THE NEW GILDED AGE (Part 2)
THE NEW GILDED AGE (Part 2)
(A Complete and Comprehensive Assessment)
30th January, 2014 0
As we all know, US Student loan debt has surpassed the $1Trillion mark – now exceeding the combined total of credit card and auto loan debt, which comprises 6% of our national debt – the total GNP of South Korea.
In 2013, two thirds of undergraduates left school owing more than $35,000 in debt. Those grads continuing on to medical school can expect an additional debt load of over $166,000 and those who choose law school can expect to an additional $100,000.
The mind numbing statistic is that 50% of that Trillion debt is either in default, forbearance or deferment. In other words – one out of every two of the 37 million American borrowers is not repaying their loans. In areas like the Great Lakes Bay Region – these numbers will grow increasing dismal. The recent announcement of massive lay-offs in the medical and retail sectors, as wells as the TRW plant closing, will force local entrepreneurs to create new opportunities in the private sector or face the prospect that the “best and brightest” of our home grown college grads will relocate to different parts of the state or the country.
College Is Not For Everyone
As a society, we need to reevaluate our attitude that college is a “one size fits all” path for young people. For many, technical or vocational training or simply joining the “blue collar” work force is a much more viable option than taking out $40,000 in loans without a viable plan. We need to encourage people to choose the right thing for them, rather than buying into this “college for all” mentality.
Financial Literacy Must Be Taught in High School
The vast majority of Millennials between the ages of 22 and 32 think that personal finance should be taught in high school. They cited basic skills like investing, how to save for retirement, and how to calculate loan interest. 54% of Millennials say debt is their biggest financial concern, with 42% calling it “overwhelming.”
High schools need to step up and accept the fact that financial literacy is a critical skill. Personal finance and basic math skills are necessary high school graduation requirements. To get a diploma, teens have to pass math, science, English, and social studies, but rarely do schools offer classes that prepare students to evaluate a school’s financial aid package or help them figure out if an expensive four-year college is really worth it.
One commentator suggested that a good rule of thumb for prospective students is: Don’t borrow more to pay for college than your projected first year’s salary. This advice makes sense, but most – if not all of current borrowers never received such advice prior to taking out their loans. At age 18, you can sign a contract, vote, serve in the military, even tie yourself to thousands upon thousands of dollars of debt, yet you’re never asked to demonstrate your competence in basic banking, which is essential when it comes to understanding what your debt means in the future.
Federal Student Loan Programs
The federal laws that govern federal student loans are a patchwork of bills passed over the past 50 years that mimics the Internal Revenue Code in terms of its complexity and lack of sensibility. The acronyms are mind boggling: Stafford; Direct Loans; FDLP; FFEL; IRR; ICR; PAYE; PSLFP; SAFRA; and, TPD – to name a few.
The growing number of government investigations and consumer complaints show that government supervision has been lax. Seemingly, the profitability of the private student loan companies like Sallie Mae are more important than promoting the success of the borrowers. Other systemic problems include: A high default rate, poor quality of education, poor loan administration, system wide corruption, inexcusably bad oversight, governmental secrecy, to name a few.
The Student Loan Fairness Act
Senator Elizabeth Warren recently introduced a bill named the Student Loan Fairness Act with the intent of helping student loan borrowers manage their debt. This Bill was introduced in March of 2013 and has 51cosponsors. There are a few important benefits of the bill which can make a big impact on borrowers lives.
This new legislation has no expiration dated. As long as there is no further interference from the Senate, the House or the President, students and their loan co-signers will know what to expect when applying for a loan. The Student Loan Forgiveness act proposes to tie interest rates to the Federal Reserve discount window rate. The discount window rate is the rate which banks are able to borrow from the Federal Reserve, which currently stands at .75%. Student Loan Borrowers of Stafford Loans are currently paying 9 times the amount in interest than banks pay.
10/10 Repayment Plan
The Student Loan Fairness Act would offer borrowers the 10/10 loan repayment plan, limiting the payment on student loans to 10% of discretionary income. Although this plan is offered with the Income Based Repayment Plan, one of the big differences is that this plan also offers a maximum capitalization of 10% of interest of the original loan amount. This means that your loan balance will never surpass your original balance plus 10%.
