same is equally true of many educational institutions that are either run for pure profits or that are not willing to inform the potential student loan recipients about the negative financial implications of such loans. As Eli Wiesel has often preached, those that acquiesce are just as guilty as those that pull the trigger. Unfortunately many of our universities have flunked the moral and ethical standards that one would have associated with such institutions of higher learning.

Note the dire implications of what the recent data reveals. 1.4 million students have student loan debt in excess of $100,000 when everyone knows that in general no loan above the expected first year earnings should be approved. How many degrees have an expected first year earnings of over $100,000? Not many. Besides those that are successful MD’s or the very few that are successful lawyers no one comes even close. But the country graduates only about 19,000 physicians every year and about 53000 lawyers pass the bar exam. But as hard as it might be to believe the country needs only 26,000 new lawyers each year. That is one reason that the median income for lawyers was only $44159 in 2009. As is obvious, there is only one conclusion: universities and colleges, including Pace University, have flunked the only test that counts, that of honesty and high ethical standards. No university has any business in either encouraging students to get in debt beyond what the models suggest is sustainable or not discouraging students from seeking such levels of indebtedness. Any other course of action is inexcusable and unconscionable.

Reduce Your Debt Burden by Becoming Well Informed

 

 Falling behind in meeting your debt obligations is never easy.  Obviously, avoiding an unsustainable debt burden is the best strategy to follow but if you have already accumulated a large amount of Student Debt don't let the notices from collection agencies transform you into a "frozen deer in a headlight". Become well informed and investigate the various government programs that are meant to help you. These programs can and often will make life a little bit easier by explaining the various alternatives that you might be eligible for. In some cases you might qualify for some debt forgiveness and in other cases debt write downs or extensions and subsidies.

Read the following article that appeared in the NYT  and learn from the mistakes of others. Student Loans can and often do create financial burdens that will change your life but they do not need to destroy you. The Income-based program , once you qualify, will limit your monthly payments to 15%-15% of your income for a period of 25 years after which the balance will be forgiven. That does not sound like much for those in the late 20's but it sure beats having your wages garnished for the rest of your life.

 

 Debt Collectors Cashing In on Student Loans

By ANDREW MARTIN

At a protest last year at New York University, students called attention to their mounting debt by wearing T-shirts with the amount they owed scribbled across the front — $90,000, $75,000, $20,000.

On the sidelines was a business consultant for the debt collection industry with a different take.

“I couldn’t believe the accumulated wealth they represent — for our industry,” the consultant, Jerry Ashton, wrote in a column for a trade publication, InsideARM.com. “It was lip-smacking.”

Though Mr. Ashton says his column was meant to be ironic, it nonetheless highlighted undeniable truths: many borrowers are struggling to pay off their student loans, and the debt collection industry is cashing in.

As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years.

In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.

In an attempt to recover money on the defaulted loans, the Education Department paid more than $1.4 billion last fiscal year to collection agencies and other groups to hunt down defaulters.

Hiding from the government is not easy.

“I keep changing my phone number,” said Amanda Cordeiro, 29, from Clermont, Fla., who dropped out of college in 2010 and has fielded as many as seven calls a day from debt collectors trying to recover her $55,000 in overdue loans. “In a year, this is probably my fourth phone number.”

Unlike private lenders, the federal government has extraordinary tools for collection that it has extended to the collection firms. Ms. Cordeiro has already had two tax refunds seized, and other debtors have had their paychecks or Social Security payments garnisheed. Over all, the government recoups about 80 cents for every dollar that goes into default — an astounding rate, considering most lenders are lucky to recover 20 cents on the dollar on defaulted credit cards.

While the recovery rate is impressive, critics say it has left the government with little incentive to try to prevent defaults in the first place.

Though there are programs in place to help struggling borrowers, the companies hired to administer federal student loans are not paid enough for lengthy conversations to walk borrowers through the payment options, critics say. One consequence is that a government program called income-based repayment has fallen short of expectations. Under the program, borrowers pay 15 percent of their discretionary income for up to 25 years, after which the rest of their loan is forgiven. But participation has lagged because borrowers are either not aware of the program or are turned off by its complexity.

“If people were well informed, how many defaults could be averted?” asked Paul C. Combe, president of American Student Assistance, a loan guarantee agency based in Boston. “We are hurting people here.”

For borrowers, the decision to default can be disastrous, ruining their credit and increasing the amount they owe, with penalties up to 25 percent of the balance.

Ms. Cordeiro, a single mother, dropped out of Everest College, a profit-making school, 16 credits shy of a bachelor’s degree. She said she could not get any more loans to finish. “I get these letters about defaulting, and I get them and throw them in the bin,” she said.

