Ending the Evil of Student Loans

Ending the Evil of Student Loans


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Yves here. I don’t pretend to have a magic bullet for the student loan problem. At a bare minimum, student loans should be dischargeable in bankruptcy and servicers should not be able to garnish Social Security payments to satisfy student loans. Another step in the right direction would be to end default interest rates, which rapidly compound the amount owed when borrowers miss payments, which can readily happen due to job loss or a medical or personal emergency (having a car is critical to being employed in most parts of the US, so a transmission failure can wreak havoc for someone whose finances are on the edge).

Once you go beyond measures like those, you get into the complicated terrain of whose debt to write down, and how much. I’m frankly surprised that a Main Street coalition for student debt relief hasn’t sprung up, since low household formation rates among the young are due to a significant degree to the student debt peonage. After all, people buy lots of stuff when they move out of their parents’ home or quit living in apartments with roommates.

Writeoffs mean losses to the government on Federally guaranteed student loans, which constitute over 93% of the amount outstanding. Now as Michael Hudson is wont to say, debt that can’t be paid won’t be paid, so this is arguably an exercise in loss recognition (the losses exist, as in marking many of the loans to fair market value would result in writedowns). However, the current draconian repayment requirements mean that debt moralists will argue that reducing or writing off principal is a gimmie.

One way to refocus this argument is to marshall evidence of how colleges often acted as predatory lenders. For instance, students were often shown data about the earnings of recent graduates that was unrepresentative (as it didn’t allow for how many completed degrees, nor did it show incomes by major). Provisions to require lenders (meaning schools) who have a high level of defaults and/or engaged in deceptive marketing to pay significant penalties would help politically. But while that will (deservedly) put a lot of for-profit colleges out of business, measures like this should not be limited to them. Otherwise, we will have yet another two-tier system in which  respectable-seeing institutions get away with bad conduct.

However, it’s hard to see ideas like this coming from anything to the right of the Sanders wing of the Democratic party. Student loans have subsidized a huge income transfer to college and universities, particularly to highly paid administrators. Academics and higher education bureaucrats have a high propensity to vote Democrat, so the party is not going to attack one of its strongholds, as attested by Elizabeth Warren’s timid student loan reform proposals. Maybe we need to start talking up prosecuting college administrators who knowingly devised misleading student loan marketing materials to raise the baseline. Another important set of measures would be to greatly strengthen the laws against predatory servicing and assign large penalties.

While I differ with some of his ideas, particularly his idea of getting rid of licenses, as opposed to getting rid of educational requirements that are tolling as opposed to providing needed instruction,  Bob Hertz’s proposals below will hopefully help foment more discussion of how to greatly reduce the harm done by the student loans’ millstone.

By Bob Hertz, Editor, New Laws for America You can reach him at Bob.Hertz-at-frontiernet-dot-net

According to John Galbraith. the wealthy always want to avoid taxation and put debt in its place. Student loans substitute debt for taxes perfectly; thanks to loans, the burden of funding higher education has been largely transferred to the backs of students

In the words ofMike Konczal , “Student debt has taken the place of public funding, and it has become a slow-moving disaster.”

Per Ellen Brown, author of Web of Debt:

 

The lending business is heavily stacked against student borrowers. Their debts normally cannot be discharged in bankruptcy, and these debts can compound and dog them for life. Without a well paying job, many students will be hounded by collectors, have their wages and even their Social Security garnished, and have abysmal credit the rest of their lives. They may feel unable to buy a house, or even start a family. We are sacrificing a generation to student debt.

 

What Must Be Done Instead

New Student Loan Law  #1: No repayments are due until the borrower’s income exceeds $40,000 a year. 

This rule has been in effect in Australia, Britain and Canada for several years.

The student-borrower owes nothing until the year after they file a tax return with over $40,000 personal income.

Also, no interest will accrue when earnings are low.

If they never earn $40,000, they never owe anything. If they fall below $40,000 after years of higher earnings, their payments will be reduced.

Federal farm loans worked like this for decades through the Community Credit Corporation. If farm prices fell, the farmer owed nothing; if prices went up, the farmer had to pay.

This ‘rule of $40,000’ will effectively end student loans for cosmetology schools, medical coding schools, culinary schools, non-profit work, fashion design schools, art schools, et al., In these fields, many salaries will be less than $40,000. The lenders will likely never get paid back.

The rule will bring immediate relief to many debtors who are in dire trouble. Even if their debts are modest, they may have dropped out of school, and now can only find low wage work. Right now they have “no way out” as their debts multiply with interest and penalties

There is nothing wrong with someone wanting to go to barber school!  But they should be in a public vocational school that costs far less than $5,000, and could be largely covered by a Pell grant.

