By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
We’re well beyond the Presidential “Message: I care about the middle class” tour, but among his priorities at one whistle-stop was a plan for reining in the cost of higher education. The idea for a ratings system tied to federal funding and eligibility for student aid has been shredded both here and elsewhere, but another part of the plan was to bulk up the Income-Based Repayment (IBR) system. Under IBR, loan recipients have their monthly payment capped at between 10-15% (depending on the IBR program) of annual “discretionary” income, defined as above 150% of the poverty line for a fixed period (between 10-25 years, again depending on the program – public service or teaching professions reduce the years, for example), and at the end of that period, any outstanding principal balance is forgiven. Right now it’s open only to those who get into financial hardship; under Obama’s proposal it would extend to every student who takes out a loan. There’s bipartisan legislation that would expand IBR mostly along the Administration’s lines (from Tom Petri and Jared Polis).
This is a least-worst option as far as I’m concerned – using available tax benefits and other resources already employed to “make college affordable” and simply making college free would be at the top of the list – but it’s an improvement over a student loan system that currently works more like an indenture. With IBR, there’s at least a light at the end of the tunnel, it’s mildly progressive in that people with a higher ability to pay do pay more, and it generally reduces the risk of default, and all the attendant problems that go with that.
Perhaps because it’s a better deal for debtors, particularly struggling ones, it’s not being used very much. According to CFPB, only around 30% of those eligible for IBR are signing up. In many cases, the debtor doesn’t even know about the option; a National Consumer Law Center survey in May found that 65% of borrowers “do not recall receiving any contact prior to default.” As for the “pay as you earn” plan, the Obama Administration’s contribution to this (President Bush actually passed IBR in 2007), the numbers are pathetic – just 40,000 have signed up, out of 1.6 million potential eligibles. Rohit Chopra of CFPB said in a recent report that “If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided.”
Ah, there’s that word: “servicer.” Despite the fact that the government directly lends out about 85% of all student loans, they don’t directly service them. They hire for-profit companies to handle day-to-day operations, and they’re paid a sliver of the loan proceeds. (Does this sound familiar?) And though the government has laid out a payment option that would be more affordable for debtors in trouble, the servicers, who wouldn’t see the same profits under such programs, have not extended that information to their customers. (No, really, does this sound familiar?)
Shahien Nasiripour and Joy Resmovits have the story:
Sallie Mae, the nation’s largest servicer of federal student loans, is failing to enroll many of its distressed borrowers into one of the Obama administration’s main initiatives for alleviating high student debt.
Documents obtained by The Huffington Post and estimates provided by the White House separately suggest that Sallie Mae, or SLM Corp., has enrolled relatively few borrowers into the Income-Based Repayment program. Sallie Mae dominates the now-discontinued Federal Family Education Loan Program, owning between 37 and 40 percent of the outstanding FFELP debt held by the private sector. But its share of FFELP borrowers who are enrolled in IBR is about half that, or 15 to 18 percent […]
“It is concerning that Sallie Mae has such a disproportionately low number of borrowers utilizing the Income-Based Repayment program,” said Persis Yu, a staff attorney at the National Consumer Law Center. “Unfortunately, we do not have a lot of data about Sallie Mae or other servicers’ performance.”
In an emailed statement, Martha Holler, Sallie Mae spokeswoman, criticized HuffPost’s figures, arguing that the “conclusion is misguided.” But despite several requests for data that could alleviate the alleged error, the company refused to provide any additional information.
Gotta love the “you’re wrong but we won’t tell you exactly how wrong” statement from Sallie Mae.
Data on student loan servicers is incredibly thin, but my guess is that this industry is as corroded and diseased as mortgage servicing, striving to wring every last dollar from their customers, denying them aid for which they are eligible. With IBR, like with HAMP, we have a program designed to help borrowers which is administered entirely at the discretion of the servicers. And here we have servicers just not complying with the program. In the case of mortgages, servicers used HAMP as a predatory lending accessory; here it appears that students just aren’t being told about IBR, or they make it so confusing to sign up that people don’t bother. The financial incentives are likely the same – additional late fees, collection fees, et al for servicers and their collection departments if the borrower slides into default. In addition, Sallie Mae’s chief executive said in an earnings call in July that it was labor-intensive and cost-prohibitive to move a borrower into IBR. That directly parallels the reluctance among mortgage servicers to engage in the high-touch business of loan modifications.
In this case, for the most part you have the US government as the underlying loan holder, rather than far-flung investors. Sallie Mae still has some legacy loans from when the government didn’t directly lend; many of those have been securitized, so there are VERY similar circumstances as with HAMP. But by and large, the Department of Education is in a far better position to do something about this.
