41 posts categorized "Student Loans"

Suffolk/NCLC Student Loans Symposium

posted by Dalié Jiménez

I had the pleasure of participating in this weekend's very successful Research Symposium on Student Loans organized by Kathleen Engel of Suffolk Law School and Deanne Loonin of the National Consumer Law Center (NCLC) (NCLC, by the way, is looking to hire three attorneys!). In this post I want to mention some of the highlights.

Elizabeth Warren at Suffolk LawThe symposium was not your typical academic conference. Although almost 20 papers were presented during the two days, a number of participants were from industry and nonprofits. Participants also heard from an NCLC client who had actually dealt with student loan issues and come out the other side. This was, as one speaker mentioned, the conference some of us had been waiting for. 

The speakers also included former Slips regular and now senior Massachusetts Senator Elizabeth Warren (pictured at the event). The Senator focused her remarks on her proposal to allow refinancing of student loans (federal and private) at the interest rates Congress approved last summer (3.86% for undergraduate loans and 5.41% for grad unsubsidized loans). She noted that this is just a small step on the road to fixing the problems with the student loan system but since Congress not too long voted to lower future students' interest rates agreeing that they were too high she is hoping this proposal might actually have some political legs.  

Continue reading "Suffolk/NCLC Student Loans Symposium" »

Gainful Employment Rule Redux

posted by Jean Braucher

It’s time for us to pick up this story again. Late last week, the U.S. Department of Education finally released an 841-page notice of a new proposed final Gainful Employment Rule (GER) aimed at predatory, debt-laden higher education, particularly at for-profit colleges.  The for-profits enroll about 13 percent of the total higher education population but account for about 31 percent of all student loans and nearly half of all loan defaults.

The new rule seems to have a better chance of withstanding an inevitable legal challenge than DOE’s 2012 version, and it gets tougher on career colleges in a few ways outlined below, although it's still pretty forgiving to the colleges.

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The NYT on Intermediaries and Student Loans

posted by Bob Lawless

The New York Times ran an important story today by Natalie Kitroeff on the role of Educational Credit Management Corporation in policing student loans in bankruptcy. It is a story that should interest all Credit Slips readers.

Observers of the legal scene often underestimate the role that intermediaries play in shaping not only the court system but the legal doctrine itself. In the story, Ms. Kitroeff mentions a decision of the U.S. Court of Appeals for the Eighth Circuit that essentially adopted Educational Credit's loan repayment guidelines as the legal standard for what constitutes "undue hardship" for a discharge. One could ponder how the legal doctrine on undue hardship might look if Educational Credit was not pushing so hard in one direction.

Research Symposium at Suffolk Law on Student Loans

posted by Nathalie Martin

Suffolk Law School and the National Consumer Law Center are convening a Research Symposium on Student Loans in Boston on April 10th and 11th.  The goal of the Symposium, which is invitation-only, is to bring together the nation’s top experts, including academics, attorneys, industry representatives, consumer advocates, and government officials, to discuss research and policy related to student loans. We invite paper proposals that are empirical, qualitative, theoretical or policy-oriented.  Topics of particular interest are:

The Impact of high levels of student debt

Impact of debt on individuals

Impact of  student loan debt on the economy, e.g. housing markets and  consumer spending

Government loans

Continue reading "Research Symposium at Suffolk Law on Student Loans" »

Student Lending

posted by Katie Porter

As Prof. Nathalie Martin noted, the ABI has an upcoming conference on student loans. For those more interested in policy than straight up bankruptcy law, the St. Louis Federal Reserve will host a one day conference on the state of student loans in America on November 18. The conference, “Generation Debt: The Promise, Perils and Future of Student Loans,” comes on the heels of a report issued by the Consumer Financial Protection Bureau outlining the similarities between the student loan crisis and the recent financial meltdown. The Fed's involvement as a leading research institution--on student lending is great news.

Policy makers, academics and students (young adults) need frank and honest discussions about education finance. But young people’s economic vulnerability in this country is about much more than student loans; this generation faces critical junctures as they secure jobs (or not), marry and form families (or not) and pursue and pay for higher education (or not). The Fed's conference will hopefully offer a more multi-dimensional view into young adults and their financially fragile status than many of the high-profile articles that focus singularly on the role of student loan debt.

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ABI To Hold All-Day Program on the Next Big Thing, the Dischargeability of Student Loan Debt

posted by Nathalie Martin

College photo On Friday, November 15, 2013, the American Bankruptcy Institute will hold a conference in its Alexandria Virginia Offices, and by webinar, entitled You Can’t Discharge Student Loans in Bankruptcy – Or Can You? The conference will run from 9:30 a. m. to 3:30 p.m., and will be held at 66 Canal Center Plaza, Suite 600 in Alexandria, Virginia.  You can also participate remotely.  More information can be found here.   When we say the next BIG thing, we aren’t kidding, as this graphed Mother Jones article shows. 