The Medical Assistant program at for-profit Heald College costs $22,275 a year; a comparable program at Fresno City College costs $1,650. A paralegal degree at Everest College costs $41,149, compared to $2,392 for the same degree at Santa Ana College. Without federal loans these educational crooks will disappear, and not a moment too soon. 

New Student Loan Law #2: No interest will accrue on any federal student loans. (either during school, or during repayment.)

Instead of lowering interest rates, we should eliminate interest altogether. (As New Zealand did in 2006, and Nova Scotia is doing right now.)

Also, any existing accrued interest should be forgiven, immediately.

In too many cases, multiple years of forbearance, penalties.and high interest rates have caused original loans  to double or even worse. A student who borrowed $50,000 might now owe  $100,000. It is not hard to find debtors who borrowed $20,000, have paid back $40,000 in principal and interest, and still owe $35,000.

Loan interest must end, if not all at once then over just a few years.

The person who borrowed $20,000 and has made $40,000 in payments will be done paying.

The person who borrowed $20,000 and has made no payments will still owe $20,000….NOT the interest..

If any default or ‘rehabilitation’ penalties have been added to the loan balance, they also will be wiped out. The hideous extra charges imposed by collection agencies (often 25% of the loan balance, and 25% of future repayments)  must be cancelled retroactively.  . Late fees are a gold mine for predatory servicers,  and must be taken away.

In any event, monthly payments for many debtors will shrink dramatically. This will be a quick and efficient write-down, far preferable to millions of drawn-out court cases or futile requests of help from servicers. The federal government will simply declare a new balance.

In addition, the forgiveness of loan interest should be income tax free, or at least taxed very lightly.

(It would  be ideal to forgive all existing student loans. But that is politically impossible —due to understandable resentment from those paid back older loans in full, those whose parents saved diligently for college, and those who did not go to college to avoid loans.

Cancelling interest (or re-calculating interest at 1%) seems a decent compromise. The borrower must repay what they borrowed – but not all the interest and penalties.) 

Meanwhile:  Private loans will have interest capped at the federal funds rate (about 1.50% currently)  This will apply to both new and existing loans.

If a private loan is guaranteed by the government, then the bank is taking no risk…why should the bank get a generous interest rate? As Michael Hudson says,” Banks don’t take risks, that’s what governments are for.”

Private. Lenders will likely not want to offer loans at low rates, since interest and late fees are the “gold” in the market.,,,,but they will not be missed. Colleges should be funded with grants, not loans.

The ‘SLABS market’ – which consists of securitized, high-interest loans sold to investors — will probably collapse in short order. The government will cover much of the investors’ losses, but this is a cost of our foolish policies.

Complaints will be made that this is all bad for business. Which it is… but when did we get the idea that college funding should be a business? Government aid to education should be just that –aid -with no private profits on the side.

Student loans have been an attempt to get more people into college without raising taxes. State governments are indeed under a lot of pressure from health care costs, pension costs, infrastructure, et al., and can no longer fund colleges automatically as in the 1950’s. Drafting private capital may have seemed like the least bad solution. The general public sees student loans as a generous program, not a rip-off.

This rosy scenario did not reckon with the millions of borrowers who would not earn more, or the drop-outs, or the greed of for-profit colleges; or the lethal power of compound interest.

Loans are a dangerous drug….they are an endless replay of  Pleasure Island, if you remember the story of Pinnochio. The policies to expand home ownership also looked like free lunches, until the mortgage brokers and big banks came aboard. Now once again we must pick up the pieces 

New Student Loan Law #3: All student debt owed by borrowers or cosigners over age 60 will be forgiven, immediately.

This is a barbaric practice and the nation should be ashamed. We are creating multi-generational webs of debt, exactly the opposite of a good society.

Debtors over age 60 have the highest default rate, and can be forced into poverty if their Social Security or disability benefits are garnished for loan repayment. Most students have no assets, so lenders are going after the parents, who do have assets.

Under our law the government will see its loan portfolio shrink by about $85 billion .This is not a major issue:  The government’s net revenue from student loans is negligible in a $3.5 trillion federal budget. The government is ruining lives, in order to collect money it does not even need.

In fact, the government will eventually take in more money when debts are forgiven — because the debtors can then re-enter the economy and spend on more constructive things other than debt.

Consider the example of Europe after two World Wars. In the 1920’s, the victorious allies demanded full payment of German war debts, and this helped cause the Great Depression. After World War II, German debts were forgiven and this helped lead to a boom. 