So far, they have announced that they would use Sallie Mae less as a servicer. But considering that students aren’t picking up IBR across the board, I’d be surprised if just Sallie Mae were the culprit. In addition, the President has promised to publicize IBR, something CFPB has taken on as well. In March, the President cut commissions for debt collectors and retained them for low income-based repayments, which theoretically ends the incentive to avoid informing borrowers about IBR. But Sallie Mae’s statistics show that hasn’t worked yet.
One thing the Administration hasn’t done is auto-enroll students in IBR when they fall into hardship (eventually, every borrower could be auto-enrolled; that’s a feature of the Petri-Polis plan). The National Consumer Law Center recommended this in May, saying that “automatic placement into IBR will allow borrowers to avoid the draconian costs of collection and extraordinary government collection powers.” Because the private collection army wouldn’t have to be paid, the net effect for government finances is probably a wash, and borrowers benefit from a manageable payment.
Combining income-based repayment with auto-enrollment gets us close to the “Pay It Forward”-type plan under study in Oregon. Again, there are better options out there, but this isn’t bad. But it’ll never happen as long as it gets routed through rapacious servicers. It’s another failure of privatization of public processes, harming those who need the most help.
Well, it turns out that I just looked on my loan servicer website tonight, and can report that the income-staged repayment plan was featured on the front page. This may not be the IBR exactly, but is the front end of it at least, where payments are tied to earnings.
As a doctoral student, my interest is way outside the relief given the undergrads; at nearly 9%, it is comparable to some credit cards. (There is a notion out there to use cc to pay student loans-which debt can at least be discharged in bankruptcy court).
To me the bigger question here is how these loan servicing companies get their contracts from the Dept of Ed?
Since my servicer is Great Lakes, the fact that it is in Wisconsin is a red flag, being in the heart of Koch country in the People’s Republic of Scott Walker!
If DD could hook up with another sleuth like Matt Taibbi and uncover the Larry Summers/Wall St-David Koch alliance, now would be the time to do it!
I’m actually consulting with a group that’s working on this right now.
Bravo, and thanks!
It’s worth mentioning the variance in tax treatment on IBR loan forgiveness between federal employees and private sector workers. In addition to the 10 vs 25 years, federal employees receive total loan forgiveness. If I’m not mistaken, private sector has to then treat the original principal as income and is retroactively taxed on it.
A hugely important post, if student debt is — as some think, but above my paygrade — the next bubble to pop. If the last time this happened banksters seized people’s homes fraudulently, one hesitates to imagine what they will do with student’s bodies. Indentured servitude? The stocks? Branding?
As Dayen says, education should be free. Of course, that would involve nuking a layer of parasitical rent collectors, so that will never happen.
Option A Lambert. It’s already in student debt contract law.
Nondischargeable debt = indentured servitude.
Your future productivity is their collateral, unless you:
*go expat permanently
*eschewing labor permanently as a bum
What i want to know though is if these student loans are being sliced and diced and “sold off” into securities like the mortgage loans whith no clear chain of ownership. I mean, it would be even more terrible to work until you are 50 at McDonalds to pay off your loans and then find out you paid off the wrong creditor, and have to start over.
also, if you become disabled such that you qualify for SSDI, they will forgive your loans supposedly.
so, take a vow of poverty (IBR), become an outcast (flee your gov’t), commit suicide, or have some physical or mental breakdown that makes you incapable of functional employment.
none of that sounds particularly appealing.
Just a guess, but I would imagine the game plan is as follows:
– Book a lot of loans as assets using unrealistically low risk assumptions and default rates
– Construct a web of derivatives based on said loans, preferably triggered on default events. Make sure the sum at risk exceeds the aggregate loan amount by at least an order of magnitude
– Continue blowing up the bubble until it bursts
– Insist that the government buy up all your loans at your marks; threaten systemic collapse leading to financial Armageddon if they don’t.
The same basic formula works for any asset class based on loans – you just have to be able to value them using assumptions about default rates based on historical data, and then scale up to the point where the assumptions no longer hold. You get a few years of outsized profits (and bonuses) due to systematic understatement of risk, then the taxpayer picks up the tab.
There is no plan for the long term. Lets be honest, our elected officials reflect the level of discourse among average Americans. If things were a bit better, we would celebrating mechanized divisions running around Syria now.
From the vantage point of the financial sector, these aren’t partnerships but publicly traded companies. The only thing that matters is the stock price when the important people want to collect. People who work there are possibly stuck as corporate work forces rapidly age from not hiring, and many of the people who couldn’t live with it left. They’ll grab what they can get and leave. Politicians who aren’t lucky enough to get jobs in the next next wave will whine about how “no one could have predicted.”
