Overview of Student Debt Issues

My view on student debt problems is somewhere between Bernie Sanders and Hillary Clinton.  I don’t believe that free college is economically feasible but my evaluation of statistics on the growth of student debt, the growth in overextended borrowers, and the growth in the number of elderly with unpaid student loan balances convinces me the college debt problem cannot be solved with minor adjustments.  

My book “Defying Magnets:   Centrist Policies in a Polarized World” attempts to find progressive centrist (not an oxymoron) solutions in three areas — student debt, health insurance, and retirement income.    

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized-ebook/dp/B07NLLWH1H/ 

The analysis in this book leads me to propose substantial increases in financial assistance concentrated on first-year students, changes to student loan contracts, and changes in programs and policies designed to assist overextended student borrowers.   The overview of the student debt section of my book is below.

Overview of Student Debt Issues

The Republicans and Democrats are far apart on their approach to student debt and the increasing cost of college.

The Trump Administration and many Republicans in Congress are more interested in reducing taxpayer costs than assisting students borrowing for college.  Their current proposals include — the repeal of subsidized student loans, the elimination of the public service loan program and major modifications to income contingent loan programs.   Their administrative actions and enforcement decisions almost always favor loan servicers and for-profit schools over students.

The Democrats have been advocating free-college or debt-free college at public universities.  Democrats also favor the Income Contingent Loans, a program that links loan payments to income and offers to forgive unpaid loan balances at the end of the loan term.

The analysis presented here indicates that Trump Administration proposals would adversely impact many students.   Proposals by Democrats to offer free or debt-free college are expensive and inefficient.  Moreover, Income Contingent Loan programs are not the most effective way to assist overextended borrowers.

Proposals are presented for additional financial assistance, which are designed to reduce the growth of student debt.  These proposals include:

  • Provision of additional assistance for first-year students.
  • Allocation of a modest sum to a program that funds college internships at start-up firms.

Proposals are offered to assist overextended borrowers and reduce the reliance on Income Contingent Loan programs.  These approaches include:

  • Interest rate reductions on student loans after 15 years of payments
  • Limits on increased student loan interest rates when general interest rates rise.
  • Limits to the liability of parents on PLUS loans and cosigned private student loans and other alterations to the PLUS loan program.
  • Provision of priority to student debt over consumer loans in chapter 13 bankruptcy
  • Allowing discharge of private student loans in bankruptcy
  • Revisions to the Public Service Loan Program

The proposals presented here have the potential to expand access to education and improve the financial condition of student borrowers entering the workforce.  Additional subsidies are carefully crafted to assist people who might not otherwise try higher education or would experience severe payment problems.

The proposals presented here also will be less costly to taxpayers than many current policies and policy proposals.

 

 

 

Questions for Candidates – Student Debt

Questions for Candidates – Student Debt

The Trump Administration is proposing the elimination of subsidized student loans for low income borrowers.  The main advantage of subsidized loans is the government pays all interest while the borrower is enrolled as a full-time student. Do you support or oppose the elimination of subsidized student loans?

The Trump Administration is proposing the elimination of the public service loan forgiveness program.   Do you support the elimination of this program?  Are there any changes that you would like to make to the public service loan forgiveness program?

The Trump Administration is considering changing the undue hardship provision in the bankruptcy code to allow for some discharges of student debt in bankruptcy?  Do you support this idea? What changes to the undue hardship rule would you support?

Chapter 13 bankruptcy payment plans generally treat student debt and other unsecured consumer loans in the same manner.   Should Chapter 13 bankruptcy rules be altered to give priority to student debt over other unsecured consumer loans?   How would you alter these rules?

The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.[1]  What policies are needed to reduce the number of older Americans nearing retirement with substantial student debt?

One recent study revealed that around 28 percent of direct student loans are now Income Based Replacement loans.[2]  The study also found the lifetime cost of the IBR loan subsidy for loans originated in 2014 was around $11.0 billion.  Is the IBR program the most economically efficient way to assist overextended students?

The Income Based Replacement program is complex. Several loan servicers have been accused of making it difficult to enroll in IBR.  Student borrower finances change over time and as a result many students who initially enroll in IBR end up with larger student loan payments.   Does this program need to be modified?

Should student loan interest rates be automatically reduced 15 years after repayment is initiated?   Would this approach be a more effective way to assist overextended borrowers than Income Contingent Loan programs or other loan forgiveness programs?

Several candidates support laws allowing people to refinance their student debts at lower interest rates.  However, many economists believe that interest rates will soon rise.  Wouldn’t this proposal be of limited value in a rising-rate environment?

Current student loan interest rates are linked to the value of the 10-year Treasury bond. Do you support changing the student loan interest rate formula to cap potential increases in student loan rates if Treasury rates rise?

Currently lenders do very little underwriting or credit checks on PLUS loans.   (Why should they?   The loans are insured by the government and not discharged in bankruptcy.)  Do you support stricter underwriting standards on PLUS loans to graduate students and parents? Do you support the discharge of PLUS loans in bankruptcy ten years after loan origination?

Do you support debt-free or free four-year public college proposals?

The Tax Policy Center a highly reputable think tank concluded that one free public college program would cost $807 billion over a decade.[3]   These cost estimates were based on favorable assumptions – no increase in college attendance, no switches from private to public schools and no tuition increases at public schools.  Do you agree with these conclusions?  Are cost estimates for your proposal consistent with the work by the Tax Policy Center?

Around 28 percent of students drop out after their first year of college and around 12 percent of first-year students transfer to another institution.[4] Almost half of students with debt who dropped out of college are in default on their student loans.[5]  Should programs to reduce debt incurred by first-year students take priority over proposals to spread additional debt over the entire population of students?

Do you support efforts to eliminate debt incurred by first-year college students at four-year institutions?   How much should the government spend on such efforts?