The US government should not be squeezing its own citizens with debt extortion. The government should levy sufficient taxes for public programs, so that odious debt is not necessary in the first place. If we want more college graduates, then let’s spend the money on free or next-to-free public college.

New Student Loan Law #4: Allow student loans to be discharged in bankruptcy.

If the lender demands a payment schedule that the borrower  cannot meet,  then bankruptcy can go forward. Private student loans are the worst offenders here, and  these loans will be cancelled with ease in bankruptcy court.

There are many thousands of debtors who now have required loan payments of perhaps  $1000 a month, but incomes of just $2,000 a month. (or similar ratios) They are not eligible for income-based repayment plans, so loan servicers harass them mercilessly

This can end starting tomorrow. The normal rules of bankruptcy court can take effect. If your loan payments exceed a standard per cent of your income, and the lender will not offer some  forgiveness, then the debt is wiped out.

Note: If a college is guilty of outright fraud — and some of them are– then any related student loans should be cancelled immediately and not need bankruptcy court  This must not be a timid step that any later administration can reverse,

It is worth repeating that private colleges can declare bankruptcy; huge airlines can declare bankruptcy; Donald Trump has declared it several times. (and got a huge tax deduction for his unpaid debts.)  Gamblers can declare bankruptcy; credit card abusers can declare bankruptcy; VA mortgage holders can declare bankruptcy; SBA loan recipients can declaire bankruptcy. All across society, people can put their mistakes behind them. We would not be “coddling” ex-students, if we give them the same rights as all other borrowers.

Tbis is not to deny that some borrowers have made huge mistakes. They did not keep track of all their loans; often they  kept taking loans in a desperate attempt to get an advanced degree…..which (they prayed) would lead to higher incomes.

The question is, how long are we going to make them suffer for a bad bet? The rest of their lives?

As Elizabeth Warren has pointed out, bankruptcy court is where America’s social problems are exposed.. Lost jobs, erratic incomes, inadequate health insurance, no disability insurance, and the fallout of divorce—all are addressed eventually in bankruptcy.

Bankruptcy is a recognition that both borrowers and lenders have made a mistake. That the federal taxpayer is in effect the lender makes this politically painful, but no less true. We are fiscally responsible for the foolishness of public bodies.

New Student loan law #5: Pell Grants must be expanded to $8,000 a year, and be available to any student from a family that earns less than $100,000.

This could cost the government an extra $74 billion a year. (Obama made a pathetically small proposal to increase Pell Grants, by $35 billion over ten years.)

We ca afford this, because the government will be making a lot fewer loans. If  Washington can currently make new loans of more than $100 billion a year, it also has the money to make grants instead.

We give vouchers to parents for elementary education, and even right-wingers applaud. No one has to pay interest on a voucher. We do not fund Medicare or Medicaid by backing up private loans to patients (who would then default in massive numbers.) Again the principle must be grants, not loans.

More federal funds should go into vocational schools. These have no dormitories, no athletic teams, and no professors being paid lavish salaries to do research. They actually help their graduates find jobs.

The loan monies that have been going to dishonest for-profit colleges could have funded every vocational school and community college at 100%, with ease. 

New Student Loan law #6: Guaranteed student loans must be cut back across the board.

We may want to stop all loans to:

– third tier law schools

–  ‘Parent Plus’ borrowers

–  liberal arts graduate school programs

– ‘online universities’

– for-profit vocational schools

– any loans for living expenses

– loans to persons over age 50

Note: If a student has just a year or two to go to complete a professional degree, we can give out another loan. But the amount must be reviewed. Even for the professions, some tuition prices are ludicrous. A year of law school need not cost $50,000. 

Would this be a form of  paternalism? Absolutely yes. We have been treating students as though they were knowledgeable loan customers, with disastrous results.   

Personally, I  like paternalism. Mortgage re-fi loans should have been greatly restricted in the 2000’s. Millions gave up their home equity for what seemed like free money at the time, but in the long run made them poorer. Compound interest swallows up assets, it happens every time. 

Alternatives to Student Debt

To survive without loans, many colleges will have to get their tuition down to the level of a Pell Grant, or perhaps a Pell Grant plus $5,000. Students can stay at home and commute, rather than  destructively borrowing money for living expenses.

If an industry actually needs new employees, that industry can help pay for their education. (This happens right now in  vocational schools.) Employers who need workers can also help their employees pay down their loans. If an industry does not want new workers badly enough to  train them, why give out loans?