Jake Brock, who graduated in 2008 from Keuka College, a private liberal arts school in upstate New York, defaulted in May on a federally guaranteed loan of $8,000. With penalties and accumulated interest, the loan balance is now $13,000, he said. “I just fell behind and couldn’t dig myself out,” said Mr. Brock, who is 29 and owes a total of $100,000 in student loans.

There is no statute of limitations on collecting federally guaranteed student loans, unlike credit cards and mortgages, and Congress has made it difficult for borrowers to wipe out the debt through bankruptcy. Only a small fraction of defaulters even tries.

“You are going to pay it, or you are going to die with it,” said John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring service.

The New Oil Well?

Business is booming at ConServe, a debt collection agency in suburban Rochester. The company recently expanded into a neighboring building. The payroll of 420 is expected to double in three years.

“There is great opportunity,” said Mark E. Davitt, the company’s president and founder.

Where some debt collection firms have made their fortunes collecting on delinquent credit cards or hospital bills, ConServe is thriving because of overdue student loans, a large majority of its business.

With an outstanding balance of more than $1 trillion, student loans have become a silver lining for the debt collection industry at a time when its once-thriving business of credit card collection has diminished and the unemployment rate has made collection a challenge. To recoup unpaid loans, the federal government, private lenders and others have turned to collection agencies like ConServe.

Mark Russell, a mergers and acquisition specialist, writing in the same trade publication as Mr. Ashton, the consultant at the N.Y.U. protest, suggested student loans might be a “new oil well” for the accounts receivable management industry, or ARM, as the industry is known.

“While the Department of Education debt collection contract has been one of the most highly sought-after contracts within the ARM industry for years, I believe it is now THE most sought-after contract within this industry, centered within the most sought-after market — student loans,” Mr. Russell wrote last October.

In 2010, Congress revamped the student loan program so that federal loans were made directly by the government. Before that, most loans were made by private lenders and guaranteed by the government through so-called guarantee agencies.

Of the $1.4 billion paid out last year by the federal government to collect on defaulted student loans, about $355 million went to 23 private debt collectors. The remaining $1.06 billion was paid to the guarantee agencies to collect on defaulted loans made under the old loan system. That job is often outsourced to private collectors as well.

The average default amount was $17,005 in the 2011 fiscal year. Borrowers who attended profit-making colleges — about 11 percent of all students — account for nearly half of defaults, while dropouts were four times as likely as graduates to default. A loan is declared in default by the Department of Education when it is delinquent for 360 days.

Borrowers are most often declared in default when they cannot be found. That is when the collection agencies take over. While some in the industry, like Mr. Ashton, worry about public revolt over aggressive collection tactics, there is no holding back at this point.

At ConServe, in a room of cubicles with college pennants lining the walls, collectors comb through databases and public records hunting for contact information for borrowers. If ConServe reaches a borrower who refuses to cooperate, the company considers garnisheeing wages or withholding a government check, which requires approval from the Department of Education.

Dwight Vigna, director of the department’s default division, says the government does not give up easily. If a vendor like ConServe has not found a borrower in six months, the department turns the case over to another collection agency.

In fiscal 2011, the department wrote off less than 1 percent of its loan balance, for such things as death or disability of a borrower.

“We never throw anything away,” Mr. Vigna said.

Lying in Wait

Arthur Chaskin, a disabled carpenter, can attest to the government’s long memory.

Since he left college in the late 1970s, Mr. Chaskin has largely ignored his student loans — until June, when a federal judge ordered him to turn over $8,200.

Mr. Chaskin had borrowed $3,500 in federally guaranteed student loans to attend Northwestern Michigan College, a community college. He did not graduate. The federal government sued him in 1997, but over the next 15 years he made only five payments.

Last January, a lawyer in Michigan working on contract for the government was alerted to a credit check for Mr. Chaskin. The lawyer filed a garnishment order and discovered a brokerage account with nearly $20,000 that Mr. Chaskin said he had opened with disability checks.

By the time the government caught up with him, Mr. Chaskin owed more than $19,000 in accumulated interest and penalties, but the judge reduced the amount to $8,200 after Mr. Chaskin pleaded for a break.

“If you wait long enough, you catch people when their guard’s down,” said the lawyer, Charles J. Holzman, who was rewarded with more than 25 percent of Mr. Chaskin’s payment.

Government officials estimate they will collect 76 to 82 cents on every dollar of loans made in fiscal 2013 that end up in default. That does not include collection costs that are billed to the borrowers and paid to the collection agencies.

While the government’s estimates take into account the uncertainty of collecting money over long periods, some critics say they don’t go far enough.