Some Articles on Student Debt Policies

Article on Trump Student Loan Programs

https://thecollegeinvestor.com/21636/trump-student-loan-forgiveness/

Where 20-20 candidates stand on student debt?

https://www.marketwatch.com/story/where-the-2020-candidates-stand-on-student-debt-and-college-affordability-2019-02-20

GOP blocks Warren’s Student Loan Bill

https://thehill.com/blogs/floor-action/senate/217908-gop-blocks-warrens-student-loan-bill

Klobuchar and Baldwin push to lower student debt

http://www.startribune.com/klobuchar-baldwin-push-to-lower-student-debt/378202791/

Bills to help students with student debt sponsored by Klobuchar and Franken

https://www.studentsunited.org/blog/2017/6/2/federal-update-bills-introduced-to-help-students-with-higher-education-costs

Forbes article on student loan refinance changes;

https://www.forbes.com/sites/zackfriedman/2018/08/09/student-loans-refinance-changes/#6f65764d749b

 

[1] Source:  https://www.documentcloud.org/documents/3319386-201701-Cfpb-OA-Student-Loan-Snapshot.html

 

[2] Article from New America Foundation on cost of IBR loans. https://www.newamerica.org/education-policy/edcentral/income-based-repayment-cost/

 

[3] Tax Policy Study includes an assessment of cost of free college proposals. https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000786-an-analysis-of-senator-bernie-sanderss-tax-and-transfer-proposals.pdf

[4] Statistics on drop-out rates after the first year of college are found here. https://www.creditdonkey.com/college-dropout-statistics.html

 

[5] A statistic on percent of student who have dropped out in default can be found here. https://lendedu.com/blog/college-dropouts-student-loan-debt/

Authors Note:  I have written a book on how a progressive centrist (not an oxymoron in my view)  would deal with student debt, health insurance and retirement income.   Go here for the book.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=1551214070&sr=8-1

Publishers Note:   I am taking polls.   The current polling question — what is your first choice and second choice candidate for the Democratic Nomination for President — can be found here.

 

https://docs.google.com/forms/d/e/1FAIpQLSch4lBKZkabruXcyftP6yqt8wjicFQ6BFQzK79gvWLye8qgAg/viewform

or for the latest poll go to the community Policy and Politics.

https://www.facebook.com/groups/441029743334277/

 

 

Tweaking Amy Klobuchar’s Student Loan Proposal

Tweaking Amy Klobuchar’s Student Loan Proposal

Senator Klobuchar gave an honest and realistic response to a question on free college at the New Hampshire town hall.   Free college for all is unaffordable and would end up burdening the nation with higher debt or taxes.

Senator Klobuchar proposes additional assistance for students at two-year colleges and for additional Pell grants and loans.   These proposals are not likely to substantially reduce the trend growth of student debt or the number of overextended student borrowers.

  • The percent of borrowers leaving school with more than $50,000 in student debt rose from 2 percent in 1992 to 17 percent in 2014.[1]
  • The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.[2]

Two-year colleges are a good and less expensive option for many students.  However, student debt is skyrocketing for students at four year schools.  Many students who start a four-year college drop out or transfer after the first or second year.   These students often have substantial repayment problems.  The most effective way to reduce this problem is increased assistance for first-year students.  The increase in first-year assistance will also reduce total debt for students who complete their degree.

Many overextended students are counting on Income Contingent loans, which have substantial problems.    Alternative ways to assist overextended borrowers need to be considered including:

  • Interest rate reductions on student loans after 15 years of payments
  • Limits on increased student loan interest rates when general interest rates rise.
  • Limits to the liability of parents on PLUS loans and cosigned private student loans and other alterations to the PLUS loan program.
  • Provision of priority to student debt over consumer loans in chapter 13 bankruptcy
  • Allowing discharge of private student loans in bankruptcy
  • Revisions to the Public Service Loan Program

I recognize that many people who have repaid their loans and many taxpayers oppose debt relief to overextended student borrowers.   However, some people get substantially overextended and need assistance.   The debt relief proposals presented here attempt to establish a balance between assisting overextended borrowers and protecting the interests of taxpayers.

Kudos to Senator Klobuchar for recognizing the obvious fact that free-college is unsustainable.   She need to develop a more extensive set of policies to mitigate student debt problems.

One place to find these policies is my book Defying Magnets:   Centrist Policies in a Polarized World.   This book proposes centrist solutions to student debt, health care and retirement income.

Defying Magnets:  Centrist Policies in a Polarized World

https://www.amazon.com/s?k=defying+magnets%3A+Centrist+policies+in+a+polarized+world&rh=n%3A6669702011&ref=nb_sb_noss

Book is free for Kindle unlimited users.

The book is free on promotion days.   The second promotion day is February 20, 2019.   Day after this post is published.

Please consider reviewing the book for Amazon and Kindle.

[1] Source: https://www.brookings.edu/wp-content/uploads/2018/02/es_20180216_looneylargebalances.pdf

[2] Source:  https://www.documentcloud.org/documents/3319386-201701-Cfpb-OA-Student-Loan-Snapshot.html

 

On-time graduation and student debt

Issues:   One way to limit college costs for some students is to implement policies that enable students to graduate on time or even early.  This post discusses issues and presents data related to on-time graduation from college and costs incurred by delaying graduation.

The Department of Education College Score Card web site provides statistics on the percent of people at four-year undergraduate institutions that graduate within six years of first enrolling in a school after high school.  However, there is a big difference in potential debt accumulation and lost earning for a person who graduates on-time or earlier and a person who graduates two years after the expected graduation rate.

The analysis presented here provides some insight on the impact of the number of years it takes to finish undergraduate programs on debt levels at graduation?

The Department of Education Web Site providing information on different colleges stresses median federal guaranteed debt at graduation.   Less information is available on PLUS loans for parents and for private loans.

The analysis presented here provides information on whether colleges need to provide more information on other types of loans and on how these loan total vary with the number of years in school.

