postings by Alan White

What's Wrong with PSLF and How to Fix It

posted by Alan White

The Public Service Loan Forgiveness program has so far rejected roughly 99,000 out of 100,000 student loan borrower applicants. Poor Education Department oversight, poor contract design and implementation, and widespread servicing contractor failures are as much to blame as problems in the legislative and regulatory program design. Making this program work to provide loan relief for potentially millions of public servants requires a comprehensive set of fixes. US Ed. could start by enforcing its contracts and compensating its contractors properly, and by relaxing its needlessly strict 15-day on-time payment rule, while Congress could give borrowers credit for all payments made under any repayment plan. In our new white paper summarizing federal agency reports, attorney general and borrower lawsuits, consumer complaints, and contract documents, my research assistant and I survey the various reasons nearly all applications have been denied, and we propose contractual, regulatory and legislative reforms needed to fix PSLF.

USED could have seen PSLF Fail coming

posted by Alan White

The Department of Education (USED) knew by 2016 that hundreds of thousands of student loan borrowers planning to apply for public loan service forgiveness (PSLF) were headed for rejection as they started applying in late 2017. The Department conducted a review of servicing contractor PHEAA’s administration of PSLF on October 25, 2016, about a year before the first cohort of borrowers would become eligible for loan cancellation. At the time of the review, 449,860 borrowers were designated as PSLF participants, presumably because they had at least one approved public service employer certification form (ECF). The reviewers audited a sample of 34 borrower loan files, and found that 53% had ZERO qualifying payments. Of those, about 40% were in a non-qualifying payment plan and 60% had ECFs with employment periods ending more than one year prior to the review date, in other words, no current evidence of qualifying employment. Given that all of these borrowers submitted at least one ECF, it is reasonable to assume that most if not all of them were unaware that they were making no progress towards the required 10 years of repayment.

Instead of faulting PHEAA for a situation in which half of borrowers were in danger of not getting PSLF credit for their payments, USED delved into the minutiae of PSLF payment counting, and found two instances of payment-counting errors resulting from servicing transfers. In their recommendations, the USED reviewers stress “it is imperative that Fedloan Servicing and FSA partner to ensure only those truly eligible for forgiveness receive this benefit.” No mention is made of any need to get in touch with the 53% of borrowers who are in the wrong payment plan or do not have up-to-date employer certifications.

The authors of the October 25, 2016 review (Debbe Johnson, Larry Porter, and Christian Lee Odom of SFA) note on the first page that it is for internal USED use only and is a policy deliberation document, presumably to shield it from FOIA release. It became public when the House Education and Labor Committee released the review as an exhibit to the committee’s October 2019 report on the PSLF fiasco.

$5 to forgive public servant student loans

posted by Alan White

Five dollars is the contract payment the US Education Department makes to its servicer FedLoan for a borrower's first approved Public Service Loan Forgiveness (PSLF) employment certification. FedLoan is supposed to review employer certifications, track PSLF borrower payments for ten years, and then process a loan forgiveness application, all for five dollars (plus the servicing fee paid for all loan accounts.) FedLoan must verify that the borrower made each payment on time, in the right payment plan, for the right loan(s), while working for the right employer full time. US Ed. has made FedLoan's task far more difficult than the statute requires, with its 15-day on-time payment regulation and various employer exclusions. The Department needs to seriously rethink its contract design before renewing its 10-year servicing contracts early next year.

The process of matching each payment with a qualifying employment period appears to account for more than half of the astounding 99% denial rate. The Congressional proposals to fix PSLF have largely missed this point, although the House bill calls for one obvious fix by requiring US Ed. to give FedLoan a list or database of qualifying employers. FedLoan's task would be far easier if the on-time payment rule were scrapped, and replaced with a rule that any borrower who made a total of 120 payments in any payment plan without going into default qualifies, so long as they can submit employment verification for the relevant 10 years. Because borrowers submit IRS information to the servicer each year to set an income-based payment amount, another tech fix would have the servicer store the IRS employer identification number (EIN) and match it with a list of approved public service employers, rather than having the student and employer fill out a 10-page employment certification form every year.

