By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
It is student loan week in the Democratic Party. Elizabeth Warren’s bill to refinance prior loans to the current 3.86% rate (including private loans owned by the likes of Sallie Mae), gets a vote on Wednesday. Yesterday, the President endorsed that bill, and threw in his own executive memorandum to, as the White House puts it, “make student loans more affordable.” Today, Obama will show up on Tumblr to further make the sale.
Personally, I think the goal ought to be to make student loans irrelevant. Low- or no-cost public options for higher education helped create the middle class during the Great Compression, and with the pool of money used for existing student aid initiatives, i.e. tax breaks and grants, you could pay the tuition of every student enrolled in a public university. Student loans are an easier lift politically, but won’t solve the problem.
But of course, the Warren bill isn’t designed to pass. It is “paid for” (using that term in the parlance of Washington, MMTers) with the Buffett rule, a tax hike on the wealthy which Republicans have rejected multiple times over. I can tell you with specificity that it will get either 53 or 54 votes (depending on Joe Manchin; Harry Reid will vote no in a procedural maneuver in case he wants to reconsider the vote and try again), and fail to break a filibuster. The only point here is to make a contrast between the two parties in the hopes of attracting young people to turn out for the midterms.
As for these executive actions: the first expands income-based repayment, allowing approximately five million more student debtors with older loans to have their payments capped at 10% of their monthly income. IBR is available on most new loans today, and the balance is forgiven at the end of the payment period. For some people it will represent a modicum of relief, though it remains a loan, and payments would increase as wages increase over time. IBR, which actually has its roots with Milton Friedman (although his proposal was more of an equity investment), also shares similarities with Pay It Forward, the plan that Oregon passed last year for debt-free college with a nominal pre-tax fee on future earnings. But by the way, expanding IBR requires new Education Department regulations, which means nobody will see the benefits of this until December 2015 at the earliest.
The other pieces, which didn’t get as much notice today, have some odd echoes and contradictions in them. From the Administration’s fact sheet:
Strengthen Incentives for Loan Contractors to Serve Students Well: The Department of Education administers the federal student loan program through performance-based contracts with private companies awarded through a competitive process. Rather than specifying every step of the servicing process, as was done in the guaranteed loan program that ended in 2010, these contracts provide companies with incentives to find new and innovative ways to best serve students and taxpayers and to ensure that borrowers are repaying their loans. Today, the Department announced that it will renegotiate its contracts with federal loan servicers to strengthen financial incentives to help borrowers repay their loans on time, lower payments for servicers when loans enter delinquency or default, and increase the value of borrowers’ customer satisfaction when allocating new loan volume.
If you’re like me, you’re thinking, “Hm, financial incentives for servicers to modify the terms of loans for delinquent borrowers, where have I heard that one before?” And yes, this has all the behavioral nudges of a HAMP 2.0. It goes a bit further than that by having carrots and sticks; unlike with private label MBS loans, because the government is the owner, they can set compensation contracts to increase fees for good servicing and reduce them for situations that result in default. Indeed, this is precisely the overhaul that’s desperately needed for mortgage servicer compensation, so the financial incentives finally point in the right direction.
But the order neglects to mention the fact that student loan servicers have been ripping off borrowers for years, exploiting the fact that the Education Department does not deliver step-by-step standards for servicing loans. The idea of giving these servicers more money to entice them into doing their job correctly should strike everyone as unseemly.
The star reporter on the role of student loan servicers is Shahien Nasiripour of the Huffington Post. And you only have to read through his back catalog to see the state of the industry. Student loan servicers like Sallie Mae illegally blocked payments from accruing to loans with the highest interest rates, prevented borrowers from learning about cheaper repayment options, overcharged active-duty members of the military, violated discriminatory lending practices, pushed debtors into plans that increase their overall burden, and harassed borrowers after their co-signers died (even if they were current on their loans), to name just a few activities. Sallie Mae and its loan unit Navient just paid $139 million last month in penalties to resolve federal investigations into these and other matters.