The increase in the number of students taking Advanced Placement Exams has allowed some students to graduate with a BA or BS Degree in three rather than in four years.   However, in response to an increase in the number of students taking AP exams many schools have scaled back or are reconsidering the amount of credit that students get from AP exams.

The analysis presented here provides some information on the costs associated with colleges impeding early graduation.

The Data:

The statistics presented here were generated from the National Postsecondary Student Aid Study NPSAS 2012 database from the Department of Education.

The logical variable to look at with the analysis of this issue is cumulative amount borrowed, which is called BORAMT1.  However, the NPSAS documentation reveals this variable does not include information on PLUS loans for parents and may also omit some information on private loans.

I present statistics on cumulative debt and cumulative PLUS loans for parents for people who graduated in 2012 with a BA or BS degree.     Statistics on the cumulative amount borrowed variable are presented for private non-profit colleges and for public institutions.

Cumulative Debt Results:

Below is a table presenting information on cumulative amount borrowed for graduates in 2012 based on when their undergraduate career began

Duration of Undergraduate Career and Cumulative Debt at Graduation
# of years from initial enrollment and graduation Public Universities Private Non- Profit

Universities

% With Debt Average Cumulative Debt for Borrowers % With Debt Average Cumulative Debt for Borrowers
3 50.5 $19,625 68.5 $27,822
4 56.9 $22,504 70.0 $29,123
5 67.0 $25,537 80.2 $34,683
6 72.4 $27,163 72.0 $29,069
7 71.1 $27,707 64.2 NA
>7 69.3 $30,043 79.5 $39,102
Total 64.1 $25,640 73.5 $32,308

Observation on cumulative debt and duration of undergraduate career.

The results presented here indicate that people who finish their undergraduate careers efficiently have less debt on average.

The increase in debt with years in school exists for increases from 3 years to 4 years and for increases from 4 to 5 for both private and public schools.

The increase in debt with years in school exists for increases from 5 to 6 years for public universities but not for private universities.

These figures don’t include PLUS loans for parents.  I proceed to look at the relationship between usage for PLUS loans for parents and duration of undergraduate career.   The PLUS loan analysis looks at all undergraduate institutions together – public universities, private non-profit universities and private for-profit universities.   I combine the three types of universities because of sample size constraints impacting the PLUS loan usage variable.

PLUS loan for Parents Results:

Duration of Undergraduate Career and PLUS loan for Parents Usage
# of Years from Initial Enrollment to Graduation % with Plus Loans for Parents Average PLUS Loan for PLUS Loan Borrower
3 12.0 $33,770
4 18.5 $30,218
5 21.2 $31,463
6 18.4 $22,120
7 14.4 $18,199
>7 5.9 $16,345
Total 15.5 $27,352

Sample includes public universities, private non-profit universities and private for-profit universities.

Observations on PLUS loan for parent usage and duration of undergraduate career:

The percent of people who rely on PLUS loans by parents is dramatically lower for people who graduate in three years compared to people who graduated in four or more years.

However, the average cumulative PLUS loan for people graduating in three years is a bit higher than for people who took longer to graduate.  (I suspect the average for three years was driven by a few outliers.

Policy Discussion:

It is apparent that the amount of time it takes for a student to finish their undergraduate career is an important determinant of debt at time of graduation.

Policies that help students finish on time can greatly reduce financial debt incurred in college.

Detailed information about the frequency distribution on the number of years it takes for students to get their degree at each college would be invaluable for students and their parents.   The College Score Card reveals information on the percent of students who graduate in six or fewer years.  This statistic is inadequate.   The Department of Education should require that schools report 3-year, four-year, five-year six-year and > 6-year graduation rates.

Statistics based exclusively on federal guaranteed debt, like the ones presented in College Score Card are inadequate.   Cumulative PLUS loans and cumulative private loans also contribute to financial risk associated with taking on too much debt in college.   Several articles have revealed that many parents who take out PLUS loans on behalf of their children are incapable of repaying these loans and there has been an increase in the number of instances where PLUS loan borrowers have had Social Security payments garnished.  One of my previous posts on this topic revealed that the proportion of PLUS loan parents with low income levels has increased over time.

The Department of Education should insist that colleges report detailed information on the usage of PLUS loans and private loans by their students.

Many colleges are now deliberately making it much more difficult for students to graduate in three years by denying college credit for AP exams.

Article on AP credits being denied to students at major colleges:

http://www.msn.com/en-us/money/careersandeducation/as-advanced-placement-tests-gain-popularity-some-colleges-push-back/ar-AAmXr6o

The results presented here indicate that there are potentially large financial costs incurred by colleges choosing to deny credits for AP exams.    Some states have enacted laws requiring that publicly funded colleges provide credits to student who pass AP exam.

I believe all colleges should be required to provide detailed information on AP credit awards and information on frequency distribution describing years it takes for student to graduate.  it would be inappropriate for the state to mandate AP credit policies at private institutions.  However, the state does have an interest in insuring that markets run efficiently and market efficiency is impossible when consumers lack basic information.

Academically trained economists generally support providing consumers with better information unless they are being paid to advocate for special interest.   You would expect that university presidents might place a higher priority on the public’s right to know than other industries.   Interestingly, as demonstrated in the post below college presidents have successfully stopped meaningful college ratings

Ranking Colleges on Value and Costs:

http://policymemos.blogspot.com/2016/04/ranking-colleges-based-on-value-and.html

On this issue colleges are behaving like tobacco firms and insurance companies.

 

Comparison of Obama and Trump IBR Payment Formulas

 

Question:  Under the Obama IBR program, a person is required to pay 10 % of disposable income.  The Trump proposal payment requirement is 12.5%.  Obama’s plan offers debt relief after 20 years.  The Trump proposal offers debt relief after 15 years.