US Ed.'s public stance (apart from Secretary DeVos' desire to kill PSLF) is to blame Congress for bad program design, while Congressional overseers can't seem to recognize that PSLF can only work with a comprehensive set of legislative, regulatory, and contractual fixes. Meanwhile the count of student loan borrowers with at least one approved ECF, i.e. future PSLF applicants, is 1.1 million.

 

Student Loan Crisis Driving Racial Wealth Gap

posted by Alan White

Twenty years after taking out student loans, white borrowers have paid 94% of their debt (at the median.)  Black borrowers, on the other hand, have paid 5%. While a disturbing 20% of white borrowers defaulted on student loans at some point during twenty years, a catastrophic 50% of Black borrowers defaulted.

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Inst. on Assets & Soc. Policy

 A new report from the Institute on Assets and Social Policy at Brandeis collates NCES and other data on student borrowers beginning college in 1995-96 to paint a grim picture of student debt burden as a key contributor to the racial wealth gap. As today's students take on far greater debt than the 1990s cohorts, this pernicious effect can only magnify. Cancelling student loan debt could play an important role in closing the gap. Debt cancellation should be judged not by the dollar amounts of debt forgiven for various borrowers, but by the degree of debt burden relieved for borrowers at various income and asset levels, as explained by progressive economist Marshall Steinbaum.

Home Contract Financing and Black Wealth

posted by Alan White

A remarkable new quantitative study finds that over two decades, African American home buyers in Chicago lost between $3 and $4 billion in wealth because of credit apartheid. The study authors from research centers at Duke, UIC and Loyola-Chicago reviewed property records for more than 3,000 Chicago homes. During the 1950s and 1960s, up to 95% of homes sold to black buyers were financed with land installment sale contracts rather than mortgages. Mortgage loans were largely unavailable due to continued redlining by banks and the Federal Housing Administration (FHA). Instead, a limited group of speculators bought homes for cash and resold them with large price markups to newcomers in the Great Migration. The interest rates for  land installment contracts were several points higher than comparable mortgage loans offered to whites. Thus, black home buyers were overcharged for the home price and the interest rate they paid compared with similar white home buyers. The authors quantify this as a 141% race tax on housing.

Buyers financing homes with installment land contracts also face greater risks of losing their homes and accumulated equity than buyers with a deed and mortgage purchase, for reasons we teach, or ought to teach, in any Property Law or Real Estate class in law school. A missed payment on a land contract can mean quick eviction, while a homeowner behind on a mortgage is protected in many states by foreclosure procedures and redemption rights. More importantly, when a bank, FHA or other lender finances a home, the lender has strong incentives to protect the buyer and itself from defective home conditions or title problems. Those protections are missing from the installment land contract financing structure. The Duke study did not include the cost of premature evictions, home repairs, and title problems experienced by black contract buyers, all of which would further magnify the wealth gap between white and black home buyers. 

The Student Loan Tax

posted by Alan White

Democrats’ policy proposals have sparked a vital and overdue debate on our system to pay for post-secondary education, and how that system burdens and redistributes income. The existing system combines a small share of taxpayer funding (via the Pell Grant) with a large share from the student loan tax. The student loan tax requires the students themselves to pay a percentage of their income for 20 to 25 years, collected not by the IRS but by private contractors for the US Education Department. The Clinton and Obama administrations converted a clunky loan system involving banks and state guarantee agencies into a direct federal “loan” program. The federal government issues funds to colleges and universities, and then outsources to collection contractors to tax the earnings of college grads and noncompleters. Although not all students participate in income-dependent repayment, greater numbers are expected to do so if nothing changes. Not only are student loans different, they are looking less and less like loans at all.

The current system is a tax on future earnings, rather than a true loan program, for several reasons. First, the income-dependent payment programs tie “borrower” payments to their disposable income, and cancel debt at the end of 20 or 25 years. Second, borrowers who are declared in default end up having wages garnished at a fixed percentage of income, as well as tax refunds intercepted, both of which are essentially taxes on earned income (or cancellation of earned income tax credits.) Third, a few (and so far badly administered) loan forgiveness programs allow students to stop repayment after 10 years if they remain in low-paying and socially valued jobs.