Remarkably, student loan debt now exceeds auto and credit card debt. This program will help you learn whether bankruptcy law is keeping up with the Jones’s so to speak.

President Obama takes on the student debt bomb; meanwhile, the Gainful Employment Rule saga enters a 5th year

posted by Jean Braucher

Prospects do not look good for President Obama’s vastly ambitious initiative (not yet really a plan) to take on growing college debt.

Consider that the U.S. Department of Education (DOE) is going into its fifth year, and counting, of efforts to regulate just one higher education sector, for-profit schools, to stop those with the worst record of imposing unmanageable debt from continuing to live on a federal dole.  After a big setback in a legal challenge by the industry last year to a new Gainful Employment Rule, DOE has recently resumed its efforts, with a second round of negotiated rulemaking set to begin in September

The for-profit industry itself has argued for an expansion of regulatory scope to all colleges, presumably not because that would lead to quicker controls on for-profit schools' own operations.  The Obama administration may have lost necessary focus.  It should be taking on worst things first rather than subjecting even the most efficient, debt-free sectors of higher education to expensive new regulation.

About half of U.S. undergraduates go to community colleges.  As of 2011-12, according to the College Board, the average annual published tuition at public two-year schools was $2,963 (sticker price), and after taking into account grant aid and tax benefits, the average student paid nothing for tuition and fees (actually on average they got $810 more in aid than tuition and fees, meaning some money for living expenses).   In the most recent figures available on debt (probably getting worse because of public funding cuts leading to higher tuition), 62% of two-year public school graduates incurred no debt, and only 5% finished school with more than $20,000 in debt.  Most of the students at community colleges pay as they go by working their way through school. These schools need continued public funding to preserve their largely debt-free culture, which also makes not finishing school a low risk to students’ financial futures.  President Obama’s new rating system for all of higher education would not address the problems in this all-important two-year public sector, which offers subsidized education that only costs as much per student as high school.

For-profit schools, which have grown to enroll about 10% of college students, are at the other end of the debt spectrum—their students incur the most debt and have the highest default and delinquency rates (while the schools pay the least for actual education as opposed to marketing and other administrative costs).  For an exposition of the for-profit schools' business model, including heavy dependence on federal funds, see my paper from last year; it also provides a comparison to the debt picture at public and non-profit institutions as well as an account of the regulatory process through spring of 2012). 

It is good news that DOE hasn’t given up on regulating for-profits better despite a loss, discussed more below, in federal district court in June of 2012.   That decision actually provides a roadmap for redoing the Gainful Employment Rule (GER) to pass legal muster, while making it tougher than the very weak regulation that was struck down.

Continue reading "President Obama takes on the student debt bomb; meanwhile, the Gainful Employment Rule saga enters a 5th year" »

The Two-Year Tuition Fallacy and Other Confusion in Legal Education Reform

posted by Adam Levitin

Even the President has now weighed in about the cost of legal education, thus elevating the profile of the debate about the "dual crises" of legal education:  costs and job placement.

Let me put aside all of the possible criticisms one might make of the President weighing in on this matter and focus on one pernicious fallacy:  that reducing law school to two years would result in a corresponding reduction in the cost of legal education.  Let's call this the 2+0 approach, as opposed to the traditional 3+0 approach. There might be good pedagogical reasons for reducing law school to two years.  I personally don't think that's the case, although I do think law schools need to think more systematically about the content of legal education. 

Here's the problem:  most law school's budgets are taken up by fixed and semi-variable costs. Totally variable costs are a small part of law school budgets. That means that in the short-term, law schools simply cannot reduce their revenue (mainly tuition and endowment income) and still operate in the black. Schools cannot simply cut the salaries and benefits of tenured faculty, nor can they meaningfully reduce the costs of maintaining and operating their physical plants. This means that if law school went from 3 years to 2 years, law schools would still have expenses based on being 3-year schools. That would necessitate maintaining total tuition revenue equal to 3-years. That could be done by either increasing annual tuition or by increasing class size. The former would mean that students would still be paying for 3 years and getting 2 years of education, while the latter would flood the job market with lawyers who would still have significant debt burdens. 

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Bipartisan Deal to Reduce Deficit on Backs of Student Borrowers

posted by Alan White

Congress and the President are making huge decisions about the future of our biggest consumer credit markets – mortgages for homebuyers and college loans for students.  Unfortunately critical policy choices are being avoided, ignored, or obfuscated.  I’ll comment on student loans in this post, housing finance reform in a future post.