Consider a single person with no dependents making $50,000 per year.   The person has $35,000 in student debt at a 5 percent annual interest rate.

What are the monthly student debt payments under the two plans?

What are the loan payments on a 10-year and a 20-year standard student loan?

What are the income levels where there are no loan payment reductions from IBR compared to a standard 10-year loan and a standard 20-year loan?

 

Analysis:

The calculations for the monthly payments on IBR loans and traditional student loans are laid out below.

IBR Payments and Break Even Obama Versus Trump
Obama Trump
AGI $50,000.0 $50,000.0
FPL One Person Household 2016 Figures $17,820.0 $17,820.0
150% FPL $26,730.0 $26,730.0
Disposable Income $23,270.0 $23,270.0
Annual Loan Payment as a Percent of Disposable Income 0.1 0.125
Annual Loan Payment for IBR $2,327.0 $2,908.8
Monthly Payment IBR $193.9 $242.4
  • The Obama-formula IBR payment is $194.   The Trump-formula IBR payment is $242.  The Trump proposal would increase IBR monthly payments by 25 percent in this example.

Comparisons of IBR payments to 10-year loan payments are presented below.  I have also calculated the AGI level where 10-year loan payment is equal to IBR payment for both the Obama and Trump formulas.

Obama Trump
Loan Balance $35,000.0 $35,000.0
Interest Rate 0.05 0.05
Traditional Monthly Payment Ten Year $371.2 $371.2
IBR Payment – Traditional Payment (Monthly 10-yr) -$177.3 -$128.8
Breakeven calculation IBR Versus 10-yr $71,277.52 $62,368.0
Check of breakeven calculation 371.2 371.2
  • Under Obama-formula IBR the borrower in this example with income less than $71k will have a reduced monthly payment compared to a 10-year loan.   Under Trump-formula IBR the cutoff is around $62k.

Comparisons of IBR to 20-year loans are presented below.

Loan Balance $35,000.0 $35,000.0
Interest Rate 0.05 0.05
Traditional Monthly Payment Twenty Year $231.0 $231.0
IBR Payment – Traditional Payment (Monthly 20-yr) -$37.1 $11.4
Breakeven callculation IBR Versus 20-yr $54,448.14 $48,904.51
Check of breakeven calculation 231.0 231.0
  • The potential reductions in loan payments from IBR are really small compared to a 20-year loan.  Under the Trump proposal the calculate IBR payment exceeds the 20-year loan payment for this borrower.

Concluding Remarks:

The Trump alterations to IBR are very clever.   He offers loan forgiveness in 15 years rather than 20 years.   However, in many cases if income for the student borrower rises, the payment on the IBR could exceed the payment on a 20-year loan.  In my view, the main objective of the Trump proposal is to reduce the number of people who might claim IBR benefits.   The Trump Administration has not been very good to student borrowers.

More on Trump student loan policies can be found here:

http://financememos.blogspot.com/2018/02/president-trumps-approach-to-student.html

And Here:

http://financememos.blogspot.com/2018/02/public-service-loan-programs.html

The Trump plan does offer the possibility of debt relief at an earlier date.   The higher IBR payment could reduce the amount of debt relief provided to the student.  Forgiven debt is taxed as ordinary income under both plans.

Whether a person is better off under IBR or a traditional loan depends on future disposable income over the course of the loan.  This calculation can be impacted by marriage and the IBR decision can alter tax filings.   In short, it is impossible for applicants to determine whether they will be better off under IBR or a traditional loan when they are asked to make this decision.   Often applicants with little income at the time of graduation simply sign up for IBR because it is the only way they can remain current on their loan.

I am working on alternative simpler debt relief proposals.  More to follow.

President Trump’s Approach to Student Debt

President Trump’s Approach to Student Debt

The Trump Administration is pushing forward a broad range of policies that will impose substantial financial costs on student borrowers.   The policy levers include changes to the tax code, changes in rules governing student loan programs, and reduced consumer protections for borrowers.

Proposed Policy Change and Actions

The Elimination of Subsidized Student Loans

Currently, subsidized student loans are available for low-income students. The government pays all interest on subsidized loans while a student is still enrolled.  The Trump Administration’s budget proposes the elimination of all subsidized student loans.  As a result, low-income students will accrue interest even when in school.

Comment on Proposal to Eliminate Subsidized Student Loans: Subsidized student loans are only available for lower-income students.   The build-up of interest payments while a student is in school will have the largest impact on students who fail to graduate on time.   This provision may discourage students who leave school after their freshman or sophomore debt to reenter school later in life.   This provision will also have a large impact on low-income students in complex fields (medicine, science and law) because interest will accrue for years prior to the initiation of repayment.

The Modification of the Income Based Replacement Loan Program:

The Trump Administration is proposing a uniform set of rules for Income Based Replacement Loan programs.   People with an undergraduate education would pay more annually but would be able to receive loan forgiveness after 15 years rather than 20 years.   However, debt incurred in graduate school would not be forgiven until after 30 years.

Comments on Income Based Replacement Loan Programs:    The current IBR program has many flaws.   The modifications proposed by Trump worsen the program. 

Many people enrolled in the IBR program because they temporarily have low income and they are trying to prevent a loan default.  These people pay more under iBR than under a 10-year loan plan. Many people who enroll in IBR fail to receive any debt relief because obtaining debt relief requires that a person stay in the loan program every year.

Many borrowers will be unable to make the new annual IBR payment.   These borrowers may default or may sign up for a 20-year loan, which will cause them to pay more student loan interest over their lifetime.  It is highly likely that a substantial number of student borrowers will select 20-year repayment options because of higher debt totals and the increases in the annual IBR payment.

The Elimination of Public Loan Forgiveness Programs:

Current law provides loan forgiveness to borrowers who have been certified to work in a public service job after 10 years of on-time payments.   President Trump’s budget proposal would end public loan forgiveness for loans issued after July 1, 2018, except for loans needed to finish the current program.   Current law provides loan forgiveness to borrowers who have been certified to work in a public service job after 10 years of on-time payments.