When we talk about canceling student loan debt, we are really just talking about how much of college students’ future earnings we will tax. As I have noted previously, some, especially graduate degree holders, repay far more than the cost of their own education, because of above-cost interest rates. Others benefiting from various “forgiveness” programs repay less, at least on a present-value basis.

The problem with costing out a one-time loan cancelation program is that each year a new cohort of students is assigned nearly $100 billion in new federal loans to repay. The combined federal payments under the major loan and grant programs (DL, Perkins and Pell) total about $125 billion annually. The issue going forward is whether to tax individuals and corporations in the present year, or the students in future years, and in what combination. There is also the problem of the disappearing role of states in funding public higher education, a topic I will write about separately.

This is why the policy choices are not binary (full debt cancellation and free college, i.e. 100% taxpayer financing, versus the status quo.) A notable benefit of our expanded policy debate is some real attention to the distributive consequences of major changes in higher education funding. We could, for example, offer new and less onerous income-dependent repayment, taxing a lower percentage of earnings, setting a higher exemption than the poverty level, or shortening the 20-year repayment period. We could, as some have proposed, reduce student repayment even further for borrowers engaged in public service or national service, although as we have seen, defining eligibility categories creates big process costs. We can, and should, abolish “default” and re-evaluate payment obligations for borrowers who did not complete their college education. We could examine the pros and cons of IRS or private contractor collection. The value of elements of our existing system is the ability to apply income progressivity as measured both by students’ pre-college family income as well as their post-graduation income to allocate the burden of their college costs.

Student Loan Fixes

posted by Alan White

While presidential candidates propose sweeping new policy initiatives, a few simple legislative fixes could go a long way to alleviate the student loan crisis. Three numbers set by Congress have a huge impact on the burden borne by millions of borrowers: the Stafford loan interest rate, the income-driven repayment plan income share, and the number of years to balance forgiveness. These three numbers (currently 5%/6.6%, 10%/15% and 20/25 years, respectively) essentially allocate the burden of funding postsecondary education between students and taxpayers. The interest rate, for example, has produced a net profit for the Treasury for many years, meaning that former students pay more than the cost of loan administration and loss recoveries, essentially paying a surtax. Some income-driven repayment plans require borrowers to pay 10% of disposable income, while others call for 15%, and of course several numbers go into defining disposable income. Finally, income-driven repayment plans call for debt balance cancellation at the end of 20 or 25 years. Reducing the interest rate, the income percentage and the repayment period are all means to shift the funding of an educated workforce from graduates (and noncompleters) to the broader taxpaying public. Student loan costs can be reduced incrementally; the choices are not limited to the status quo or free college for all.

While some Democrats propose to "refinance" student loans, Congress can reduce interest rates on existing loans at any time, saving borrowers and federal contractors lots of transaction costs. Loan defaults could be virtually eliminated by making income-driven repayment the default, automatically enrolling borrowers, and authorizing IRS income reporting. In lieu of creating new national service programs, the existing public service loan forgiveness program could be fixed to allow enrollment on graduation and automatic employer certification and payment progress reporting. The current 10-year PSLF repayment period could also be shortened. Finally, the Pell grant amount could be set to cover the full cost of attendance for low-income students at public 2-year or 4-year colleges in each state.

Deleveraging Is Over

posted by Alan White

An unsustainable run-up in consumer housing debt and other debt was a fundamental structural cause of the 2008 global financial cScreen Shot 2019-02-26 at 11.59.42 AMrisis. Following four years of painfully slow decline, total U.S. consumer debt has now risen back above its 2008 peak, with the growth led by student loan and auto loan debt. Mortgages outstanding are not quite at their 2008 levels, but student loan and auto loan growth more than makes up for the modest home loan deleveraging. Americans are back up to their eyeballs in debt, but now some of the debt burden has shifted from baby boomers to millennials. While the cost of health care may be a key electoral issue for the over-50 crowd, under-40s will be listening for policymakers to offer solutions on student loans.

