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.

 

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.

Student Loan Reform in Future?

forbesAn article passed along to me this week with a lead that caught my attention:

A growing number of student loan borrowers — nearly one in three — aren’t making headway in paying down their loans five years after leaving school.

A couple of brief observations:

1.) 2/3 Borrowers with more then $50k in debt aren’t paying down their balances. It’s ‘compound interest’ in reverse – if you owe a lot, the minimum payments just barely – or in some cases don’t – cover the accruing interest. I noted this has a striking similarity to Negative Amortization Mortgages that contributed to the financial meltdown a decade ago.

2.) One of my major concerns two years ago was that the government could change it’s rules anytime on loan forgiveness. This article mentions several proposals that are on the table to do just that including eliminating the Public Service Loan Forgiveness plan altogether. It’s one of the main reasons I don’t think using any version of the loan forgiveness plan should ever be your primary payoff strategy.

3.) We’ve noted before about how the government makes over $50 Billion in profit from the student loan program each year. That enormous cash cow for those in power is the primary reason I don’t predict significant student loan reform for the benefit of the borrowers. In fact, this article says the proposed reforms will earn the government an additional $104 Billion over the next ten years. Incredible.

4.) If the government was actually serious about reform for the benefit of the American citizen, there are a number of options. For example they could put a hard cap on total student borrowing at the median household income ($55,775 in 2017), limit borrowing to the cost of tuition, or financially involve the educational institutions.

My 600lb Life – 8 financial observations

600lb-lifeMy wife and I fell into a rabbit hole mini-binge watch of TLC’s “My 600lb Life”. Besides being very motivating, the show is a fantastic look into human behavior. It isn’t a coincidence that many financial teachers have used weight loss as a picture of getting our personal finances under control.

As I watched these episodes, I noted a couple observations:

  1. Real change takes two years

The show follows a subject’s story over an extended period of time, generally about 2 years. It’s obviously not easy to lose 300-400lbs, but it’s easy to forget that a huge change can take a long time. For people in large amounts of debt, I’ve also noticed it takes about 2 years to get out of a massive financial hole. This could be discouraging – but I choose to think of it as encouraging. No matter how big your problem, there is a decent chance that two years from now you could have a completely different life.

  1. Surgery doesn’t fix it

The people on the show are there because they’re seeking to get a lap band surgery to help them lose weight. It’s interesting that the doctor doesn’t let them get the surgery unless they lose a significant amount of weight first. He understands that surgery isn’t the solution – the patient has to be willing to change first. The first step is always a change of the heart and mind. It’s helpful to remember that there isn’t any financial fix (more money, better job, lower interest rate, rich uncle) that will ‘fix’ your life. Instead…..

  1. It always starts with a choice

Any big life change will always be initiated by being ‘sick and tired of being sick and tired’. It’s being ‘mad as hell and not going to take it anymore’.

  1. Caused by trauma

It’s heartbreaking to hear the back story of the people on this show. Nearly all of them can trace their physical problems back to a major trauma – often being abused (physically, sexually) in some fashion. It seems obvious to this amateur physiologist that there is a direct connection between an event that caused the victim to hate their body and the ensuing weight gain. Finances aren’t always like this, but often we can trace our attitudes and behaviors back to the way we were raised to understand money. Often students I counsel will start our conversation with some version of “My parents weren’t very good with money”.

  1. A million small choices

Nobody gains 400lbs in a day, week, month, or year. Similarly, most of us got into debt over a period of time through a lot of small choices.

  1. This will change your life

Losing 400lbs over 2 years will change your life. The show’s participants are always so grateful to have made the journey. Nobody loses that much weight and says “You know, my life is pretty much the same just with smaller jeans.” When I’ve felt the crushing burden of too much debt, it expands into my mental and spiritual spaces. I’ve found myself thinking about money throughout the day, or trying not to think about it and feeling guilty about ignoring my problems. Getting out of debt will change your life. Once you’re out of debt, your life won’t be “pretty much the same just without any payments”. No, I think you’ll find it affects lots of decisions and emotions that you never considered.

  1. Takes a team

The story of the show isn’t just the main character, it’s always the supporting cast.  There is usually a massive enabler or two that helped the protagonist get to their current state. Once they are ready to change, a team of doctors, nurses, personal trainers, nutritionist, friends, and family all come along side the person and help them toward their goal. Finances are similar – if you can build a team of encouragers around you it is wildly helpful. Here’s some more info on working toward a goal with a team.