Comment on Abolishing Student Loan Forgiveness Programs:  Some economists including staff at the Government Accountability Board have forecasted large costs for the current Public Service Loan Program.  Around 500,000 people have enrolled and many jobs are potentially covered by the program.   I believe the number of people receiving public service loan forgiveness may be lower than anticipated because people who leave public service employment prior to ten years do not receive any loan forgiveness.

This program will encourage some people to stay in a public service job even when more productive opportunities exist elsewhere. Proposals providing partial loan forgiveness for people serving in public service jobs for a period smaller than ten years should be considered.

Denying Access to Enrollees in Public Loan Forgiveness Programs Prior to the Elimination of the Program:

The Department of Education under Betsey DeVos has denied student borrowers with existing loans access to the public loan forgiveness program.   This administrative change is being applied to people who have already taken on debt and are currently working.  A law suit is currently challenging these denials and claims that the Administration has arbitrarily changed eligibility requirements for the public service loan program.

Comment on Denial of Access to Public Service Loan Programs:  The Trump Administration position favors taxpayers over students.   The savings to the taxpayer may be smaller than anticipated if many people do not stay 10 years in a public service position.

Consumer Protections:

Reducing Protections for Defrauded Students:

Under President Obama, the Department of Education put into place rules that provided defrauded students debt relief.   Betsey DeVos stopped work with the CFPB on student loan fraud efforts, proposed changes to the Obama-era rule that would limit the amount of debt relief given to defrauded borrower and delayed applications of debt relief until the new rule is finalized.

Comment on Reduced Protections for Defrauded Students:   The Trump Administration appears to oppose most regulations of for-profit colleges evens when there is documented abuse.

Enforcement of IBR loan application rules:

The CFPB recently found that loan servicers were illegally denying students access to Income Based Replacement loan programs. The CFPB ordered loan servicers to improve procedures to guarantee

Comment on CFPB Ruling:   The Trump Administration and many Republicans oppose the existence of the CFPB.   The Administration named an interim director who opposes the agency.   

The lack of regulation of applications to the IBR program is important because applications must be renewed annually and no debt relief is offered to debtors who do not remain continuously enrolled.

Taxing free tuition waivers, ending the tax deductibility of student loan interest and other student loan tax preferences.  

The House tax bill, which has been supported by President Trump, proposes to treat tuition waivers for graduate students and sons and daughters of university employees as ordinary income for tax purposes. The House bill also eliminates the tax deductibility of student debt, the exemption from tax for lifetime learning, and exemption from tax for employee tuition assistance.

Most of these proposals were removed from the final tax bill, which was enacted into law.  

Links to Articles Documenting These Policy Changes:

https://www.nytimes.com/2017/11/15/us/politics/house-tax-bill-higher-education-increases-tuition.html

http://www.denverpost.com/2017/11/08/gop-tax-bill-student-loan-interest-deduction/

http://time.com/money/4784214/trump-2018-budget-education-cuts-student-loans/

https://www.usnews.com/news/politics/articles/2017-05-22/budget-seeks-end-to-subsidized-student-loans-forgiveness

https://www.washingtonpost.com/news/grade-point/wp/2016/12/20/lawsuit-accuses-education-department-of-reversing-course-on-student-loan-forgiveness/?tid=a_inl&utm_term=.b62d5935222e

https://studentloanhero.com/news/betsy-devos-delays-closed-for-profit-colleges-student-loan-forgiveness/

https://www.marketwatch.com/story/cfpb-student-loan-companies-are-illegally-denying-borrowers-right-to-make-lower-payments-2016-10-31

https://www.politico.com/story/2017/11/27/consumer-financial-protection-bureau-fight-mulvaney-english-190862

http://thehill.com/policy/finance/349223-education-dept-ends-agreement-to-work-with-consumer-bureau-on-student-loan

Student Debt and College Cost Reforms

 

 Introduction:   This post is a quick list of fiscally prudent policies that could alleviate problems associated with increased college cost and student debt.

The proposals presented here involve two approaches to the problem.  The first approach (proposals one and two) entail policies ideally designed to decrease student debt totals or at least control the growing use of debt.   The second approach entails policies (proposals two through seven) designed to assist overextended student borrowers.

All policies presented here are designed to be fiscally prudent and to balance benefits and costs of taxpayers with student borrowers.   The proposals for additional assistance to students are a fraction of the cost of proposals for free or debt-free attendance at public universities offered in the 2016 Presidential campaign.   The new proposals to assist overextended student borrowers are more effective and less burdensome to tax payers than current debt-relief policies.

I have also worked on ideas on how to lower college costs by improving on-time graduation rates and lower the number of people who fail to complete college.   These ideas will be presented in a separate memo.

People who are interested in learning more about this topic should go to my student debt book at Amazon and Kindle.

Print Version:

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

Kindle Version:

https://www.amazon.com/dp/B07D9VV8K7/ref=rdr_kindle_ext_tmb

Proposal One:  Increased Financial Assistance for First-Year Students:  The primary goal of this proposal is the elimination or substantial reduction in loans taken out by first-year students.  Each state would create and administer a tuition assistance fund.   Money in the fund would come from three sources – the federal government, the state government and private donors.  The rules governing disbursement of the additional assistance would be determined by each state.

Advantages:

First-year students generally do not have a credit history and do not have a post-secondary academic record.  Many first-year students who fail to finish their degree have low incomes and substantial difficulty repaying their loans.  As a result, targeting assistance towards first-year students is more progressive than additional assistance spread over all students.

Increased financial assistance to the highly vulnerable first-year student population will result in a larger reduction in default rates than increased assistance to the general population of students.

Debt reduction targeted towards first-year students is an effective way to reduce interest accrued on student debt.