The 10/10 repayment plan also offers 120 months of forgiveness. In the current Direct Loan program, only public sector employees can qualify for loan forgiveness after 120 months. Under the 10/10 repayment plan, anyone in that plan would have their loan forgiven at the end of those 10 years as long as their loans were taken out prior to the date of enactment of this bill. If your loans are taken out after the enactment of the bill, then you would qualify for a maximum of $45,520 in loan forgiveness. Better still, any loan balance forgiven would not be taxed.
Convert Private Student Loans Into Federal Loans
The Student Loan Fairness Act would allow borrowers a year in which they would be able to convert their private student loans into federal loans based on certain criteria. You would be eligible for this conversion if you were eligible for federal student loans at the time you took out your private loans and your gross income is less than your total educational debt. Once your loan is converted you would be able to enroll into any of the programs available to federal borrowers.
Enhanced Public Service Loan Forgiveness
In the current Public Service Loan Forgiveness program, borrowers may be eligible for loan forgiveness after 120 payments in the direct loan program under qualifying repayment options. The Student Loan Fairness Act takes this one step further and would offer forgiveness to public sector employees after only 60 months or 5 years. This five year forgiveness requirement may drive many college graduates to work their first five years out of college in the public sector to simply take advantage of the loan forgiveness, and then pursue whatever profession they want. The 60 month public service loan forgiveness plan would make the exorbitant fees of college less daunting knowing that students could simply sacrifice a few years of their desired profession to work in the public sector to qualify.
The Issue of Cost to the Taxpayer
Because of the demand created by this Bill, students may be paying more for their college tuition. With the prospect of such small payments and forgiveness of student loans regardless of balance, borrowers will take advantage of these “student friendly” terms and take out loans indiscriminately. Colleges and universities may raise their tuition costs with the tax payer picking up the balance of the forgiven loans.
Proponents of the bill argue that this bill would jumpstart the economy by increasing the purchasing power of a new generation of Americans allowing them to start families, buy homes, and other durable goods. This type of legislation would also send a “lifeline” to borrowers who have fallen on hard times. The bill would also promote financial responsibility in higher education by incentivizing students to be mindful of accruing costs based on the $45,520 cap on loan forgiveness.
The year is just beginning, but we’re already on track to see some noteworthy student loan related issues during 2014. Here are some highlights:
Higher Education Act Reauthorization
The Higher Education Act (HEA) is the massive piece of legislation that governs much of the federal student loan system. It has to be periodically renewed by Congress and it is up for renewal in 2014. Traditionally, Congress has dragged its feet on reauthorization and this year should be no different. The reauthorization of the HEA presents a significant opportunity to reform the student loan law.
Higher Interest Rates
The recent student loan interest rate bill signed into law in 2013 lowered interest rates for many federal student loan borrowers after they had doubled due to a lapse in a prior law. However, the interest rate benefits of this law will be short lived – it is expected that interest rates will increase. This was a short term, politically expedient solution with predictably nasty longer term consequences for new borrowers which we will see as this year progresses.
Modest Relief for Defaulted Federal Borrowers
New federal regulations go into effect later this year that will provide some relief to borrowers burdened by wage garnishments. The Department of Education will release the garnishment by allowing the borrower to make 5 consecutive monthly payments to cure the default.
More Oversight of Private Loan Servicing Companies
The Consumer Financial Protection Bureau (CFPB) will be providing direct oversight of private companies that service federal student loans. The CFPB is aware of the ongoing and serious problems that borrowers encounter on a day-to-day basis, including improper payment applications, surprise account transfers, and failure to adequately advise borrowers of rights and options.
There is Still Room for Improvement
Federal loan servicing is terrible especially since the Department of Education contracted these servicing operations to various private companies such as Sallie Mae, ACS, NelNet, FedLoan Servicing (PHEAA), and Great Lakes (among others). The Department of Education will transfer student loan accounts to a different servicing company - seemingly randomly and with little advance notice. Many (if not all) of these companies have a terrible reputation of working with borrowers.