The student loan bill about to be signed by the President is touted as “reducing” interest rates for students.  This is nonsense. The “reduction” is only from the jacked-up rates that went into effect a few weeks ago on July 1 because of a prior legislative gimmick.  The basic undergrad student loan rate of 3.4% was scheduled to go up to 6.8% on July 1 mostly so that the federal deficit over multiple years would appear smaller in out years.  Most observers assumed that the rate hike would not happen, but deficit hawks used this gimmick as another pressure point to advance their agenda.  If you compare interest rates before July 1 with rates being charged under the new law, students are paying more interest, not less.  The CBO scores the bill as reducing the federal deficit by about $700 million.  Instead of a fixed 3.4%, students will pay 3.9% this year, and the 10-year Treasury bill rate plus 2.05% in future years.  Graduate students will pay much more (and are lower credit risks.)

More problematically, the “rate reduction” bill continues a practice, never fully debated, of using student loan interest as a profit center for the federal Treasury. The student loan Treasury profit is a consequence of the Clinton Administration’s Direct Loan program.   Under that program, instead of subsidizing banks to fund student loans, the Treasury lends money directly to students (albeit through private servicing contractors).  In the 1990s, banks and their Congressional mouthpieces vigorously disputed the proposition that direct Treasury lending would be cheaper than the old system of subsidizing the banks to fund student loans.  Not only were they wrong, but they were so wrong that the same interest rates that had to be subsidized when offered by banks produced a net profit to the Treasury under the Direct Loan program.  For many years, Congress was not willing to offer cheaper interest rates on Direct Loans than on bank loans, so the Direct Loan borrowers effectively subsidized the guaranteed bank loans.  The fact that the government could be the low-cost provider was just too mind-blowing for the Washington consensus.  In recent years, it has been convenient for Congress to ignore the fact that Direct Loan student borrowers pay much higher interest rates than are necessary to cover the costs of the program.

Senator Warren has proposed pegging student loan rates to the low rates paid by banks borrowing from the Federal Reserve.  This is an interesting idea, but it seems to me we should begin with the proposition that students pay no more interest than is needed to cover the cost of the student loan program, i.e. that we run it as a break-even operation rather than a money-maker for the Treasury. 

Here is the Senate vote on the bill, and here is the House roll call.

Student Loan Bubble Data

posted by Alan White

The New York Fed has posted a new analysis of student loan debt.  Depending on how you read the data, student loan borrowers are either in serious trouble, or are no worse off than consumers with credit card debt or car loans.  The bad news is that only 39% of borrowers are paying down their student loan debt. The rest are either in deferment, income-based repayment (which permits paying less than the interest coming due), or default.  On the other hand, only 14% of borrowers are contractually delinquent in payments. The NY Fed bloggers have yet another way to slice the delinquency data: of those borrowers who appear to be in repayment, rather than in deferment or income-based repayment, about 27% are delinquent.

As for the total debt, it grew to $870 billion as of September 30, exceeding total credit card debt and exceeding total auto loan debt.  The median loan amount is $12,800, which does not seem so unmanageable, but the average is $23,300, meaning a small percentage of borrowers have large amounts of debt. Borrowers like the law students we worry about, with $100,000 of debt or more, are a very small percentage of the student loan population, about 3% of borrowers.  On the other hand, many of those with small balances are college drop-outs, who also struggle.

The bubble aspects of student loan debt are suggested by two statistics.  First, 40% of all borrowers are under 30, and they hold 33% of all the debt and 25% of past due loans.  Given that this group includes every student who has just signed up for her first loan, the future of student loan debt is clearly worrisome.

Second is the 39% figure mentioned earlier; 61% of borrowers are in deferment or income-based repayment paying less than the interest coming due each month. 

So, how many student loan borrowers and how many student loan dollars are in income-contingent repayment and in negative amortization, i.e. the student loan equivalent of Option ARM's? (Actually, not quite equivalent, because unlike neg. am. mortgages, neg. am. student loans are paid off by taxpayers after 25 years, not by borrowers.) The NY Fed data cannot distinguish borrowers in income-contingent repayment from those who aren't repaying because they are still in school.  After some fruitless googling at the Education Department, CBO and think tank web pages I can't seem to find the answer to this obviously important question.  Readers?

The Legal Employment Market, Student Debt, and Legal Education Reform

posted by Adam Levitin

There has been a great deal of press recently about the sorry state of the legal jobs market, student debt, and the irrelevance of legal education (see, e.g., here).  A lot of the thinking on these issues has struck me as incredibly ga-ga and muddled and as reflecting unrelated and pre-existing agendas about legal education, student debt, and the role of lawyers in society.  The jobs market, student debt, and legal education are all distinct, if related issues.  But it's important to untangle them and see where the problems are and what can be done about them.   