Labor groups have been trying to get the Education Department to dump Sallie Mae. Yet Arne Duncan has mostly shielded them and other servicers from scrutiny, and even renewed Sallie Mae’s contract after knowing that they cheated servicemembers. In Shahien’s latest story, we find yet more Administration coddling of Sallie Mae:
The U.S. Department of Education is seriously considering granting a potentially billion-dollar, decade-long contract to a former unit of Sallie Mae, the student loan company the Justice Department last month accused of cheating U.S. soldiers.
In a previously unreported move, the department said May 30 that Navient Corp., the nation’s largest student loan company, was one of four finalists for a new contract to run its system for originating and disbursing new federal student loans and grants and keeping track of existing ones. The current contract, held by Accenture LLP, was valued at $880 million as of May 19, according to the Education Department.
If Navient wins the contract, it would have a role in originating new federal loans for borrowers, keeping track of their debts, collecting monthly payments on their loans, and chasing them if they default. In other words, a borrower’s entire interaction with the Education Department — from the moment she takes out a loan to the day she pays it off — could solely be through Navient.
That billion-dollar contract presumably makes up for the $139 million fine. So with Sallie Mae and its pals basically untouched by their various illegal activities, what makes anyone think that renegotiating their contracts so they really, truly, no-we-mean-it-this-time have to respect their customers will make a difference?
That brings us to the next piece of the Administration’s fact sheet:
Ensure Active-Duty Military Get the Relief They Are Entitled to: The Servicemember Civil Relief Act requires all lenders to cap interest rates on student loans – including federal student loans — at 6 percent for eligible servicemembers. The Department of Education… will reduce those interest rates automatically for those eligible without the need for additional paperwork. It will also provide additional guidance to Federal Family Education Loan program servicers to provide for a similar streamlined process.
This translates to “try to automate the process to end-run student loan servicers so they don’t break the law again.” Maybe don’t hire the same miscreants to do the job!
Back to the fact sheet:
Work with the Private Sector to Promote Awareness of Repayment Options: The Secretary of the Treasury and the Secretary of Education will work with Intuit, Inc. and H&R Block, two of the U.S.’s largest tax preparation firms, to communicate information about federal student loan repayment options with millions of borrowers during the tax filing process… In addition, the Administration will work with Intuit to explore ways to communicate with federal student loan borrowers through Intuit’s free personal financial management product, Mint.com… Too many borrowers are still unaware of the flexible repayment options currently available to them, especially when they run into difficulties in managing their payments. The Department of Education is redoubling its efforts to identify borrowers who may be struggling to repay and provide them with timely information about their options supporting them through the repayment process and helping them avoid or get out of default.
Hold on, isn’t this the servicers’ JOB? Isn’t the government giving them bunches of money to keep people out of default and inform them of better options? Why are we ALSO paying Intuit and H&R Block for the same task? Why is the Education Department working on their own to identify at-risk borrowers when the servicers have the information in their own databases? Aren’t they the first line of defense, and hasn’t it been proven that they’re blocking alternatives for these borrowers in a bid to increase profits?
You literally have the Administration going around the servicers to do their job for them, while also paying the servicers more to encourage better performance. And the servicers have already proven themselves to be criminals! Why are they even still in the equation? Why are the same servicers getting the contracts?
(FYI, the last part of the executive memorandum is about stronger financial literacy for borrowers before they take out the loans, and we all know that simply doesn’t work well.)
This is another example of this White House working to prop up a broken, corrupt existing system rather than working to overhaul it. The student loan debate is a sideshow compared to actually reducing the cost of higher ed, as organizer Melissa Byrne so compellingly points out. But trusting the same fraudulent actors in the servicing arena to better serve the customers they bilked, and then covering for them with all these add-on efforts, inspires no confidence that we’ll ever get to the meaningful solutions on the other side.
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I cringe every time I see Arne Duncan’s name in print, and when I hear Obama call something a “no-brainer.”
“No-brainer”–just remove your brain and it makes perfect sense!
Back in the day I used to just think that student loan servicers were incompetent, but as I learn more I see that they are corrupt. I remember applying for IBR a few years ago and they kept “losing” my paperwork. So my monthly payment would jump 500% without notice and they would charge me late payment fees.