A 2007 academic study, for instance, estimated that the recovery rate was closer to 50 cents on the dollar.

“The reporting standards that the government imposes on themselves are far weaker than what they require of private institutions,” said Deborah J. Lucas, a finance professor at the Massachusetts Institute of Technology and an author of the study.

Over all, collections on federally backed student loans were $12 billion in the last fiscal year, 18 percent higher than the previous year. Of that, $1.65 billion came from seizures of government checks like tax returns and $1.01 billion was collected by garnisheeing borrowers’ wages. More than $8 billion of defaulted loans, however, were consolidated or rehabilitated.

Some borrowers say they do not see a path out of default, because they are sick, unemployed or facing so much debt they cannot imagine any way to pay it off. Some have defaulted on private student loans, too.

Patrick Writer of Redding, Calif., received a certificate in computer programming in 2008 from Shasta College, a community college. But he graduated in the midst of the financial crisis and has not been able to find a job as a programmer. He defaulted on $12,000 in federally backed loans in 2009.

“If you can’t make your utilities and your rent, your student loan payments are almost goofy, inconsequential,” said Mr. Writer, who is 57.

But Mr. Writer said he had come to realize what it meant to have a student loan that was guaranteed by the federal government. “It’s the closest thing to debtor prison that there is on this earth,” he said.

A Bias Toward Default

Jill Shockley, 36, of Rockford, Ill., owes more than $50,000 in federally guaranteed and private student loans, some of which are in default. A nursing school dropout, she said her loan servicer, Sallie Mae, asked her to come up with $600 a month to keep three of her federal loans from going into default. But she said she did not have enough money.

“I barely clear $30,000 a year,” she said. “I have rent, a car payment, insurance. They say maybe I should borrow from relatives.”

On paper, there are few good reasons struggling borrowers should go into default, or stay there, since there are many programs to help them keep up with payments. In addition to income-based repayment, there is forbearance for temporary financial woes and different types of deferment for issues like unemployment, military service and economic hardship. But the challenge of creating the right incentives — and getting collectors and debtors to embrace them — has bedeviled Congress and the Department of Education.

Critics say the result has often been contradictory incentives that provide little help to struggling borrowers. For instance, loan servicers are paid $2.11 a month for each borrower in good standing, but only 50 cents a month for borrowers who are seriously delinquent, too little to devote much time to them.

Guarantee agencies are paid a default aversion fee, equal to 1 percent of the loan balance, if they prevent a borrower from going into default. But the same agencies get paid much higher fees for collecting or rehabilitating a defaulted loan.

And debt collectors are rewarded primarily for collecting as much as possible, not for making sure a borrower can afford the payments, critics say.

Introduced in 2009, income-based repayment was supposed to help change that by allowing borrowers with high levels of debt but modest incomes to make relatively small payments over a long term. But many borrowers were never told about the income-based option, and many others have been frustrated by the onerous requirements. So far, 1.6 million borrowers have applied for income-based repayment; 920,000 are active participants and another 412,000 applications are pending.

In a June memo, President Obama wrote that “too few borrowers are aware of the options available to them to help manage their student loan debt.”

Education officials say there are changes in the works that could help struggling borrowers and perhaps reduce the default rate, which they attribute to the sluggish economy and dismal results among profit-making colleges.

Under proposed regulations, debt collectors would be required to offer borrowers an affordable payment plan. And, the department vows to do a better job of publicizing income-based repayment, including telling borrowers about the plan before they leave college.

In addition, borrowers will be able to apply for income-based repayment online rather than going through their loan servicer. Monthly payments will be reduced to 10 percent of discretionary income, down from 15 percent.

But efforts to change the incentive structure for guarantee agencies have stalled. And the Obama administration’s efforts to impose new regulations on profit-making colleges were initially watered down and then significantly weakened by a federal court judge.

“We’re trying to balance two priorities, working with students who have fallen on hard times while trying to be good stewards of the taxpayers’ dollar,” said Justin Hamilton, a Department of Education spokesman. “We’re always going to be in a process of continuous improvement.”

Lindsay Franke, of Naugatuck, Conn., is among the borrowers taking advantage of income-based repayment. While her monthly payment is now lower, Ms. Franke, who is 28 and has a master’s degree in business administration from Albertus Magnus College, said the program had not changed a crushing reality: she still owes too much money and makes too little to pay it off. A marketing coordinator for a law firm, she filed for bankruptcy last year because she could not afford her mortgage, car payment and student loans. She lost the house, but still owes $115,000 in student loans, both private and federal. Under income-based repayment, she pays $325 a month on her federal loans; she also pays $250 a month on her private loans.

“I will never have my head above water,” Ms. Franke said.