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Student-Loan Collections Could Be Subject to Drastic Overhaul

posted by Nathalie Martin

Bloomberg reports that Congress will consider overhauling debt collection in the $100 billion-a-year U.S. student loan program, replacing it with automatic withdrawals from borrowers’ paychecks tied to their income -- a system similar to those sued in the U.K., New Zealand and Australia. The bill, proposed by Wisconsin Republican Representative Tom Petri, would require employers to withhold payments from wages in the same way they do taxes, capping payments at 15 percent of borrowers’ income after basic living expenses. The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceed credit- card debt. Under the new system, the government would no longer need to hire thugs to collect, and I personally have found these student loan debt collectors to be quite formidable indeed. Never mind that the debt collectors fees can add up to 25 percent to borrowers’ loan balances, leaving defaulted former students even deeper in the hole.  This new process would streamline the confusing process of getting on a reduced payment plan if a borrower is un or under-employed, but would still provide for repayment of the student debt.

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Student Loans Are the First Step Toward Nazism

posted by Bob Lawless
Unbelievable.

NYT on Student Loans in Bankruptcy

posted by Bob Lawless

At the New York Times, Ron Lieber has a story about the treatment of student loans in bankruptcy. The story does a good job of explaining the harshness and capriciousness of the current system, but it is a story that bankruptcy lawyers and judgres already know. We have been discussing these problems since the early days of Credit Slips, but it is great to see the facts get to a wider audience. Maybe that will help us get some change.

The bankruptcy rules for dealing with student loans are broken. An easy fix would be to go back to the old rules where, after a certain amount of time has passed, student loans are treated like any other unsecured debt and subject to discharge. Back in 1976, the period was five years and then it became seven years in 1990. A time period like that sounds about right. Persons seeking to discharge their student loans before the expiration of the waiting period would still need to show undue hardship. The old system struck a balance between the problems that would ensue if recent graduates could too easily walk away from their loans immediately after graduating and the harshness of the current system.

Indeed, the reason we have the current problems is largely because "undue hardship" was meant to be a rare exception to the 5- or 7-year period before a student loan became dischargeable. Congress repealed the waiting period but did not do anything to the underlying standard. Now, we just have a harsh standard.

Equity Financing of Higher Education

posted by Adam Levitin

Luigi Zingales had an op-ed in the NY Times a few days back proposing equity financing of higher education combined with IRS collection of educational debt. Sound familiar? It should to Credit Slips readers.  I suggested the very same thing right here on this blog back in April

In thinking about it further, it strikes me that there are a few fundamental problems and concerns with an equity financing system.  

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The Student Loan Tax

posted by Alan White

As student loan debt passed the $1 trillion mark, President Obama, speaking at Chapel Hill yesterday, called the upcoming interest rate hike on student loans a tax.  He didn’t tell the half of it.  Congress’ dirty secret is that the government makes a huge annual profit on student loans.   According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.)   The President’s current dispute with Congressional Republicans is about whether to increase this annual profit next year.  The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.

How does the government profit from student loans?  In two words, yield spread. 

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Speaking of Student Loans . . .

posted by Melissa Jacoby

President Obama is at UNC-Chapel Hill today to talk about student loan interest rates. His speech should be streamed here at around 1:15 pm EST according to recent estimates.  

Some Thoughts on the Student Loan Debt Problem

posted by Adam Levitin

The student loan issue is increasingly coming the front-burner, both domestically and abroad. I haven't blogged about it before (and it's worth noting how little scholarship there is on student loans compared with say mortgages or credit cards). So here are some initial thoughts by way of encouraging a less muddled conversation on student loan debt.  

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NACBA warns of student loan "debt bomb"

posted by Jean Braucher

At its annual Capitol Hill Day in Washington this week, the National Association of Consumer Bankruptcy Attorneys sounded an alarm about the growing student loan problem, calling it a “debt bomb.” NACBA released a survey of its members indicating that more potential clients these days have unmanageable educational loans and are facing aggressive collection efforts. See http://www.nacba.org/Legislative/StudentLoanDebt.aspx. It has become common for people to have two mortgage-size debts, one for a home and another for an education. The educational loan problem is looking something like the one a few years back with subprime mortgages.

Absent “undue hardship,” very hard to establish, student debt can be a life sentence because these loans are not dischargeable in bankruptcy. NACBA supports making private students loans dischargeable again (as they were before the 2005 law). Beyond that, it favors going back to the pre-1990 approach of allowing discharge of any student debt after five years. If the education isn’t paying off enough to make the loan repayable after that much time, something has to give so that people can get on with their lives--and some day buy a home, start a family, and save for their kids’ education and their own retirement.

As a participant in the Capitol Hill Day, I found congressional staff reacted very sympathetically. They are mostly young people carrying big student loans or with friends who have them. They know how hard it is to manage this debt even when you have a decent job. They easily recognize what a big problem this is for their generation and even more so for the next one. This issue isn’t going away.