States and schools would be allowed significant latitude in designing benefits for different populations of students; although, the reduction in first-year student loan default and delinquency rates would remain an important objective of the program.

This proposal is substantially less expensive than free-college or debt-free college discussed during the 2016 Presidential campaign.  The program is not an entitlement.  The cost of the program would not exceed allocated funds.

Proposal Two:  Allocate around $100 million to a pilot program that will fund internships at start-up tech incubators.

Advantages:   Many people are taking unpaid internships to gain workforce skills. This option either adds to debt or is unaffordable for low-income students.

This program provides funds to startups with relatively little cash who might not otherwise be able to hire talent.

Only actively enrolled students seeking a degree are eligible for these positions.   The program does not take away jobs from people who are currently in the workforce.

The size of the program and the number of firms and students served is determined by funds available.   First come first served.

Proposal Three:  Interest rate reductions for older student debt balances:   Set the interest rate on guaranteed student loans to 1.0 percent after 15 years of active payments including negatively amortized payments.

Advantages: Under current law some debt forgiveness can be obtained for people who enroll in the income contingent loan programs. The automatic interest rate reduction after 15 years is easier to administer and fairer than programs offering loan forgiveness.

The interest rate reduction occurs automatically 15 years after loan repayment begins.

Interest rate reduction could not be blocked by loan servicers who currently often block annual re-enrollment in income contingent loan programs.

Loan servicers frequently fail to properly administer debt relief claims under loan forgiveness programs.

Under this program, all borrowers with outstanding student debt after 15 years will receive a lower interest rate.

This program does not provide loan forgiveness.   People who take out a 10-year student loan and pay on time will pay less than people who take out a longer maturity loan that leads to the interest rate reduction.

Under income contingent loan programs some people can increase the amount they borrow without increasing their lifetime repayment amount.  By contrast, under this proposal even with the interest rate reduction starting at year 15 total loan payments are larger for people who borrow more.

Proposal Four:  Reduce the link between interest rates on government guaranteed student debt and market interest rates: 

 Rules would be changed to create an interest rate floor 4 percent and cap 6 percent regardless of the 10-year interest rate.

Note on current law:   Current law links the interest rate on student debt to the 10-year government bond rate.

Advantages:  High interest rates on student debt was a pressing problem in the 1980s and 1990s.   A return to high interest rates would be much worse today because education costs, the proportion of students taking out debt and the amount of student debt per borrower have all gone up.

Failure to alter the link between market interest rates and student loan rates could reduce access to education or increase costs for an entire cohort of students.

This is a potentially pressing problem now that the Federal Reserve has begun raising interest rates.

Proposal Five:  Change rules governing PLUS loans to parents:  Limit parent guarantor obligations on Parent Plus Loans and Private Student Debt to Five Years after initial payment.   The student borrower would be exclusively responsible for the loan at the end of the five-year period.

Advantages:    Currently parents on a PLUS loan are responsible for the loan until they die.   Many of the parents who cosign PLUS loans for their children have low income.  In 2012, an estimated 6.2 percent of parents of dependent undergraduate students with income in the bottom quartile had taken out a PLUS loan.   More alarming, in 2012 over 11 percent of graduate students with parent + student income in the bottom quartile had taken out a PLUS loans.

Many of the parents with PLUS loans are nearing retirement.   Limiting their responsibility would reduce the number of older Americans with unpaid student debt.

There appears to be some bipartisan support for changes in laws that would provide some debt relief to parents who sign PLUS loans.   Under current law, parents who take out PLUS loans can only have the loan discharged if they become disable or if their child dies.  Under current rules, parents with PLUS loans with children borrowers who become disabled and cannot have their loan discharged.  A bipartisan bill in Congress seeks to allow discharges of PLUS loans for parents of students who become disabled.

https://www.cnbc.com/2018/12/05/she-took-out-20000-in-loans-for-her-sons-college-then-he-went-blind-.html

Proposal Six:    Reconsider treatment of student debt in bankruptcy including rules governing priority in chapter 13 bankruptcy and discharging of private student loans in both chapter 7 and chapter 13.

 The general goal is to assure that student debtors who enter chapter 13 bankruptcy leave bankruptcy after seven years with a substantial reduction in the amount of student debt they owe.

Advantages:   Many student borrowers who currently enter chapter 13 bankruptcy will exit bankruptcy without substantially reducing their student debt obligations.

This change will increase student debt payments for people in chapter 13 bankruptcy by allowing for reductions in payments on credit card debt and other consumer loans.  Total payments in Chapter 13 bankruptcy would remain unchanged but taxpayers would receive more payment and other unsecured creditors less payment.

This change would reduce the number of occasions where a student borrower dies prior to repaying his or her entire student loan.   This represent a direct gain to taxpayers because student debt, like other consumer loans, is forgiven when the borrower dies.

The new rule could be applied to both publicly guaranteed debt and private student loans.   The 2005 bankruptcy law made it difficult to discharge student debt in bankruptcy.  A return to the pre-2005 bankruptcy rules by allowing for the discharge of private student loans would allow student borrowers to accelerate payments on government guaranteed student debt.   This change would also benefit taxpayers.

Proposal Seven: Revise Public Service Loan Programs: New program will provide up to $40,000 in loan forgiveness after four years in a public service job.  Current law provides more loan relief after ten year.

Note:

The budget offered by the Trump Administration proposes to eliminate the public service loan program starting in 2019.   It is not clear how this proposal or any which passes Congress will affect people who are currently applying for assistance through the public service loan program.

Advantages:

The new law by providing limiting loan relief to $40,000 allocates more relief to people with modest debts and modest incomes, rather than relatively high-income professionals.

The shorter period for debt relief allows people to move to a more productive opportunity and reduces job lock.

Concluding Remarks:  The progressive wing of the Democratic party want free college and debt forgiveness programs.   The Trump Administration is advocating weakened consumer protections, changes to income contingent loan programs, elimination of subsidized student loans and the elimination of the public service loan program.