TBTF has reached a point where they will turn on each other when the host is dead. Wal-Mart is opening up clinics and banking services. Those are attacks against banking and healthcare cartels which are squeezing Wal-Mart’s customers to a breaking point. Neither side is going down without a fight. At some point, Wal-Mart-type companies will recognize the student debt issue and others are major problems. Sides will be drawn.
Nice post on an issue that more should be paying attention to.
As someone currently under the IBR plan, I thought I would add a few comments.
Generally speaking, unless you are in the higher income brackets, IBR should be strongly considered as an option as in most cases your payment under IBR will be significantly less than under the standard 10 or 25-year repayment plan.
Your anticipated AGI is key. Given most folks with large amounts of student loan debt aren’t likely to be homeowners and are thus not able to take advantage of the mortgage interest deduction (or even then the size of their mortgage interest payments each year is not big enough so as to merit itemizing), the only means available for most to reduce their AGI is via contributions to a tax deferred retirement account such as a 401k.
Think of it as a forced savings plan, with the catch that a lower disposable income for the foreseeable future – 10 or 25 years, depending on your planned course of action – is a conscious sacrifice one needs to make, along with household formation, marriage, kids and all that jazz.
With real interest rates basis the 10-year TIPS yield still only around 75 basis points, the net present value of that loan forgiveness can in fact be quite large depending on the person.
The CBO is projecting student loan revenue for Uncle Sam in the 10s of billions of dollars each year over the next 10 years, so more people should be taking advantage of IBR given the money for eventual forgiveness will “theoretically” be coming from this pool of money.
I’ve worked with a couple of different servicers over the last few years and have generally found them to be satisfactory, although I don’t have the means for comparison to mortgage servicers. Folks with federal student loan debt should also know that the Department of Education has an ombudsman group if you are having problems with your servicers.
Why are we reducing an entire generation to fiat currency debt serfdom? Makes no sense, and the economic implications will likely be significant.
You hve not seen the projection by the CBO using Fair Market Valuation
As a bankruptcy attorney, I’ve counseled many people to try to get onto the IBR program, but even as I do I feel a sense of futility, because they uniformly report back to me that when they asked their loan servicer about it (usually Sallie Mae, but not always), they were told there is no such thing. The loan servicers relish the power that collection of student loans give them. They love telling borrowers that there’s no way out.
As someone who defaulted on their student loans, I can testity how true this is. I was literally point-blank told by a loan representative that “We can collect more from you if you’re in default, why would we give you the option to get out of it?” (I finally managed to rehabilitate my loan, but that is something I had to find out and do completely on my own.)
repayment under IBR is only “cheaper” if you are banking on the ability to obtain loan forgiveness at the end of the period. the disclosure documents for my loan(s) state that you will end up paying thousands more by the end of the period than those who chose standard repayment.
the table they disclose shows that, the poorer and more in need you are of such programs, the more you end up paying. of course, this is natural as the extended time to repay drags the time you’re paying interest out longer.
this is not the actual table that they disclose, but has a table illustrating the point:
so, unless you really do NEED those lower monthly payments, you will be out of pocket even more over the long haul.
why do we have a system that forces those most financially vulnerable to pay more for almost every single thing they need?
and another which shows a clearer breakdown:
“why do we have a system that forces those most financially vulnerable to pay more for almost every single thing they need?”
That brings to mind the old Bob Hope quote: “Banks exist to lend money to people who can prove they don’t need it.”
As someone with both a large amount of federal and private loans (thanks, law school scam), I’d just like to point out that IBR sometimes does not work for those in my situation (depending on your income). I called me federal lender about IBR and was told that it would double my federal loan payments from $300 to $600 a month. As I am already paying $800/month for my private loans, I can’t afford to pay more than I already am on my federal loans. The lenders do not take into account what you might already be paying on private student loans, unfortunately.
Don’t expect major change in the student loan debacle until students (as in Canada) take to the streets en masse (peacefully).
And as a resident on a university town, I actually don’t expect to see this occur anytime soon. I believe that the “missing ingredient” is a dearth of working class students, who would be more likely to be distressed by their prospective debt loads.
Heck, year after year, the students I interact with are more and more affluent.
The rage for the past decade is for students to buy their own home or townhome (or, in some cases, their parents).
We have a property on short street with only seven homes. And two of the seven homes are student occupied and “student” owned.
One, directly across the street from our property, is owned by a 26-year-old undergraduate student (engineering) who not only bought it, but renovated it. And this young man owns another home (in his hometown), which he rents out.