My wife has loans through Sallie Mae and when she looked at her online statement it listed all the loans that she had, there were 8 or 9 loans listed, one for each year plus private loans to cover what the Federal loans didn’t. The loans all had the same account number. Down at the bottom of the statement there was a line that said total due and I naively sent them a check for the total due. They applied the entire payment to one of the loans and, again, charged late and missed payment fees. They were happy to capitalize these payment fees and interest, when I called to complain. Now we get everything from them in paper, and if I need to send a payment by check I write out 8 or 9 separate checks and put them each in a separate envelope.
I have so many stories like these in my years of student loan indebtedness. I was relatively happy when my loans were serviced by the government, but they kept selling them from company to company, probably making some sort of commission on the sale.
This is the only policy these scumbags have. It’s the Shylock Administration. It’s all they know how to do: bait the debt hook with the common-law economic rights of the UDHR. For education rights, it’s unexpungeable loans. For health care rights, it’s an unlimited-liability lien on all your assets, imposed on your family when you die. For housing rights, it’s subsidies to predatory lenders. For your right to a livelihood, it’s more lifetime peonage for useless “training” by credential mills. Their pretense of means testing is nothing more than a way to extract the absolute maximum.
It will take more than elections to exterminate these human hookworms. Take a deep breath, we’ve got a big worm bolus to push out.
What a fiasco.
This frankenversailles form of capitalism is interfering with the ability to make pragmatic business decisions deferring instead to the protection of rentiers. In its current guise, it’s inefficient, wastes energy, and is acting as a tax on society. It is a drain on resources.
‘The student loan debate is a sideshow compared to actually reducing the cost of higher ed.’
Precisely. Baumol’s cost disease rages on. Instead of fixing it, the plan is to subsidize it.
This is of course what status-quo political parties do: protect entrenched interests.
Any discussion of IBR isn’t complete without a discussion of the potential tax consequences at the end. There’s lot a of confusion, given all the different categories and programs, as well as the fact that nobody has actually gone through this system end-to-end yet, but forgiven debt is generally considered taxable income if there’s not an exception in place. Since the first forgiven IBRers are years away, nobody in office or the IRS seems to be clarifying the issue for borrowers making plans based on these programs.
That is going to hurt a lot of people that are already hurting. Something will likely be done about it, but it will have been too late for many.
According to one article I read this morning, the Obama “plan” does not address this issue at all. Any debt forgiven at the end is taxable income.
“[…] If a graduate still has loans after 20 years of payment, and the graduate has consistently paid every single payment on time, then part or all of the remaining loan may be forgiven after the borrower pays taxes on the remaining sum. […]” http://www.wsws.org/en/articles/2014/06/11/stud-j11.html
BTW, I know executive orders are a controversial topic, but I don’t understand how O gets away with this one at all. Revenue issues, which this one certainly is, as these are gov’t-backed loans, are supposed to originate in the House. Ah, well, I suppose it hardly matters, given how much of the constitution we’ve jettisoned in the past decade or two anyway.
“It is “paid for” (using that term in the parlance of Washington, MMTers) with the Buffett rule, a tax hike on the wealthy which Republicans have rejected multiple times over.”
There is no reason, according to Modern Money Theory (MMT), to talk about paying for anything with taxes. One would hope that the concept of taxes and how they actually work would eventually reach into the general public so the upper echelon of the political culture and bureaucrats would stop lying to us about that. Simply put taxes do not pay for anything, they are needed to drive our money system and to keep our currency system vital and liquid.
Once that concept is digested, (recite ten times before going to bed “taxes do not pay for anything, taxes drive our money system”) one will realize there is no reason to not have tuition free education for anyone who wants it. Simply put, Federal Government transfers of payments into the private sector via grants, scholarships and gifts for college tuition would eliminate student tuition and fees.
Meanwhile we could expect colleges and universities to clean up their act by hiring full time teachers-professors-instead of more full time administrators. Regularly attending classes on a campus filled with huge edifices of brick, steel and glass does not a college education give.
“Meanwhile we could expect colleges and universities to clean up their act by hiring full time teachers-professors-instead of more full time administrators.”
Why would we expect that?
Yesterday, in this confronting financialization on steroids post we learned that Costas Lapavitsas, professor of economics at the School of Asian and Oriental Studies, University of London, authored a book titled “Profiting Without Producing: How Finance Exploits Us All (Verso)”.