  1. A persistent spark of Hope

When things are dark, we need to remember that it will be worth it. In “The Pilgrims Progress”, Christian is helped in his darkest times by his companion Hopeful. When we’re ready to quit, what we really need is Hope. Hope that all the sacrifice will ultimately be worth it. Watching the TV show I’m reminded what Paul taught:

“We also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.”

How to Reset your Life

redditThis reddit thread came to my attention yesterday and it is fascinating. If you scan through the original post there are some good comments. In my judgement from reading, research, and exemplified by one person’s experiences on this thread, here is my formula for resetting your financial life:

  • Cut expenses to nothing

Dave Ramsey has said he can tell by the tone of callers voices if they are ready to change. It’s the “sick and tired of being sick and tired”. He calls it “Selling so much stuff the dog thinks its next”. Like the reddit poster, I need to be willing to cut cable, internet, eating out, Netflix, move residences, and anything else that is preventing me from paying off debt and building an emergency fund.

  • Create a plan for more income

There seems to be some direct connection between getting dramatically serious about cutting expenses and creating an income plan. Perhaps not having any entertainment options creates space in my life for more work and time to think about my work. How am I going to create more income? When I take the time to focus my will, my brain starts finding solutions to the problem. Praying is also deeply powerful. Prayer aligns my will with Gods. The Bible says we were “created in Christ Jesus to do good works, which God prepared in advance for us to do.” The Psalmist says God’s direct favor can be seen by “establishing the work of our hands”.  Pray that God would reveal opportunities for us to “work as unto the Lord”. In my experience the most common way these opportunities are revealed is by working on what is available to me right now. “All hard work brings a profit, but mere talk leads only to poverty.”

That’s the formula. It may be simple but it isn’t easy. I have a note in my office from Tony Robbins. If you want to change your life:

  • Decide what you want
  • Take MASSIVE action
  • Review results & make course corrections
  • Repeat steps 2 & 3

Two Causes of Poverty

powell-poverty-quoteWhat causes poverty? Thinking about this question can teach us a lot about how to create personal economic mobility. Those are big words for get out of debt, build an emergency fund, save for retirement, and create stability for our children.

In my post-election reading, I came across this long interview (actually made and posted before the election).  The author makes a case that endemic poverty is caused by two main factors:

  • Social Structures That Harm. These are cultural forces that are weighted against the poor and against upward mobility. These aren’t unique to our society, the author of Proverbs 22 points out as a matter of fact that the “The poor are always ruled over by the rich.” In the past I have used the term “Risks” to bring personal awareness to some of these structures. Examples of these cultural forces include redlining neighborhoods, the town factory closing, poor educational systems, payday lenders, having bad parents, and corrupt governments. You might call these “Things that happen to you.”
  • Personal Choices. The interviewee calls this “helping people make better moral choices.” This is the personal responsibility that is required to change your life. Proverbs also address this in a number of says such as “Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows over time.” Examples of “Things you do to yourself” include substance abuse, not living on a budget, spending on wants vs needs, not deferring gratification, a poor work ethic, and having a negative attitude.

Here are two personal questions to ponder:

Do my thoughts and beliefs lean one way or the other?

One of the points the interview makes is that Liberal leaning folks tend to over-emphasize the social structures and those that bend Conservative tend to over-emphasize the personal responsibility.* This makes me think that you and I probably overemphasize one side or the other in our thinking and beliefs:

Do I think poor people are lazy? Do I believe it’s impossible to get out of debt in today’s society? Do I tell people that there aren’t any good jobs out there? Do I complain about my lack of money while wearing these sick new Jordans? Do I define my employability by the time I was laid off? Do I believe that employer really isn’t looking for someone of my age, sex, or color?

The biases and beliefs I carry will dramatically affect my ability to change my story.

Where is my personal greatest return on investment?

If you are called to change the social structures, I encourage you to go for it. I believe these are evil institutions of oppression and that Jesus was directly addressing these when he said the Kingdom of Heaven is advancing and the “Gates of Hell” won’t prevent good from eventually breaking these down.

However, practically for us today complaining and worrying about these cultural forces isn’t helpful. To personally change, we need to First recognize the cultural forces so I can artfully navigate around those to the best of my ability and Second accept the moral responsibility for that which God has entrusted me, managing my life.