Big Change in Graduate School Loans Flew Under the Radar

posted by Nathalie Martin

When Congress recently compromised on balancing the budget, it chose to “save” Pell grants for undergraduates by throwing Stafford Loan for graduate students under the bus. It is unclear why this particular horse trade was necessary, and I am not even saying it was the wrong thing to do, but I do think people who might care (law students, law professors) should at least know about the change.

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Brain-Injured Marines and For-Profit Colleges

posted by Jean Braucher

Military personnel have long been targets of predatory creditors, going back to the moneylenders who followed the Roman legions. More recently, payday lenders clustered storefronts around military bases. The latest development is that subprime operators are hawking degrees at for-profit colleges to former and current service members.

Holly Petraeus, who heads up service member affairs in the federal Consumer Financial Protection Bureau, has a powerful account in an op ed for the NY Times of the targeting of current and former military personnel by for-profit colleges, including some seriously brain-injured Marines at Camp Lejeune, N.C. Appointing Petraeus, whose husband David is CIA director and former commander of American forces in Iraq and Afganistan, to this post was a stroke of genius. When general consumer protection arguments fail to get much traction, finding some military victims seems to help get the message across.

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For-Profit Higher Education Industry Sues to Block Weak “Gainful Employment” Rule

posted by Jean Braucher

Last week the Association of Private-Sector Colleges and Universities (aka the Career College Assn.) filed suit in U.S. District Court in Washington, D.C., to block enforcement of the U.S. Dept. of Education’s “Gainful Employment” regulation, issued in June.  See here for the complaint.   The for-profit colleges are challenging the agency's authority to issue that regulation.  It requires that, to be eligible to receive federal grant and loan funds, the colleges must show that 35 percent of former students are paying something (even $1) on their student loans (or that they must meet other benchmarks set in terms of debt to income).

So let’s back up and put this issue in context.  There is lately a general unease about whether the cost of higher education is worth it, even though income rises and unemployment decreases steadily with successive degrees (except that PhD’s are more likely to be unemployed than those with professional degrees, hardly a surprise).  See here.   

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Student Loans Now Greater Than Credit Card Debt

posted by Bob Lawless

Total outstanding student loan debt now exceeds credit card debt, as reported yesterday in the Wall Street Journal which in turn elaborated on a web article by Mark Kantrowitz, publisher of FinAid.org. Revolving consumer credit according to the Federal Reserve is $826 billion. Kantrowitz calculates outstanding student loan debt at almost $830 billion.

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Undercount of Student Loan Default Rates

posted by Bob Lawless

From Kelly Field in today's Chronicle of Higher Education:

According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.

These numbers are much higher than the official government statistics that track student-loan defaults only in the first two years of payment. The default rates become very high over a 15-year window. For example, over a 15-year window, the default rate is 31% for loans made to community-college students. I highly recommend reading the full article, which provides much more detail and an extended discussion of default rates at for-profit colleges.

Interchange Irony: George Mason University Edition

posted by Adam Levitin

George Mason University law professors Todd Zywicki and Joshua Wright have been the leading (and almost sole) academic defenders of the current interchange fee system.

So how's this for irony:  Zywicki and Wright's own employer announced that it will no longer accept Visa for tuition payments because interchange fees are too high.  (You'll have to watch a 15-second BP propaganda bit before the video on GMU).  The school doesn't want other students or taxpayers footing the bill for rewards programs.  Antiregulatory ideology runs deep at GMU, but clearly it won't get in the way of a real world business decision.  

Note, btw, that GMU was able to opt-out of taking a particular card network (somehow the other networks are permitting a convenience fee to be tacked onto the tuition bill to cover interchange).  Universities are in a rather unique position of being able to refuse to take cards altogether.  For most merchants, taking payment cards is just part of operating in the modern commercial economy.  

Debt-Free: An Unrealistic Expectation

posted by Elizabeth Warren

A Vice-President at Dickinson College complained about the move by wealthier schools to eliminate student loans as part of the aid package, arguing that such a move creates the "unrealistic expectation that students should graduate debt-free."  He points out that people borrow for cars and homes, and that education is just like any other big-ticket purchase.  In effect, rich people can buy it for cash and those with less money should finance it over time. 

If education is like a Hummer--cash or credit--then why stop with college?  Why not shut down the public schools K-12, and let those whose parents want them to learn to read and write pay cash or take on loans? (Maybe we're heading that way with failing schools in some cities.) 

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Student Loans and U.S. Bankruptcy Law: Hard to Understand

posted by Gene Wedoff

Student loan debt in the U.S. is a growing problem, with college students graduating with an average debt load of nearly $20,000 as of 2006.  In my last post, I pointed out a recent opinion suggesting a bankruptcy approach that might help students with these loans, even though the debts are nearly always nondischargeable.  Comments to this post suggested that there is an underlying problem in the way U.S. bankruptcy law treats student loan debt.  The comments are right: this treatment of student loans is very difficult to understand.