This is worse. It is profiting by destroying people. Navient gets a $139,000,000.00 fine for criminality, and then is rewarded with a $1,000,000,000.00 contract to do it all over again.
No one that is sane can support this irredeemably corrupt system. With student debt at a $trillion or so, I see no difference between university professors and banksters.
“No one that is sane can support this irredeemably corrupt system. With student debt at a $trillion or so, I see no difference between university professors and banksters.”
University administrators are more to blame than faculty.
Faculty is getting hollowed out these days. Poorly paid adjuncts now comprise
70% of university-level faculty.
Who’s pocket does the vast sums borrowed for an education end up in, if most of the instructors are not actual professors, but poorly paid adjuncts? The only ones not in on the university education scam are the custodians and cafeteria workers.
Yup, it’s rank corruption about as naked as it gets — a stark example of klepto-parasitism more likely a result of criminal collusion than gross negligence alone. Bribery works, cheaply, so now we officially chisel college students for profit in a scheme, which, given the ZIRP-to-six percent spread and federal guarantees, can only be called usury. It’s raw rent-extracting vampirism at public expense that does serious lasting harm to the country. It’s greedy, reckless, cruel, and stupid — criminally stupid, like most neoliberal policy.
But like Terrierist, I wouldn’t target faculty professors, many victims themselves, for this. This goes all the way up the food chain.
At the top of the food chain at a university sits the professor and dean. The only “educators” that make more money than professors are football coaches. Crapification taken to extremes.
Professors are supposed to be the best and brightest among us. They should know that saddling kids with a mountain of debt is detrimental to the kid’s interest, but, as smart as they are, the professors remain silent. After all, kids borrowing tens of thousands of dollars for an edukashun is what allows professors to obtain six figure salaries.
I’d like Yves and the gang to check into the “Public Service Loan Forgiveness Program”.
https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service
For years my wife tried to qualify for this, given her work in non profits. However again and again, paperwork would be lost, time at a job would not be counted… and then her debt servicer more or less forced her to pay more per month so that she’d be paying the loan off within 10 years. What, you say? How does that work? I have no clue. It’s incredibly confusing, which is why I’d like Yves to work on it, because you’ve proven yourselves to be most knowledgeable about this kind of thing.
Similar situations are found on forums, including people contacting the ombudsman, but to no good end. It’s a nightmare, and the horror stories you read are very real: http://askheatherjarvis.com/forums/viewthread/8866/
This is a program that bureaucrats complain isn’t being utilized, but hasn’t been around for the 10 years yet (120 loan payments) in order for it to have actually worked for anyone – you apply once you have made 120 payments. My guess is that it won’t, that it will be ended at the 10 year mark and while some will be grandfathered in, many will not.
There have been some articles written about it, but there’s just very little research. I think it’s needed. I think people need to know that this program is nonsense and will not work, or saddle someone with a massive tax.
http://www.bostonstudentloanlawyer.com/index_files/8-6-13.html
I’ve heard of under-utilization for these loan forgiveness plans (and income-based repayment, for that matter), and active discouragement from servicers. This doesn’t totally surprise me, then. Which is why the same servicers should not be doing this business.
I really think there’s an opportunity here for Lambert or Yves or someone to put the lie to some of these idiotic claims by servicers and bureaucrats alike, while at the same time putting together some research that could help the people in nonprofits and banking on this program.
These are people that cannot afford to have the government yank the rug out from under them.
Deleting our doubly dubious trillion dollars of student debt?
In Ha-Joon Chang’s “23 Things They Don’t Tell You About Capitalism” he explains that so many more people going to college isn’t really that big a plus for economic output — that they have to go only because everybody else goes; meaning without it they wont be competitive — on a relative basis.
He gives the example of Switzerland having had only 15% college educated up to 1990 — with about the highest worker productivity in the world — up to 40% by now; same reason.
What occurs to me is that if a college education is not that much of an INHERENT plus economically — then — the gigantically jumping costs of recent years are not justified even the slightest little bit. If everybody understood that — or had understood that all along — then, whatever has was added to college costs that has ballooned them so high and put everybody into such a deep pit (now there’s the mixed metaphor of the week) APPARENTLY FOR NO REASON could have been cut to the bone without hesitation.
