The Massive Scam of Income Based Repayment

CNBCIn response to this article on CNBC today:

https://www.cnbc.com/2018/11/07/rehabilitation-gives-student-loan-borrowers-a-second-chance-at-a-cost.html

Let’s review a few of the important points of our main character, Scott:

1.) Scott graduated with $35,000 in total debt. OK! NOT BAD.

2.) Scott made payments for 10 years, but the balance went up to $55k. NOT GREAT, BOB.

3.) Scott couldn’t make payments for a while, then “rehabilitated” his loan. MAKES SENSE.

4.) Scott now pays $6,300 a year, the balance is going UP every month, owes $130k, and declared bankruptcy which will not help his loan situation at all. WTF!

This story highlights the massive scam of income based repayment. We’ve looked at this problem before:

https://graduatefree.com/2014/11/21/income-based-repayment-and-debt-forgiveness/

and

https://graduatefree.com/2015/09/16/is-the-public-service-loan-forgiveness-plan-a-good-idea/

In that last linked article I said:

These plans often have payments lower than the interest accruing, so the balance on your student loans can actually GO UP over time. This essentially makes you dependent on loan forgiveness as your only way out of debt.

This was one reason why these student loans reminded me of the “negative amortization loans” of the mortgage meltdown.

Even if Scott gets his loans forgiven, he will have paid many multiples of his original borrowed amount ($6k a year x 10 or 20 years, plus the payments he made for 10 years, plus the income tax hit). And again, there isn’t any way out. If you default, the government will withhold basic social safety nets designed for the poor.

This is the payday lending industry re-imagined.

This is indentured servitude.

Please be careful out there.

 

#TheAdultStudent

hands-girl-vintage-student.jpgOne thing we’ve noticed is that grad students are often bifurcated into students recently out of undergrad (in their early/mid 20’s) and second career students that are typically 15-20 years older. This is one reason the average age of a Denver Seminary student is 32 years old.

This segment of “Adult Students” is getting more attention then they have in the past, including an article in the Wall Street Journal, for a couple of reasons:

  • We’ve documented that older students are more vulnerable to high levels of student loan debt: Students over 31 years of age are significantly (almost 3x) more likely to borrow high levels of debt (over $50k)
  • It’s a larger pool then we thought: Some 41% of students enrolled in higher education are 25 or older.
  • 38% of these older students drop out in their first year. Students that borrow money then fail to earn their degree are among the biggest fatalities of the student loan programs.

Goldie Blumenstyk is a leading voice in this area. A couple of her resources to highlight:

Additional Layer of Risk

parents defualt rateI believe one of the most important ideas in understanding debt is what we call “Layers of Risk”. One layer that I have not taken the time to fully consider was brought to my attention in an article today. That layer of risk is student borrowers with children, and specifically single parents:

  • Nearly 50% of undergrad students borrowers defaulted
  • Of those, 70% were single parents
  • 10% of borrowers are single parents, but they represent 40% of all defaults

These stats also include additional factors and layers of risk. For example, as the article points out if you’re a parent of a child under 3, a person of color, or enrolled in a for-profit school your default rates are even higher.

Additionally, many of these defaulted loans are for students that were unable to complete their degree so they are stuck with a non-bankruptable debt and no degree with which to increase their earning potential.

Any system that disproportionately penalizes the most vulnerable needs to be reformed.

Election day and Worry

merleWorry is one of the most destructive emotions to winning with money. Jesus commanded “Don’t worry about your life.” The prayer for “this day’s bread” is a continuous reminder that regret of yesterday’s bread wasted and fear of tomorrow’s lack is worthless.

35 years ago Merle wrote this beautiful poem/song:

I wish a buck was still silver
It was back when the country was strong
Back before Elvis
Before the Vietnam war came along

Before The Beatles and ‘Yesterday’
When a man could still work, still would
The best of the free life behind us now
And are the good times really over for good?

Wish a Ford and a Chevy
Could still last ten years, like they should
Is the best of the free life behind us now?
Are the good times really over for good?

Are we rolling down hill
Like a snowball headed for Hell?
With no kind of chance
For the Flag or the Liberty Bell

People were worried and scared and afraid 3.5 years ago, 35 years ago, and 350 years ago.  Fear destroys Faith and Thanksgiving, both of which are overwhelming indicators of happiness. “Do not be anxious about anything.” Including money. Including elections.

DEBT AS SOCIAL JUSTICE

words on justice.jpg Articles like this make me angry when they use a college education as the “carrot on a stick” that makes student loans a good thing:

“Student loan debt is also an investment in your future. Simply put, you will be more employable and earn more with a college degree.”

I believe this is a straw man. The argument for or against a college degree is irrelevant to the structural problems that student debt brings. I believe that student loan debt is a social problem, a social justice problem even, because it is most egregiously harmful to very specific segments of our society.