He lives here for two semesters each year, and receives rent from his two roommates year ’round.
He is really not necessarily atypical, since we’ve met about ten or so other young folks who also are doing this.
What’s exceptional about him, is that he has lawn maintenance equipment that puts our professional lawn mower to shame, has a nice foreign care, a speed boat, a $3,000 bicycle (he says), a new motorcycle, and a very nice utility trailer. (The sort of amusing part about all the modes of transportation is that the neighborhood is 10 to 15 minutes away from the university campus, on foot.)
[BTW, he’s a “good kid,” and even sends us very responsible renters, LOL! Seriously, he is a very responsible young man, and it is not my intent at all to cast dispersions on him.]
But, it may be that this degree of affluence among college youth (not their parents, mind you) is the reason that there is little incentive for many college students to unite and protest for real loan relief.
Just an observation. It may be just a fluke that we run into so many relatively “comfortable” college kids–Dunno.
But I do believe that this circumstance probably makes it considerably more difficult for truly cash-strapped college students to “rally” enough of their fellow students to fight for (figuratively) college loan relief.
And after “the ACA,” I’m very leery of “half-measures.”
I would truly like to see a new federal program implemented that would make a heavily subsidized public (secondary)education available to ALL–effective immediately.
And finance this program with a VERY progressive tax.
I cannot tell you how great it was to read of this option. My household currently has a deferment, which of course comes with interest and massive penalties. However in January, we are scheduled to come up with over a 1,000 bucks a month to make up for the monies that were loanded and that are owed. Huge amount, now that five years of penatlties and what not have come about.
Should my spouse die, I owe nothing. But so far, he has been reluctnt to take that more final step ;-)
Sallie Mae never told us at all about any of this. I have no idea if we can swing this with them. The first time they called with information tht we ahd requested some eighteen months ago, the person on the phone was speaking in sime unintlelligle language, pigden English if ever there was such. How can a borrower discuss complexities that involve legalisms, and financial terms, if the person calling does not speak English? And perhaps never amde it ast the fifth grade? I actually called Sallie Mae headquarters then, but they simply shuffled me back over to Foreign Reps International, Inc or whomever it is that handles the business. This time I got someone who although they had a heavy accent, was rather well educated about the things I was asking. But no mention of this IBR sitution being a possibility.
What massive penalties do you speak of from ??? You do not say who you are with as a servicer. If you go into forbearance, you have a period of time in which to find a way in which to pay . . . such as finding a job. Forbearance does not equate to massive penalties. Please explain so I can direct you.
They wanted almost 10% of my gross income for IBR when I consolidated my loans (all federal grad plus). I had to make a decision a month after I graduated into a bad job market in 2008, so I chose the least monthly payment option at the time, which was 25 year amortization. Not that my nonprofit services can give me an amortization table.
Personally, I can’t complain. I knew the risk going in and the ROI is there, even though it hurts to write a check bigger than my mortgage.
What scares me is if I find it hard to manage this as a professional financial analyst, what chance does a newly minted undergrad have. Most 22 year olds don’t have great financial literacy skills.
We predicted this years ago. In fact, we wrote a letter (with Ralph Nader) to Secretary Duncan that predicted this, explained why this was likely to happen, and how to avoid it.
Yet, here we are. I take zero satisfaction with being able to say “I told you so”. This is just onme of the many systemic failures that we can expect from this lending system in the continued absence of bankruptcy protections.
The citizens need who have been working hard to get Congress turned around need serious help with this. At their current strength, they may as well be banging their
heads against the wall.
Lambert and David Dayen:
Alan Collinge is the founder of Student Loan Justice Organization of which I spoke about to both of you and Yves as well as others in private emails back and forth. I have also written about Alan Collinge and his crusade concerning Jason Richwine of the Heritage Foundation, Jason Delisle of The New America Foundation, and Douglas Elmendorf of the CBO all of which advocate Fair Market Valuation of student loans which skews the return od them from a positive to a negative return. The stance on using Fair Market Valuation by the CBO and Douglas Elmanedorf to evaluate the risk of Student Loans is nonsense and will in the end increase the cost of student loans to borrowers as it increases the risk on them unfairly using commercial data. This is contrary to what you are writing about David and is an inherent and hidden risk detrimentalto students and education.
Here is the person (Alan Collinge) leading the charge against student loans very much the same as Ocuupy Wall Street and Showdown in Chicago.
Great article by you. Any chance you can chat with Alan Colling of the Student Loan Organization just above this post. He can add reams of information to your thrust on the topic.