THE INCOME DRIVEN REPAYMENT INTIATIVES
In November of 2013, the Department of Education announced that it is reaching out to about 3.5 million federal student loan borrowers in financial distress. The goal of the Department is to make sure these borrowers know about income-driven repayment options that might make their monthly payments more affordable and keep them from defaulting. These plans include: Income Based Repayment Plans; Income Contingent Repayment Plans; Pay As You Earn Plans; and, Student Loan Forgiveness Programs.
The new regulations will make it easier for distressed borrowers to get out of default and repay their loans. Under federal law, those who are in default on federal student loans may “rehabilitate” them by making nine on-time payments in amounts that are “reasonable and affordable.” Rehabilitation lets the borrower get out of default and become eligible for further federal student aid.
Income Based Repayment Plans
IBR’s are available for both FFEL and Direct Loans for borrowers showing partial financial hardship. IBR payments are capped at 15% of the amount by which the borrowers AGI exceeds 150% of the poverty level for that borrower’s family size. Borrowers who earn less than 150% of the poverty level for their family size can qualify for a $0.00 IBR payment and will be considered current on their loans. After 25 years of repayment, the balance owing is forgiven.
Income Contingent Repayment Plans
A borrower showing hardship may apply for an ICR plan which apply only to Direct Loans. Parent PLUS Loans are eligible for ICR if they are consolidated into a Direct Consolidated Loan after July 1, 2006. The monthly payment based on adjusted gross income is calculated each year. Capitalization of interest will never exceed 10% of the original amount owed when the borrower entered into the repayment program. The maximum repayment term is 25 years and any unpaid portion is forgiven at the end of the ICR term. Unfortunately, the amount of forgiveness may be taxable as income.
Pay As You Earn Repayment Plans
Students who borrowed Direct loans after October 1, 2011, qualify for monthly repayment amounts of 10% of discretionary income under the Pay as You Earn Repayment Plan. Any amounts unpaid after 20 years of consecutive payments are forgiven without any tax consequence.
Total & Permanent Disability Administrative Discharges
Disabled borrowers may apply for a total discharge of their loan obligation. As of July 1, 2013, borrowers who receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) may use their SSA award letter in lieu of obtaining a separate certification on the TPD discharge application.
Deferment and forbearance
For many years, federal loans have offered solutions such as deferment and forbearance, basically giving students more time to pay off their debt or allowing periods of relief from payments. These options are still available with terms that require interest to continue to accrue on unsubsidized loans and capitalize (be added on to the principal balance) annually.
THE CONSEQUENCES OF DEFAULT
Defaulting under a federal loan has a more immediate consequence than defaulting under a private loan. The Department of Education has administrative authority to engage in the following collection activities without a Court order: Wage Garnishments; Tax Refund Offsets; and, Federal Benefit Offsets.
Private lenders do not have the same collection powers as the Department of Education - they simply sue you for the debt owed. And, if you get served with a complaint – make sure you file an answer to avoid the entry of a default judgment. Also note, that unlike federal student loans, private loans are governed by statutes of limitations. In Michigan, the statute of limitations on a contract action is 6 years.
The purchase of a college education does not necessarily guarantee a quality education and even the quality of a degree depends on the individual who earns it. A recent survey by the Center for College Affordability and Productivity found many graduates in jobs that traditionally would not require a college education including janitors, parking lot attendants and other service based – low paying positions. A more recent study by the consulting firm Accenture found that the majority of students who graduated in 2011 and 2012 are not benefitting from their diplomas. Another 18 percent reported current unemployment, with 7 percent of those saying that they have not had a job since graduating.
Choose Your Career Path Wisely
40 years ago, a college education was a must. Times have changed. I have sat with more than one client with a degree from a notable university and $50,000 in student loan debt who find themselves relegated to low paying jobs that barely allow them to survive. Before choosing a major or obligating yourself to tens of thousands of dollars in student loan debt, research the average salary for your field of interest and find out where the jobs in that field are.
Of those who are working, the majors with the greatest return on investment for the class of 2012-13 were agriculture, health sciences and elementary education. The majors on the opposite end of the spectrum were architecture, graphic design and history. CNN Money reported that degrees in accounting, engineering and computer sciences were more likely to be rewarded with jobs that required a college degree. Graduates with degrees in other fields were often employed in retail sales, the hospitality industry as waiters and bartenders, customer service representatives, construction and other manual labor jobs.