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Bankruptcy Help for Students and Their Lenders?

posted by Gene Wedoff

Yesterday, the President signed into law H.R. 5715, the “Ensuring Continued Access to Student Loans Act of 2008.”  The law responds to a perceived liquidity crisis in student lending by allowing government purchases of privately-issued student loan portfolios, so that the lenders will have funds to re-lend. The law is characterized as a useful first step in the lead editorial of today's New York Times, but the Times urges a broader remedy: greater use of direct governmental student loans.

From the perspective of bankruptcy, though, the question is not how students can best get into educational loans, but how they can get out of them.  Under current U.S. bankruptcy law, all student loans are nondischargeable unless the debtor can establish “undue hardship” under a test that requires proof (among other things) that the debtor will not be able to repay the loan in the future—i.e., permanent disability—a very tough standard.  However, for at least some student debtors an easier way to get bankruptcy relief may be the suggested by In re Orawsky, a recent decision from a Philadelphia bankruptcy court.

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Student Loans, and the Housing Crisis

posted by Mechele Dickerson

I am honored to have been asked to be a guest blogger on Credit Slips.  Not only is this my first posting for the week, this is the first time I’ve ever posted anything to a blog anywhere.  With that warning, here goes.

Thanks to the metastasizing housing crisis, the Bush Administration is urging Congress to increase the government's participation in the private student loan market.  Rather than just guaranteeing loans, though, President Bush urged Congress in his weekly radio address this Saturday to approve quite broad legislation that is designed to encourage private lenders to continue to remain in the federal student loan program.

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What the Foreclosure Mess Tells Us About Private Student Loan Dischargeability

posted by Adam Levitin

The most recent attempt to roll back some of the BAPCPA's limitations on the scope of the bankruptcy discharge seems to have faltered in the House. The House passed an education bill, but without a proposed amendment that would have made private student loans dischargeable in bankruptcy, as they were before October 2005, was voted down. A Senate bill (S.1561) sponsored by Dick Durbin (D-Ill.) that proposes making the private loans dischargeable is still in committee. (For a discussion of the legislation see here.)

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For-Profit Student Lenders Win Again

posted by Bob Lawless

Yesterday, the U.S. House of Representatives passed H.R. 4137, College Opportunity and Affordability Act of 2007. Reading that, you might query whether the House has a calendar, but the main point of the bill is to make some reforms to the market for student loans. I'll leave those details to the N.Y. Times story reporting on the bill's passage. Readers of this blog are likely more interested in the fact that the bill left the House of Representatives without changes to how student loans are treated in bankruptcy.

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Pricing Student Loans by College

posted by Bob Lawless

The New York Times reported today that New York Attorney General Andrew Cuomo sent a letter to Senator Christopher Dodd and Representative George Miller complaining that private student lenders are setting interest rates based on the colleges students attend. The NYT story explained the practice this way:

Students at colleges with default rates of 3 percent or less, the letter said, were eligible for private loan interest rates of 8 percent to 9.25 percent. At schools with default rates of 3 percent to 5 percent, students could obtain loans at interest rates of 9 percent to 12 percent. And at colleges with default rates of 5 percent to 10 percent, students paid interest rates of 11 percent to 14 percent.

What's wrong with that? Consumer lenders are entitled to earn a profit and part of earning a profit includes considering the possible default rates of borrowers.

Because I could not find Attorney General Cuomo's letter on his web site or on the web sites of Senator Dodd or Representative Miller, I have to rely on the NYT's summary of it. Cuomo is quoted as comparing the private student lenders activities to redlining: "Just as lenders in the mortgage industry once made judgments about credit lending in entire neighborhoods as a whole, so too are lenders making generalized judgments about student and parent risk based on a student's school neighborhood." It may be effective political rhetoric to compare the two situations, but they are inapposite. The practice of redlining had the taint of racial prejudice, and there is no evidence that is occurring. Cuomo's letter mischaracterizes the facts. Lenders are not making judgments based on the "neighborhood of the school"--and a good thing that is for some schools!--but on repayment histories.

Later, the story cites statistics from Cuomo that a student at Duke University might pay 8% interest, but a student at the University of Phoenix pays 11%. These examples were chosen carefully because they raise the specter of a privileged Duke student getting a break the blue-collar student at the University of Phoenix does not (to draw on the stereotypes of the students at the two universities).