* * * * * *
Given that this generation’s unnecessarily (super) deep college debt was just that, UNNECESSARY — maybe that gives us an opening to give them extraordinary one-time relief (one-time assuming we can reverse the crazy high cost trend) — perhaps putting all such debt under the Income Based Repayment program (and not charging tax on unpaid at the end — should be easier in a presumably more sane 25 years from now).
* * * * * *
Too add to the forgiving justification: this generation has also been subjected to the results of 30 years of Republicans getting every last Voodoo economic wish (following written in 2011):
80′s Reagan got his 25% across the board income tax cuts — building unprecedented peacetime debt – his dereg’ing savings and loans crashing the industry. ’90′s Sen. Gramm and friends tore down the Glass-Steagall Chinese wall between retail and investment banking – not without help from Clinton Democrats — setting the stage for our much troubled 2000s. ’90s Greenspan noted Wall Street partying too hard while failing to remove the punch bowl – the burst bubble end gave us the 2001 recession.
2000′s Bush cleared away more financial reg’s — while smiling on little reg’ed shadow banking’s proliferation – converted Clinton budget surpluses into trillions in tax cuts for the better off — which cuts flooded by now much degreg’ed banks and never much reg’ed non-banks with too much savings to be lent to too many borrowers – inflating an oversize real estate bubble whose burst aftermath left said prolonged illiquidity contraction and said low demand dips — while trillions of piled up Reagan-Bush debt inhibit routine Keynesian easing of low demand dips with temporary deficit spending.
[Coming up? A possible end run of the Constitution’s bar to legislatively altering contracts — for public contracts only (Chicago’s parking meter rip off, restructuring student loans) — under eminent domain?]
The example of the Swiss education system may not be appropriate for comparison with that in this country; the European system and probably the Swiss in particular may have a higher degree of successfully educating students on their way through the system. At least more students there probably get a modicum of training for the job market after 12 years of struggle and are therefor better prepared to contribute to the national outcome in a productive manner.
Also, even though a diploma at the college level for so many graduates is not of much use to actually obtain a true education in this country-something more than half of the students already realize (I’m guessing)-it is a requirement on a resume for finding a decent paying job. From an LA times article:
“On average, a doctoral degree-holder will earn $3.3 million over a lifetime, compared to $2.3 million for a college graduate and $1.3 million for those with a high school diploma. — People with less education in high-paying occupations can out-earn their counterparts with advanced degrees.” With that knowledge generally out there our youngsters and young adults (some older adults) get on the college treadmill so they can put bread and butter on the table.
Finally I would like to toss out this criticism and leave a possible discussion on a solution for how education should actually work for another day:
So many educational facilities have a built in loop in there systems that cause students to fail; basically the philosophy of education found nearly everywhere is based on “open the top of your heads students, so I, the hapless instructor, may pour knowledge into your waiting mind.” For over 70% of the students, (guessing here on what I saw on my way through said system) that simply does not achieve much. It becomes an exercise in pursuing trivialities. Education should be based instead on the Socratic method of asking questions and discussion.
there’s no time for that. not in a class with 75-100 students. I’ve had small, discussion based classes and would agree with you. but most of them are not like that. most of them are packing us in like sardines, and the instructor is relying upon the textbook to give them the lesson plan, which is merely augmented by the Profs years of experience in the industry (and they do have that experience, but due to NOT ENOUGH TIME, they can rarely share it). in many classes, I could have literally read the textbook, regurgitated the info for the multi-choice test, and skipped coming to class. most instructors do an end-run around this by making attendance part of your grade.
there are very, very few instructors who simply threw away the textbooks and relied upon a carefully curated body of source documents to ground their personal experience in. the textbooks ($150 a piece) are where it is at. and I must say, after 6 years of buying and reading those, they are the worst written gruel imaginable. they grind even the most interesting subjects down into pablum, and sprinkle propaganda liberally throughout. if I had to read yet another book that OPENS with a dramatic retelling of 9/11, I would have suicided.
yes, I think you’re spot on. the problem is, the classes are too large and the textbook guys have their hooks in.