Generally, non-student co-signers on student loans are equally liable on the debt and subject to the same terms and conditions that limit the discharge of liability applicable to the student loan borrower. Thus, it is possible for a non-student co-signer to file an action to discharge their obligations through a bankruptcy proceeding.
THE NEW INDUSTRY OF “STUDENT LOAN” RELIEF AGENCIES
There has been a sudden rise in the number of companies that are selling purported student loan assistance programs. The approach is to sell consumers troubled with student loans some sort of hope or help. The problem with these programs is that they offer services that are otherwise free to borrowers. In most cases, all a borrower would have to do is go to the department of education website. There is no perfect solution for student loan debt but there are reasonable plans consumers can investigate on their own before paying needlessly for the exact same service.
Student loan assistance companies are also asking consumers for the FAFSA PIN number and logon information to logon to the consumer account and then have the potential to take action as if they were the borrower. Borrowers should never allow anyone to access their account using their FAFSA PIN.
The United Kingdom
The UK has a much smaller total student loan balance than does the US which is not surprising based on lower population. The UK system differs quite a bit from ours in that the tax system collects student loan payments via payroll withholdings that make up 9% of income once the debtor reaches a certain income threshold. For 2012, that threshold is $25,500 before payments start. Because student loans are collected through the tax system, the default rate for UK residents is low. However, for those students who are educated in the UK and then relocate elsewhere in the European Union, the default rate is a shocking 45% or $530 million.
In Japan, an increasing number of student loans totaling around $5 billion are in arrears. This has caused the Asian nation to take harsher steps when it comes to lending qualifications. In an effort to prevent future defaults, Japan has begun denying loan renewals to current student borrowers based on poor academic performance.
The Iceland Mortgage Jubilee
When Iceland was faced with its recent mortgage crisis, the country offered a qualified a qualified jubilee on mortgages. The defaulted mortgage debt was wiped out and Iceland has rebounded from the mortgage crisis faster than any other country.
Oregon: Pay it Forward, Pay It Back
The Oregon legislature passed legislation that could eliminate tuition costs and student debt for incoming students wishing to attend one of the state’s seven public universities. The plan is patterned after a similar income-based repayment program in Australia. Under the proposed program, tuition would be free and the need for taking out student loans would be eliminated. Instead, graduates would pay three percent of their income for 24 years to pay for the costs of their education and to fund the program for the benefit of future students. The plan called “Pay it Forward, Pay it Back” would enable college students to bypass traditional lenders who charge interest rates on student loans.
Oregon’s proposed solution is a bold an innovative proposal that removes for-profit banks and lending agencies from the business of exploiting student debt for profit. The plan returns funding to the student’s themselves who pay for their own education, interest-free through a deferred cost, state run program, based on their ability to pay. The plan should be modeled by other states interested in saving higher education.
Cities like Saginaw, Detroit, Cleveland and Gary, Indiana
Cities like Saginaw, Detroit, Cleveland, and Gary, Indiana, need people. Young, college educated people with an entrepreneurial spirit. People who might be willing to put down roots and pay local taxes and take on renovation projects and bring new views and businesses and opportunities to distressed, under populated communities. In consideration for their participation in redeveloping distressed areas, programs could be developed to help them reduce the principal on their student loans and limit the amount of their disposable income paid out on their loans.
Congress removed bankruptcy protections, refinancing rights, statutes of limitations, truth in lending requirements, fair debt collection practice requirements (for state agencies) and even removed state usury laws from applicability to federally guaranteed student loans. Congress also gave unprecedented powers of collection to the industry, including wage garnishments, tax return offsets, Social Security, and Disability income garnishment, suspension of state issued professional licenses, termination from public employment, and other unprecedented collection tools.
The absence of consumer protections and associated rehabilitation schemes have provided a massive revenue stream for a shadowy, nationwide network of politically connected guarantors, servicers, and collection companies. These companies have greatly enriched themselves at the expense of misfortunate borrowers, causing immeasurable damage to millions of borrowers and their families. These borrowers see what started as an unmanageable debt becomes a financial cataclysm- that debilitates, marginalizes, and ultimately relegates them to a lifetime of financial servitude and despondency.