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Rolling Back the 2005 Law on Student Loans

posted by Bob Lawless

Generally speaking, a consumer cannot discharge a student loan in a U.S. bankruptcy case unless the consumer can show undue hardship. Before 2005, the restriction on discharge reached only student loans made by governmental entities and nonprofit institutions. The idea was that governmental entities and nonprofit institutions made student loans to persons who otherwise might not be able to afford to attend college. To protect these student loan programs, the Bankruptcy Code gave government and nonprofit lenders this special advantage not available to most other consumer lenders.

The 2005 bankruptcy law amended the Bankruptcy Code so that student loans even from private lenders could be nondischargeable in bankruptcy. With the disclosures of side payments to college loan officers and other abuses in the student loan industry, Congress has been taking a closer look at lenders of student loans. On June 6, the Senate Committee on Banking, Housing, and Urban Affairs held hearings on the state of student loans, with New York Attorney General Andrew Cuomo describing private loans as the "Wild West of the student loan industry."

Senator Dick Durbin made what appears to have been the first response to these hearings. He has introduced S. 1561. Under Senator Durbin's legislation, only student loans "made, insured, or guaranteed" by a governmental unit would be nondischargeable in bankruptcy (absent a finding of undue hardship). The legislation would allow loans from private or nonprofit lenders to be dischargeable in bankruptcy. The discharge of loans from nonprofit student loan lenders would be a change from the pre-2005 law and was prompted, as I understand it, from reports that for-profit private lenders were sometimes working through nonprofit organizations. Also, as I read the legislation, it would make loans from state, but not private, universities and colleges nondischargeable. Take that Harvard.

Student Loan Scandal Fallout

posted by Elizabeth Warren

Among the many wonders of the 2005 bankruptcy amendments is the provision that for-profit student loan agencies would get the same protection of non-dischargeability as government lenders.  No one seems to know where the amendment came from and no one seems to recall any evidence of abuse that would cause these for-profit lenders to get treatment usually reserved for domestic support recipients and the taxing authorities. 

In the wake of the scandals over loan company payoffs to college officials, higher education experts are taking a closer look at BACPA.  In a document that was leaked last week, the lobbying strategy of for-profit lender Sallie Mae was exposed.  Educational policy expert Bob Shireman has started asking questions about those strategies, particularly as they relate to bankruptcy. 

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Debt Relief for Prosecutors and Public Defenders

posted by Angie Littwin

Earlier this week Senator Dick Durbin introduced legislation that would create a student-loan repayment program for new prosecutors and public defenders.  The program would cover up to $10,000 per year of loans, with a lifetime cap of $60,000.  To be eligible, attorneys would commit to at least three years of service.  It is heartening to see progress on student loans being made during the week that Credit Slips guest blogger David Moss has so effectively articulated the inadequacies of the current system.

More than 80 percent of law students finance their education with loans, and they graduate with extraordinary amounts of student debt – an average of $51,056 for state school graduates and $78,763 for those who graduate from private schools.  Many of these students still carry additional debt from their undergraduate educations.  Starting salaries for attorneys in the criminal justice system are in the mid-$40,000s, with a median of $46,000 for State prosecutors and $43,000 for public defenders.  (Federal prosecutors are already covered under a separate program.)  Persuading students to take jobs with starting salaries below their level of total debt is a tough sell.  A program like this would eliminate some of the hardest choices students face.

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Transforming the Way We Finance Higher Education

posted by David Moss

In my various posts this week, I've focused on some of the problems that afflict our current system for financing higher education.  The new approach I've suggested would ensure that every American could pay for college on the basis of income-contingent federal loans. 

A comprehensive income-contingent-lending (ICL) program would transform the way we finance education and training in this country, much as social security transformed the way we finance retirement. In fact, such a program might be thought of, roughly, as social security in reverse. Instead of paying-in over one’s working life to finance retirement (i.e., once one’s human capital is depleted), an ICL program would allow a young person to build human capital up front and then spread the cost over his or her working life. Like social security, an ICL program would allow Americans to cover risks they couldn’t otherwise cover on their own, and it would take advantage of the withholding system to simplify and streamline administration.

The ultimate investment we can make as a society is an investment in the education of our young people. Sadly, our existing system for financing higher education is hopelessly inefficient and complex – and this, at a time when the benefits of higher education have never been more clear. We can do better. A comprehensive ICL program would be like a GI bill for everyone, but one that would also pay for itself over the long term. Social security transformed retirement by changing the way we finance it. It’s time we do the same for education.

 

Promoting Investment in Education through Income-Contingent Lending

posted by David Moss

In yesterday’s post, I identified a number of problems with our current system for financing higher education, and I promised that I would suggest a new approach.

The option I think we should strongly consider is to ensure that every American can finance college or graduate-school tuition (or the cost of job training) with a special income-contingent federal loan. The loan would have an extended term (up to 30 years, like a mortgage) and would defer or potentially forgive interest payments for any year in which the recipient’s household income fell below a pre-specified trigger.