This centrist approach, presented here, differs sharply from both the policies offered by the progressive wing of the Democratic party and by the Trump Administration.

 

 

 

The Politics of Student Debt

In a recent episode of Madam Secretary, the daughter of the Secretary quits her volunteer position on a Congressional campaign because her candidate did not have a bullet point on forgiving student debt.   The candidate explains to her that debt forgiveness is too controversial because it takes money from workers and taxpayers and give money to students.  The Secretary lectures the daughter and persuades her to vote despite her problems with this candidate on this one issue.

This episode relives one of the flash points of the 2016 Clinton/Sanders contest.   Bernie Sanders supported an expensive and unrealistic free college program. This idea was first scorned and then matched by Clinton.  Clinton continued to struggle with the issue by coming up with ideas like let’s forgive debt for employees at start-up firms an idea that was laughed at by virtually everyone who has studied the student debt problem.

Student debt is a growing problem much larger for the current cohort than for previous generations.

  • The percent of graduate with student debt went from 50 in 1989/1990 to near 70 today.
  • The percent of borrowers leaving school with more than $50,000 in debt went from 2 percent to 17 percent over same period.
  • The number of Americans over age 65 with student debt increased by a factor of 4 between 2005 and 2015.

High student debt levels have long term financial consequences.  People with high student debt levels often either delay savings for retirement or delay loan repayments.   Often student debtors also delay marriage, forego having children and choose to rent rather than purchase a home.

Trump Administration proposals will worsen student debt problems.  The Trump Administration is proposing to eliminate subsidized student loans, a change that will increase debt costs and cause many to forego college.  The Trump Administration has rejected loan forgiveness applications under the public service loan programs and their actions will weaken the Income Based Replacement loan program.   The Trump team does not support of enforce rules protecting students from fraud.

Student debt like health care should be a big wining issue for Democrats.  Unfortunately, Democrats are divided between keeping the status quo and giving free college to everyone.

Doing nothing should not be an option.  Part of the solution involves increased financial assistance to students, especially for first-year students.

Many students leave college after their first year because of academic performance.  Problems associated with first year students who fail to continue their education could be substantially reduced in a cost-effective way by expanding assistance to first-year students.

Part of the solution involves policies and programs which improve on-time and early graduation rates.

Many students either fail to graduate or take more than the allotted time to complete their program.  These students tend to take on more debt and are more likely to incur payment problems.

Realistically, improvements in and expansion of debt forgiveness programs must be part of the solution because many borrowers become hopelessly overextended.  Some Democrats are currently focused on expanding the Income Based Replacement loan program.   Loan servicers regularly ignore the IBR options and debt forgiveness programs centered on the IBR program are likely to fail.

There are other more cost-effective ways to assist overextended borrowers.

Granting priority to student debt over consumer loans in Chapter 13 bankruptcy:     Currently, many applicants for Chapter 13 bankruptcy reduce student loan payments to repay credit cards and other consumer loans.  Often the student borrower leaves bankruptcy with an increased student debt balance.  The quicker repayment of student loans in bankruptcy benefits both taxpayers and student debtors.

The elimination of the link between market interest rates and interest rates on federally guaranteed student loans.   Under current rules student debt interest rates are tied to market interest rates.   This policy automatically increases costs for an entire cohort should Treasury rates rise.  This is a timely problem given recent Fed statements and moves.

Modification of the standard contract on student loans to allow for interest-only payments rather than forbearances and to allow for reduction or even elimination of interest rates after 15 years of payments:   The IBR program allows some people to borrow more without increasing the amount they repay.  By contrast, under the proposed interest elimination plan, people who borrow more repay more.  This program has better incentives and is less expensive to the taxpayer than the IBR program.

Restricting parental guarantee obligations on PLUS loans and cosigned private student loans to 5 years from repayment date:   Many of the most severe financial problems associated with student debt involve PLUS loans guaranteed by parents.   This change would reduce these problems.

 Removal of the prohibition against the discharge of high-interest private student loans in bankruptcy: This proposal returns us to rules that existed prior to the enactment of the 2004 bankruptcy law.   The discharge of private student debt in bankruptcy could accelerate payment on government guaranteed debt and assist taxpayers.

Creation of a modified public service loan program, which will allow for partial loan forgiveness after 2 to 5 years rather than 10 years of public service:   The current program creates job lock by forcing applicants to wait at least 10 years for loan forgiveness.  The shorter period for partial loan relief for the new program reduces job lock.  This program will be less expensive and have lower administrative costs than the current program.

Issues like student debt and health insurance are core issues to Democratic voters, which should drive voters to the polls.  However, there are huge differences in the way the Sanders wing and the Clinton wing approach the problem.   The Sanders proposals would cause either a fiscal crisis or unsustainable tax increases combined with stagnation.   The Clinton wing is proposing a band aid for the sake of appearances.

I understand why the screen writers of the show on Madam Secretary are frustrated at the Sander’s supporters who chose to stay home in 2016 rather than vote for an imperfect candidate who is a thousand times better than Trump.   However, Democratic candidates must have a comprehensive vision and set of policies on student debt.   College costs and debt are an existential problem for current students and recent grads.   The cost of college will deter many from getting necessary education.   The debt incurred will have long term often crippling impacts on household finances and even happiness.

There are common sense centrist solutions to this problem that increase access to education, reduce costs for overextended students and are fair to workers and taxpayers.

The failure of the Democrats to address student debt issues is sort of like a football team deciding to punt on first down.  This is not an effective way to either win the game or excite your fan base.

 

Authors Note:

David Bernstein is the author of Innovative Solutions to the College Debt Problem.   Get his book on Amazon or on Kindle.

 

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

David has also written on health care and the ACA.