———————————–

*Footnote:  An interesting side note on this I heard this week. The fundamental difference between a liberal and conservative world view is the condition of mankind. A liberal worldview leans humanist, meaning that given the right circumstances humans will move toward goodness. A conservative worldview lends itself toward humans in their nature doing the wrong things.

As I understand it, the Biblical worldview is more centric, that humans are created good and to do good (“In the image of God”) but that because we are infected with the virus of sin we will inevitably do what we don’t want to do (Romans 7:15-20).

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.

Elections and Change

networkUPDATE: Read this as a complement to to this post.

 

Shortly after the 2002 elections, I remember being optimistic that we might see some real change on several conservative key issues. Republicans had just won several swing seats and took a majority in the Senate. They already owned a majority in the House and had a very conservative George W. Bush in the presidency for the next 6 years.

Near the end of 2007 I distinctly remember President Obama’s acceptance speech in Grant Park where he famously proclaimed his administration’s CHANGE with the affirmation “Yes we can”. It was a great speech. Democrats controlled the House and Senate for the next four years.

I remember telling my wife on that night 8 years ago that there were a lot people putting their hope in this man to make their lives better. It’s a hope that no human being can fulfill.

At the risk of sounding like a self-help guru, “If it’s to be it’s up to me.”

The night of November 8th there will be a lot of disappointed people and worse there will be a lot of happy people that think they accomplished something.

I’m reading “Getting Things Done” and came across this about making a change and getting something accomplished:

 …anything personal or professional, big or little, of urgent or minor importance, that you think ought to be different than it currently is and that you have any level of internal commitment to changing.

 There it is. The key to my success and happiness and meeting my goals (financial and otherwise) is summoning the burst of energy needed to make a decision about what needs to change (getting sick and tired) and making an Internal Commitment to Changing (mad as hell and not going to take it anymore).

It sure isn’t in this election.

Changing Cultures

American Fish65 years ago, in post World War II America, there were major social and economic power structures that provided an easy path into occupational ministry. The vast majority of citizens attended a faith based service at a church founded by a national denomination. If you felt called into occupational ministry, you could pick one of those national denominations and follow a clearly defined path to ordination. After ordination, you could rely on that denomination calling you into an entry job and a clearly defined occupational path.

This was extraordinarily effectively. It’s hard to over emphasize the influence of “Methodism” to all aspects of American culture. American’s LOVE the concept of applying a ‘method’ to everything from making Ford Model A’s to making the next generation of pastors.

There was an obvious backlash to this version of cultural Christianity. That led to the Jesus Movement of the 70s which directly led into Calvary Chapels and Vineyards. I had a church planter from the 70s tell me that all you had to do was plant a ‘cool’ church and they would fill right up. I believe these churches really connected culturally with the counter culture movement of the late 60’s and 70’s. Instead of a priest or pastor in robes with a pipe organ, you had pastors in jeans and rock and roll worship.

That movement is (or has) waned. We are in the middle of another major religious cultural shift. Into what I don’t know, but you can’t just plant a ‘cool’ church and you haven’t been able to for a decade or two. (For what it’s worth, I think we’re moving back toward a version of “liturgy” and the grounding nature of old church traditions. I think the unmoored feeling of modern culture is driving us back toward practicing faith in a manner our forefathers did. For example, we are seeing a rise in young Episcopal’s and evangelical Catholics.)

The point of this is that there were two major cultural trends that have lost some footing:

  • If you go to college, you’ll have a job for the rest of your life. This idea goes back to the 1950s and factory mentality. A college degree isn’t a guaranteed job. A job isn’t a guaranteed career. And a career isn’t a guaranteed pension in retirement.
  • There will be a clearly defined occupational ministry career path. Either from your denomination, or local congregation, or society.

I don’t think this is a reason to panic. In fact, I’m excited. I think this is a wildly transformational time in our culture and power structures (religious and otherwise). I strongly believe in the value of a solid Theological Education, and I don’t think a changing society or job market undervalue that at all.

But the reason I write this blog is that the changing times require greater FINANCIAL prudence in navigating the path to occupational ministry. You cannot follow the path of our parents and grandparents. I believe it is also very difficult to go into ministry following the cultural norm of the day – accumulating large amounts of student loan debt.

Instead, to Graduate Free we are going to have to take the path less traveled. The path of minimalist living, working our way through school, fundraising, Ministry Residency’s, and being shrewd shoppers.

I am here to walk with you. It is a journey worth making, and you can do it!