Student Loan Servicing Fail (continued)

posted by Alan White

The U.S. Education Department is doing a lousy job of overseeing the private companies servicing $1.1 TRILLION of federal student loans. That is the gist of the Inspector General's findings in a new report. Among other problems, the IG found that servicers were not telling borrowers about available repayment options, and were miscalculating income-based repayment amounts. When USED found these problems, they did not use contractual remedies to force servicers to improve their performance. To quote the report: "by not holding servicers accountable, [USED] could give its servicers the impression that it is not concerned with servicer noncompliance with Federal loan servicing requirements, including protecting borrowers' rights."

Meanwhile, borrowers with 49,669 loans have applied for Public Service Loan Forgiveness as of 9/30/2018. 206 borrowers with 423 loans have been approved. So, 99% denial rate.

Reflections on the foreclosure crisis 10th anniversary

posted by Alan White

Before it was the global financial crisis, we called it the subprime crisis. The slow, painful recovery, and the ever-widening income and wealth inequality, are the results of policy choices made before and after the crisis. Before 2007, legislators and regulators cheered on risky subprime mortgage lending as the "democratization of credit." High-rate, high-fee mortgages transferred income massively from working- and middle-class buyers and owners of homes to securities investors.

After the crisis, policymakers had a choice, to allocate the trillions in wealth losses to investors, borrowers or taxpayers. U.S. policy was for taxpayers to lend to banks until the borrowers had finished absorbing all the losses. The roughly $400 billion taxpayers lent out to banks via the TARP bailout was mostly repaid, apart from about $30 billion in incentives paid to the mortgage industry to support about 2 million home loan modifications, and $12 billion spent to rescue the US auto industry. The $190 billion Fannie/Freddie bailout has also returned a profit to the US Treasury.  Banks recovered quickly and are now earning $200 billion in annual profits. Of course, equity investors, particularly those wiped out by Lehman and many other bankruptcies, or by the global downturn generally, lost trillions as well. The long-term impact, however, was to shift corporate debt to government balance sheets, while leaving households overleveraged.

Thomas Herndon has calculated that 2008-2014 subprime mortgage modifications added $20 billion to homeowner debt (eroding wealth by $20 billion). In other words, all the modification and workout programs of the Bush and Obama administrations did not reduce homeowner debt by a penny. In fact, mortgage lenders added $20 billion (net) fees and interest onto the backs of distressed homeowners. During the same period, $600 billion in foreclosure losses were written off by private mortgage-backed securities investors, implying a similar or greater loss in wealth for foreclosed homeowners. These data include only the private-label side of the housing finance market; adding the debt increase and wealth losses for Fannie and Freddie homeowners could conceivably double the totals.

Nearly 9 million homes were foreclosed from 2007 to 2016. While some were investor-owned, even those often resulted in the eviction of tenant families. Four and one-half million homeowners still remain underwater, i.e. owe more mortgage debt than the value of their home.

 While baby boomers' housing wealth was decimated by foreclosures and increasing mortgage debt, millennials piled on student loan debt, closing the door to home buying and asset building. A recovery built on incomplete deleveraging, and new waves of consumer debt buildup, contains the seeds of the next crisis. While various pundits bemoan the resurgent federal fiscal debt, we would do well to address policies that continue to stoke unsustainable household debt.

American Bar Association: exempt lawyers from FDCPA

posted by Alan White

The American Bar Association, at the urging of its debt collection lawyer members, is supporting HR 5082, which would partly exempt lawyers from the Fair Debt Collection Practices Act. Misrepresenting the bill as a technical clarification, the ABA is throwing its support, despite the consumer bar's opposition, behind legislation that would insulate collection lawyers from federal civil liability for venue abuse, sewer service, suits to collect time-barred or bankrupted debts, and garnishment of exempt wages and savings. Under an Administration undermining consumer protection and the rule of law at every turn, the ABA could deploy its lobbying clout in service of far more worthy causes.

 

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