 

Go here for a Centrist Health Plan:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3263159

 

 

I would love to work for a centrist Democrat in 2020.  Contact me at Bernstein.book1958@gmail.com or on my cell 202 413 5492.

 

 

How much house can a student borrower qualify for?

How much house can a student borrower qualify for?

This answer depends on the maturity of the student loan.

Situation:

Consider a person with a $100,000 student debt.

  • The person can either pay the debt back over a 10-year period or a 20-year period.
  • The student loan is this person’s only consumer debt.
  •  The person earns $80,000 per year.
  • The student loan interest rate is 7.0 percent.
  • The mortgage interest rate is 4.0 percent.
  • The mortgage term is 30 years.

Questions:

  • How much mortgage can the person qualify for if the person keeps the student loan at 10 years?
  • How much mortgage can the person qualify for if the person changes the student loan term to 20 years?
  • What is the increased cost of the student loan payments involved by switching from a 10-year to 20-year student loan?

Answer:   I developed a spreadsheet that calculates the maximum allowable mortgage this person can qualify for.

In order to qualify for a mortgage two conditions must hold.

  • Monthly mortgage payments must be less than 28% of income.
  • Monthly mortgage and consumer loan payments must be less than 38% of income.

The procedure used to calculate the allowable mortgage is as follows:

  • First, I calculate the maximum allowable mortgage payment based on zero consumer debt.   This value is 28 percent of monthly income.
  • Second, I calculate the maximum allowable mortgage payment consistent with mortgage payments and consumer debt payments equal to 38 percent of income.   This is done by backing out the student loan and allocating the rest to mortgage debt.
  • Third, I insert mortgage interest rate, term and payment info into the PV functions to get the mortgage amount
  • Fourth, The allowable mortgage is the minimum of the mortgage totals consistent with the two constraints.

The calculations for the two situations presented in this problem are presented in the table below

Mortgage Qualification Example for Borrower with Student Debt
row # Student Loan Information Note
1 Student loan Amount $100,000 $100,000 Assumption
2 Interest Rate 0.07 0.07 Assumption
3 Number of Payments 120 240 Assumption
4 Student Loan Payment $1,161 $775 From  PMT Function
Mortgage Information
5 Rate 0.035 0.035
6 Term 360 360
Income Assumption
7 Income $80,000 $80,000 Assumption
8 Constraint One:  Maximum monthly mortgage payment consistent with this income assumption $1,867 $1,867 28% of monthly income
9 Constraint Two:  Maximum monthly consumer and mortgage payments consistent with income $2,533 $2,533 38% of monthly income
10 Maximum mortgage consistent with constraint one. $415,697 $415,697 pv of mortgage rate number of periods, and pmt where mortgage rate and payments are assumptions baed on the market and product chosen and payment is max allowable given   income
11 Allowable mortgage payment consistent with constraint two given required student debt $1,372 $1,758 Row 9 minus Row 7
12 Max mortgage consistent with borrowing contraint two. $305,593 $391,505 Use PV function with rate and term set by market and product and payment the amount of mortgage payment after required consumer payments
13 Allowable mortgage debt $305,593 $391,505 Minimum of Row 10 and Row 12

 

An increase in the term of the student loan from 10 to 20 years increases the size of a mortgage a household can qualify for from $305,000 to $391,000.

Getting the extra mortgage is not cheap.  The increased student loan term causes total student loan payments to go from $139.000 to $186,000.

Concluding thoughts:  Most people who have $100,000 in student debt will have to refinance the student loan if they are going to buy a house.

 

 

 

 

 

 

 

 

 

 

Student debt and qualifying for a mortgage

Student debt and qualifying for a mortgage  — post one

Excel Topics:  PMT function and Spreadsheet design

Question:  A person graduates from college and graduate school with $100,000 in student debt.   The interest rate on a 10-year student loan is 5% per year.   The person wants to buy a house that costs $300,000 with a 90% LTV loan. The home mortgage interest rate is 4.5% on a 30 year FRM.

Assume that in order to qualify for the house the person must meet two conditions.

Constraint One:  The ratio of mortgage interest to income must be less than 0.28.

Constraint Two: The ratio of total interest (mortgage and non-mortgage) interest must be less than 0.38.

How much income does this person need to qualify for a loan on this house?

Why might student debt have a smaller impact on the purchase of a $700,000 home than the purchase of a $300,000 home.

Analysis:   The analysis for the $300,000 home is laid out in the table below.

Mortgage Qualification Example for Borrower with Student Debt
Note
Student loan Amount $100,000 $0 Assumption
Interest Rate 0.05 0.05 Assumption
Number of Payments 120 120 Assumption
Student Loan Payment $1,061 $0 From  PMT Function
House Amount $300,000 $300,000 Assumption
LTV 0.9 0.9 Assumption
Loan Amount $270,000 $270,000 LTV * House Amount
Intrerest Rate 0.045 0.045 Assumption
Number of Payments 360 360 Assumption
Mortgage Payment $1,368 $1,368 From PMT Function
Total Loan Payments $2,429 $1,368 Sum Payments
Monthly Income Constraint One $4,886 $4,886 Student Loan Payment divided by 0.28
Monthly Income Constraint Two $6,391 $3,600 Mortgate Payment Divided by 0.38
Required Monthly Income $6,391 $4,886 Max of income over both constraints
Required Annual Income $76,696 $58,631 12* Max Income

Observations Pertaining to the $300,000 home for a person with and without student loans

A person with no student debt could qualify for this mortgage with an annual income of $58,630.

The person with the student debt needs an annual income of $71,585.

The impact of student debt on purchases of a larger home:   The allowable mortgage is determined by two constraints one involving mortgage debt only and the other involving the sum of mortgage and consumer debt.   When the mortgage debt is very large, constraint one (the mortgage debt constraint) will be the binding constraint.

Download the student debt and mortgage qualification spreadsheet by clicking below:
Continue reading “Student debt and qualifying for a mortgage”