You are quite correct about the education system being like an assembly line-to paraphrase what you said. Back in the day, and maybe more at smaller, private colleges (still true in schools like Oxford and Cambridge), classes were actually tutorials or at least the students had many more seminars (8-15 students) than large lecture courses. In order to accumulate large amounts of money, most colleges and universities (1st and 2nd year) position undergraduate classes for the assembly line; they tend to be largish. Back in the early 1970’s my third year Political Science and History classes were about 10-15 students each. Often though, as you have pointed out, the agenda was one of merely imparting knowledge. Too many of us did not want to participate in discussions; I felt like it needed to be as expert as the teacher before commenting. I would definitely not be like that today but it has been a long time in the making for me to arrive at the point where I would question the authority of a seemingly knowledgeable person.
I agree that the advanced degree / worker productivity negative correlation claim is troublesome. RP makes a good point. Career training and qualification in Western Europe was in 1990 and remains in many fields today substantially more diversified than in the US, where surely by 1990 the Bachelor’s degree was for many if not most professions the only qualification. BA and general workforce productivity don’t correlate intuitively in economies in which labor perceives the BA as one of many possible forms of qualification.
I am reminded that in 1987 my credit rating tanked when I used a windfall to repay my student loan (5k) all at once. Looks like it has gotten worse – gotta let the man make his money.
“At least more students there probably get a modicum of training for the job market after 12 years of struggle and are therefor better prepared to contribute to the national outcome in a productive manner.”
What are you talking about? Are you saying American teenagers are so stupid they can’t contribute productively? You are seriously blaming young people for what is wrong with our country?
“Also, even though a diploma at the college level for so many graduates is not of much use to actually obtain a true education in this country-something more than half of the students already realize (I’m guessing)-it is a requirement on a resume for finding a decent paying job.”
Exactly. College has nothing to do with inherent value. It is a class system to keep the riffraff out of decent jobs.
” and fail to break a filibuster.”
It’s a little off-topic, but a continuing scandal most people don’t understand:
The Democrats LOVE the filibuster. They’ve now had 4, count them, chances to reform it by majority vote – at the beginning of each session when they were in control. Instead, they leave it in control. It serves as a fig-leaf on their plutocratic real agenda, in exactly the way Dayen describes here.
It may be even worse; it may be Harry Reid’s personal decision each time it happens. I’ve seen reports both ways and I’m not enough of a parliamentarian to know – I’m hoping someone here can clarify the rules. Basically, the filibuster, until very recently, was rare because it was very difficult and very visible. They had to literally keep talking – hence reading the phone book, etc. Required serious physical endurance, which Senators are short on, and was heavily reported, so they were held accountable.
Now they threaten to filibuster, Reid says “OK”, and it’s over. If, instead, he said “Make my day,” the old, difficult form would be restored and there goes the 60% majority. Does anyone know if there’s an actual rule change underlying it?
As it is, it’s a perfect example of the extreme level of collusion that is masked by all the partisan jim-jamming.
Thanks Yves and David for covering this. Like so much else that Obama does, this doesn’t really address the heart of the issue. It’s just window dressing to make it look like he’s doing something, or that he gives a sh*t. I have over 100k in student loans, about half of them private. My highest loan payments are for the private loans, which this doesn’t address AT ALL. Thanks for another completely inadequate “solution”, Obama Administration.
This country is being trafficked into various forms of slavery by the Obama Administration. Trade agreements underlie many of them.
The (WTO) General Agreement on Trade in Services – which has been in place since 1995- seems to ban any new public services – especially ones which would “unfairly compete” with any multinational corporations and their new “investor-state” special entitlements and rights-
That would apply to ban any kind of public nonprofit student loans just as it does with health insurance, and for similar reasons the media hushes it up, so the public just doesn’t know.
See GATS and Financial Deregulation by Patricia Arnold
Facing the Facts a Guide to the GATS Debate
GATS and Public Service Systems
Excellent. Another give away to the very rich with our tax dollars and we are suppose to be happy. I received countless emails from pseudo Dems asking to help back the bill. Note to Dem pols: no more money from me.