Income-contingent lending for education is certainly not a new idea. In the past, its intellectual champions included both Milton Friedman and James Tobin, two Nobel laureates in economics from opposite ends of the political spectrum. Among politicians, key supporters have included Congressman Thomas Petri, Republican from Wisconsin, and former Senator Bill Bradley, Democrat from New Jersey. The idea has broad appeal because it addresses an important weakness in our market system.

Just as limited liability law encourages investment in financial capital, an income-contingent-loan program would encourage investment in human capital by limiting the investor’s downside risk. In my view, it would represent a vital – and ultimately self-financing – policy innovation for the information age.

Continue reading "Promoting Investment in Education through Income-Contingent Lending" »

In Need of a New Approach for Financing Higher Education

posted by David Moss

Over the course of this week, I want to discuss student loans, including the inadequacies of the existing system for financing higher education and a potential strategy for improving it.
 
As I see it, the current patchwork of programs for covering college tuition makes little sense. The system is maddeningly complex. What’s worse, it does a poor job of managing risk and assessing need, and it actually discourages household saving. Most student loans, moreover, require borrowers to bear the heaviest burden when their earning power is lowest. For such a major lifetime expense, it is imperative that we do better.

I’ll suggest an alternative approach in my next post. First, though, I want to focus on the nature of the problem we need to solve.

Continue reading "In Need of a New Approach for Financing Higher Education" »

Bush Opposes Cut in Student Loan Interest Rates

posted by Bob Lawless

The prospects for slashing the interest rates on student loans have dimmed considerably. The Chronicle of Higher Education reported this morning that the president has announced his opposition to the bill currently working its way through the House. A copy of the president's full statement is here. Although the president did not come out and say he would veto the bill, that appears to be a distinct possibility.

I am all in favor of cutting interest rates on student loans, but I also recognize there is no free lunch here. Someone has to pay. In a post earlier in the week, I raised the question of exactly who will pay for this. Today's N.Y. Times reports the following:

The rates would drop from 6.8 percent to 3.4 percent in stages over a five-year period under the House proposal. That would cost nearly $6 billion, according to the Congressional Budget Office.

To avoid increasing the deficit, the bill's cost would be offset by reducing the yield on college loans the government guarantees to lenders and cutting the guaranteed return banks get when students default. Banks also would have to pay more in fees.

Cutting through the rhetoric, it appears that the lenders would ultimately bear the costs. Proponents of the interest-rate cut say that the student-lending industry could easily afford it. Its loans are federally subsidized and carry little risk. For example, student loans are generally not dischargeable in bankruptcy. I see that point, but we're talking about a 50% rate cut. The target interest rate of 3.4% would be below the yield on a 10-year U.S. Treasury note, which stood at 4.7% this morning. Sure, student loans are profitable products for lending institutions, but are the returns so dramatic that the industry could absorb a 50% decrease on its interest rate?

UPDATE (1/19/07): This bill has passed the House on a 356-71 vote. It is now pending before the Senate Committee on Health, Education, Labor, and Pensions. The bill's status can be tracked through the Library of Congress' THOMAS service.

 

Looking for the Unfree Lunch on Student Loans

posted by Bob Lawless

Much has been written about the Democrats' promises to enact new legislation in their first 100 hours of control over the Congress. (Aside--if my students think time passes slowly during my classes, they should see the way the congressional Dems keep time (NYT, reg. req'd).) One of the pieces of legislation is a promise to slash interest rates on student loans by half over the next five years. There have been a number of news stories on this plan, and the story in today's New York Times (reg. req'd) will get you up-to-date.

I don't know enough about the student loan program to understand exactly how this is going to work, and I'm too busy or lazy (take your pick) to educate myself on it. Maybe Credit Slips readers will help me out here in the comments. There is no free lunch, to coin a phrase, so who's paying for this? Debb Thorne posted on student loans a while back, and there is no question that reducing the crushing debt burden on graduating students would be a huge policy win for the middle class. The bankers claim the rate cut will fall on them. Is that right? Is the Democrats' plan just a big federal subsidy?

Student Loans: A Modern-day Form of Slavery?

posted by Debb Thorne

This past week, students in my Social Inequality course were asked to read and think about causes and consequences of various types of debt. Given the audience, it's no surprise that student loans kept coming to the fore. Well over three-quarters of the students indicated that they would graduate with loans--many of them well over $20,000 owed on a Bachelor's degree in the social sciences, majors that are vital for our society but not notorious for their high salaries. They described an increasingly common pickle--there was no way that they could have attended college without the loans, and they are frightened that they will not be able to repay them, but they knew that without the college degree, their futures were beyond bleak. To say they feel between a rock and a hard place would be an understatement.

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