Lenders and servicers feast on the spoils of unverified and unchecked collection costs which promote a perverse incentive to default loans rather than providing customer service aimed at helping the borrower avoid default. Recently, Sallie Mae's CEO bragged that the company's record earnings were attributable to collections on defaulted loans. The company's "fee income" increased by 228% between 2000-2005, while their managed loan portfolio grew by only 87% during the same time period.
Sallie Mae and other unscrupulous loan servicers have been fined millions of dollars without any impact on their unethical practices – default by design is just another twisted version of predatory lending. Even more perverse is the fact that the Department of Education is making more money on defaulted loans than loans which remain in good stead.
Fair Debt Collection Practices Act
The federal Fair Debt Collection Practice Act is designed to prevent abuses by consumer debt collectors. Collection companies are forbidden to harass consumers, threaten them or call them at inconvenient hours or at work.
The Act does not apply to Department of Education acts. But, once your account is transferred to a collection agent or servicer, the protections are in place and should be used to prevent any unnecessary stress at home or the work place. Fortunately, the Act does apply to all collection activities private loan companies.
The Bankruptcy Option
Under the current law, neither federal nor private loans are dischargeable as general unsecured debts in any bankruptcy proceeding. An adversary proceeding or complaint can be filed within the context of a bankruptcy proceeding attempting to discharge or partially discharge student loans bases on the standard of “undue hardship.” Although, difficult, this burden can be met based on the totality of each circumstance.
Student loan borrowers who are saddled with private loans can consider filing a Chapter 13 bankruptcy proceeding. Private loans are not bound by the federal repayment options, so more often than not, any negotiation with private servicers is in a Court room. In a Chapter 13 proceeding, the automatic stay provisions prevent any collection activity during the pendency of the 3 to 5 year plan. In addition, Chapter 13 extends the automatic stay to the benefit of co-debtors – so any co-signer of a private loan would also be protected.
Michigan Collection Laws
Michigan collection laws currently exempt certain types of benefits from garnishment, including social security and unemployment benefits. Michigan could follow California’s lead in exempting private loan judgments from garnishment. This simple change in the law would force private loan servicers to negotiate reasonable terms of repayment.
The student loan crisis has come to the forefront of the American consciousness. Interest rates and the cost of higher education have risen, resulting in more Americans facing debt as a result of student loans. It's a far-reaching financial issue, impacting all who have borrowed to pay for their education and having major ramifications on our economy as a whole.
There are critically notable microeconomic repercussions from the current student loan crisis. The housing market will continue to suffer as more and more young people put off buying a home. Sales of cards, home appliances, and furniture will decline, as well as expenditures for clothing, restaurants, and vacations.
Young people may be seen as more optimistic and resilient than their older counterparts, but they are not permanently impervious to the emotional strain and the adverse psychological impact of student debt. It is a well studied fact that debt is a major trigger for severe depression and suicide, as well as the biggest cause for divorce in America.
By thinking “outside the box” and seriously considering legislation like the Student Loan Fairness Act and other simple things like exempting private student loan judgments from garnishments, we can start moving in the right direction as a country and as a state. As preposterous as the “mortgage jubilee” sounded to many observers of the Iceland experiment – it worked. Perhaps our federal legislators should ignore the lobbying efforts of the millionaires that run Sallie Mae and think about the borrowers.
By incentivizing responsible lending and borrowing, and by encouraging lenders and borrowers to work together, we can create a system that helps the economy rather than dragging it down.
Disclosures Must Be Mandatory
To a person, not one client has ever told me that the financial aid office of their college or university ever sat them down and explained how the debt that they were accumulating would be repaid. Not one – and I ask them all. In one unfortunate case, a young lady was enticed into taking on private student loans with the lie that these loans would be taken care of by the Student Loan Forgiveness Program. This was simply not the case – the statement was a flat out lie.
Financial Aid offices with colleges and universities must be required to explain the long term ramifications of accumulating student loan debt. Borrowers must be shown amortization schedules so that they understand the interplay between principal, interest and the term of repayment. More importantly, students should be counseled with respect to career choices, anticipated income, debt loan and repayment service.
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THE NEW GILDED AGE (Part 2)