Too many degrees have been debt-financed in fields with no new jobs. These loans are often the most destructive. A larger supply of qualified social workers, counselors or computer game designers has not created a demand for those graduates.

Some colleges will shrink or close. Some probably deserve to close, given the dishonest promises they made to students, and the rich salaries that  have been extracted from loan-covered tuition. It would not be unjust if colleges had to use their endowments or reserve funds to make refunds, or to help defray the cost of government loan guarantees..

(Note: all earned credits must transfer to other colleges if a school closes. This is not negotiable.)

The highest loan default rates are actually not among university grads, but in for-profit institutions.  Downsized workers, poor kids, ex-convicts and single parents are understandably desperate  to get into the  middle class….and for-profit colleges have promoted themselves as the solution..Student loans were often the only form of credit this group could get.

Unfortuantely this group was poor back then, and often they are still poor today. The only way out is to forgive most or all of their small loans., We do not solve the problem of wealth creation by doing debt creation.

The best social alternative is not more college, but plain higher wages.

In Germany, for example,  apprenticeships lead to good wages; but college is not required.

German workers do receive training, but it is paid for by employers and the government.

Danish workers also get retraining when their old jobs disappear, but this is paid from taxes not loans. Job and training benefits like this cost about 4% of every Danish paycheck.

The  German apprenctices are well paid not because they are more educated – but because their unions demandhigher wages, and their unions can stop outsourcing and strike-breaking. European employers in general cannot replace workers with cheap labor for quick profits.

,McDonald’s workers in Germany make $37,000 a year. They rarely fall prey to dishonest pitches about needing to go to college to make a decent wage.

In America, warehouse and food service workers could  make a living wage if they had strong unions. (This has been proven by unionized Las Vegas hotels.)  The policy emphasis on  “more education’ is  a way to avoid the reality of exploiting workers.

We also need to address the licensing requirements that send people to college in the first place.

Up to 2,000 hours of classroom time is required to be a carpenter, a manicurist, a fire-alarm installer, a make-up artist, a hair braider, pest control applicator, pre-school teacher, earth driller,  et al.

These restrictions create a ‘toll booth’, where a job applicant must essentially borrow $50,000 or $100,000 or more just to enter the occupation. The only answer is to outlaw this kind of licensing, and let anyone enter the fields. Let the customers decide if they want service from a doctorate holder at $400 an hour, or a trade school graduate at $50 an hour. In a world of Yelp reviews, the markets can police themselves.

Pell grants are the foundation of our reform. If a student still needs a BA degree, they can find a program for $8000 a year in tuition.  The  private colleges charging $40,000 a year can serve the well -off.

We ought to remember what the GI Bill was like after World War II. A young veteran could marry, have children, attend any college for free and even get a stipend to help pay the rent.

This generation matured with houses they could pay for and children they could afford. With decent union jobs, both spouses did not have to work. This did not happen in a far-off fantasy land. In a sense it happened about two miles from where you live right now.

Let’s quit harassing and destroying our own citizens. The Federal Reserve was rich enough to buy up billions of ‘toxic assets’ after the bank meltdown of 2008. We can do the same with toxic student loans, which are destructive to more individuals than subprime mortgages. You can walk away from an unaffordable house. That destroys your credit but your financial life can be rebuilt. These student loans are forever.

This is not just a theoretical debate. Debtor suicides are not unknown, and loans can be a cause of divorce. In several states, one’s drivers license and professional license can be seized for not paying student loans. Debtors were actually imprisoned in America in the 19thcentury. Not likely, but it could happen again. History is filled with wars between debtors and creditors, and  the contest is not really over moral correctness, but power.

It is bad enough that helpless migrants from the Third World have to work off their transit and recruitment fees. Why are we treating so many of our own young people the same way?

We forget that  the United States was founded by debtors, and was a refuge for debtors who needed escape.

We are not saying that 100% of student loans are bad, or that all graduates are in financial trouble. Many students graduate with under $20,000 in debt, no more than a car loan, and make their payments on time.. Student loans by themselves will not destroy the US economy.

But the evil aspects of student loans will destroy millions of people, if we do not restore the right to bankruptcy and other forgiveness. This is what we are desperate to enact.

For more information, contact me at Bob.Hertz@Frontiernet.net.

Also you should follow these excellent organizations:

 

Student Loan Justice……..http://studentloanjustice.org/

Condemned to Debt……https://www.condemnedtodebt.org/

Student Debt Crisis………..http://studentdebtcrisis.org/

Student Loan Warriir……….http://studentloanwarrior.org/

Student Loan Sherpa…….https://studentloansherpa.com/

 

 

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