  • 1 out of 3 student loan borrowers don’t graduate. This immediate invalidates the ‘college is worth the debt’ argument. If as many as a third of borrowers aren’t graduating, they are stuck with debt they can’t get out of and no increased earning potential. There is myriad of reasons they might not be graduating, including being poorly trained for college, health, financial, family instability, substance abuse (yo Madison!), and more. More on that here.
  • If I default, the government will withhold low-income benefits. Because the government is the debt collector, if I default on my student loan debt the government will withhold my tax returns (including Earned Income Tax Credit and Social Security benefits). These social safety nets aren’t a big deal if I’m wealthy, but it’s devastating if I’m poor. Between the socio-economic classes (rich and poor), who is more likely to default?
  • The highly indebted are borrowing even more. We’ve discussed before that there is a bifurcation of healthy borrowers and unhealthy borrowers. The healthy borrowers borrowing is remaining level, but the unhealthy borrowers are borrowing even more than before. Some estimates put these borrowers at around 17% of all borrowers. In my experience, this sounds about right. We know that if you are female, of color, or an older student you are significantly more likely to be a highly indebted borrower.
  • Borrowing to make an “Investment” is extremely dangerous. Quoting a 15% financial rate of return is just lying if it doesn’t take into account borrowers who don’t graduate and the higher interest rates and fees on defaulted student loans. If you can’t bankrupt out of a ‘bad investment’, it can cause decades of pain for defaulted borrowers. High returns don’t mitigate risk. This is why the lottery is a bad investment. A potential 15% ROI doesn’t offset the inherent risks of student loan borrowing.

So to summarize, “it’s okay to have student loan debt!” as long as you’re intelligent (with an aptitude for intellectual studies, healthy family structures, and safety nets that allow you to graduate), are not poor, and are not a woman or minority.

There are a variety of potential improvements that could be made on the legislative level (realistic hard cap on borrowing, lower interest rates, larger Pell grants, allowing bankruptcy), but these are out of our ability to change right now.

Instead, let’s focus on personal behaviors I can change RIGHT NOW to reduce my risk of being a statistic. These include borrowing as little as possible, fully understanding my current situation and risks, and building healthy personal financial habits.

Student Loans in the News

USA TodayAs I was traveling a couple weeks ago, I picked up the March 29th edition of USA TODAY. In the Money section Peter Dunn had written an article specifically addressing adult children still living with their parents. But what really caught my attention was the following paragraphs on student loans:

I’ve come to the conclusion that asking 18-year-olds to commit to tens of thousands of dollars of debt, without a job, income or assets, is among the stupidest thing modern society does. When you have no concept of money, what’s the difference between borrowing $20,000 or $50,000? You certainly know there’s a difference now, but you didn’t when you were 18.

Student loans can convince you that money doesn’t matter. Debts tend to do that. You get the benefit of the purchase without having paid for it. Obviously, this idea isn’t limited to student loans.

His line “You get the benefit of the purchase”  popped into my mind when I read this article today:

Forbes: The Scary Truth About Millennials and Student Loan Debt

The opening line of that article reiterates a similar idea – “out of sight, out of mind”. One of the most important things financial counselors like myself can do is bring people into an awareness of their current situation.

News Roundup

Round-up

Here are several stories I’ve collected over the past couple weeks. I just returned from a conference addressing the Economic Challenges Facing Future Ministers. I’ll be collecting my notes and sharing some key takeaways next week. In the mean time:

Clinton, Sanders miss the point on student debt:

U.S. Marshals Are Arresting People in Texas Who Have Outstanding Student Loans:

Ex-Students With ‘Income-Based’ Loan Payments Face Crushing Tax Bill:

…..and just for fun:

A Simple Rule That Can Make Life More Fun:

 

 

Roundup

Round-up

Debt Can Limit Your Ministry

http://www.desiringgod.org/articles/minimize-student-debt-maximize-christian-service

 

If You’re Into Rants (and I am), This is an Instant Classic:

https://www.facebook.com/daveramsey/videos/10153385625285886/

 

How Today’s Clergy Are Putting Their Faith in Management Training:

http://insight.kellogg.northwestern.edu/article/how-todays-clergy-are-putting-their-faith-in-management-training

 

The Gender Pay Gap Among Clergy is Worse Than the National Average:

http://tobingrant.religionnews.com/2016/01/12/gender-pay-gap-among-clergy-worse-than-national-average-a-first-look-at-the-new-national-data/

 

The Racial Wealth Gap:  Why A Typical White Household has 16 Times the Wealth of A Black One:

http://www.forbes.com/sites/laurashin/2015/03/26/the-racial-wealth-gap-why-a-typical-white-household-has-16-times-the-wealth-of-a-black-one/#2715e4857a0b3c072abb6c5b

 

Change is Hard:

http://ssir.org/articles/entry/leading_change_through_adaptive_design

 

Does Technology Reduce the Cost of Teaching? (HT @goldiestandard)

https://twitter.com/BryanAlexander/status/692004362382479360