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:

Finance Basics

Datapoints logoThe basics of personal finance are pretty straightforward, but it’s easy for us to think that because we’re in a specific season of life, like graduate school, they don’t all apply. Here is a basic list of finance fundamentals as discovered through extensive research for books like The Millionaire Next Door:

datapoints snap.png

Those are pretty basic fundamentals – the only one I would quibble with is following financial markets, which many experts say is a waste of time. The reality is that following the market is probably an indicator of overall financial diligence. It’s correlation not causation.

It is easy to think that while we’re in a very tight season of life, as grad school is, that basics like spending less then we earn and savings aren’t possible.

While I would be the first to agree that it is very difficult, I would set it as a practice to live on a budget (spend what you earn) and save, even if it is a very small (almost token) amount. The point is that these practices will carry over into our future when our financial picture changes.

I’m continually challenged that to be “faithful with the little things” isn’t primarily a promise of future blessing, it is a promise that I will be changed. I continually screw it up, but let’s try again today.

Little things make big things happen.” – John Wooden

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.

Conversation with Josh Collier

josh-cI got to know Josh last year when we were stuck at the Pittsburgh airport together. He was kind enough to buy me lunch and I can confirm he pays with cash! He is a graduate of Denver Seminary currently working with Dave Ramsey’s organization teaching financial principles. He is uniquely understanding to the real life financial stress of being a graduate student.

 What years were you at Denver Seminary, what was your focus, and what are you doing now?

My family and I were at Denver Seminary beginning in August of 2007 and graduated in May of 2012. Yes, we were able to cram a two-year degree into five years. As any economist can tell you- this was a booming time in our national economy 🙂 A little backstory, my wife (Christina) and I started with one child and, before moving off-campus in 2013 for a job back in the South, when I graduated we had four children under the age of six. So we went through seminary at a slower pace – at the speed of cash.

I initially was accepted into the counseling program, but at the last minute, I changed to a MA in Leadership and studied leadership with a self-designed emphasis on community development.

Now, I am part of a team of stewardship/church advisors at Ramsey Solutions or better known as Dave Ramsey’s office in Brentwood, TN. Together we serve pastors, church leaders, community developers, and seminarians as they are building and/or remodeling their financial discipleship ministries in their churches/communities.

Draw a connection between personal finances and your ministry training. Why are you doing what you do now?

Personal finances played a large part in “How?” we went through seminary. We went through seminary as we could afford (at the speed of cash) and did not take out any student loans, or any loans for that matter pre/post seminary for living expenses before, during or after seminary… nor did we have to take out any loans for relocation expenses post seminary. Which meant I took classes part-time (a lot of night classes) and worked full-time down in Colorado Springs. We lived on campus in Littleton so that we could literally have a built-in community for my family through our seminary years. During my seminary years I truly embraced a concept that Dr. Larry Lindquist noted at my new student orientation, “Learn from, embrace and take note of the time and experiences spent outside of the class and library as much as the time inside the class and library.” In other words, pay attention and be aware of the experiences and interactions that God orchestrates during your seminary years both inside and outside the structured learning environment.

A big part of “Why?” I am doing what I am doing now is because of our experience of going through seminary debt free without loans and how God surprised and transformed my family and I with His lavish provision which came in many forms- literal hard work, redemptive financial gifts from churches back home, anonymous envelopes of cash on our doorstep, care packages from friends and families, support from our neighbors and peers on and off campus, and lavish support from ministries in the Denver metro area (e.g. Manna ministries, bread drop and food closet at Denver Seminary, odd jobs for my mentors, and support/encouragement from Colorado Community Church, etc.). Through this transformational process known as the “seminary years” we were able to graduate seminary debt free and go when God said, “Go” via a job opening at Ramsey Solutions.

Now at Ramsey Solutions, I have the opportunity and privilege to minster and walk with men and women who are leaders in their community and looking for ways to equip families, marrieds and singles who are struggling or in need of a tune up financially. It still surprises me each day how finances are many times a gateway to how someone is really doing. Billy Graham was spot on when he said, “Give me five minutes with a person’s checkbook (or online bank account these days), and I will tell you where their heart is.”

In your personal story, what did you have to do to graduate without a big debt burden?

Decide that going into debt and taking out loans was not an option from the beginning. Again, it is important to note that my personal story turned into a family and community story. When my family and I graduated from seminary it was a team success. Yes, I had to do literally whatever it took to graduate debt free, which many times required me working and traveling a whopping 70-80+ hours for a five-year period… but God was so lavish in His provision of not only work but wages, health, a steady stream of prayers and encouragement from friends and families across the country.

What do you think are the biggest FINANCIAL challenges facing future ministers?

Pride, pride and… pride. Be open and ask for help. We all need help, so put your pride aside, humble yourself and let others know how they can help you- the sooner the better. The world does not need perfect leaders, but humble leaders who can ask, be filled and receive help from God and through His means. My mentor Pastor Brad Strait said it best, when personally I hit a VERY low point midway through seminary, “Joshua, allow others to minister to you. One day, I know this may not be encouraging right now…,” he laughed and continued, “… you will be on the other side of the equation and serving others. So do not forget the struggles, thoughts and challenges you are experiencing right now and use them to better serve others.”

If you could give one piece of advice to a student just starting seminary now, what would that be?

“Slow down and go outside.”  A smile comes to my face as I reflect on my seminary years and the wisdom that was poured into me from one man in particular- the late Dr. Vernon Grounds. I can think of at least three different encounters in the Denver Seminary library in which he would stop by my desk and say, “Son, what’s the rush? Go outside… its beautiful out there. Don’t spend all your time cramped up in this library!”

Or said another way, don’t believe the myth that the pace of the seminary years will slow down once you graduate. I would argue that the pace only increases after you leave, and you need to be intentional NOW about building in times “outside” with friends, families and enemies for that matter… before, during and after your seminary years.

 How is it even possible to go to graduate school without going into debt?

First of all, going to graduate school is a want not a need and is a choice. I literally made a deal with God before going to seminary. I told him, “God, if this is your idea, you are going to have to provide and show me how to make this work financially each semester.” Remember, with God all things are possible, and  this may require one to rethink his or her current way of going through seminary and to evaluate their previous, present and future standard of living. We made a ton of small changes and pivots to live more intentionally and frugally. For example, prior to attending seminary and as a family of three, my wife, daughter and I lived in a 240 sq. ft. apartment. We also worked two jobs and saved up an entire full year before moving out West to begin seminary. Once in school, we took full advantage of bread drops for seminarians, became a one car family, very very rarely ate out, had family style meals with neighbors, refrained from getting a TV and our entertainment was enjoying the great outdoors. Chances are, if your story is like ours it will also require more than just the work of one’s two hands and will involve a community of support, gifts, pep talks from mentors, days of repentance and journaling, telling others “Sorry, I was wrong!”, forgiveness, letters of encouragement and prayers to get you through as well.

Remember, I wish someone would have told us this: It costs money to move to that new job after you graduate. So start saving for moving expenses if your next job requires you to move across the country.

 What word of advice do you have for someone that isn’t good at budgets? How do I start doing a regular budget?

Join the club! Like the Apostle Paul, when it comes to doing a budget, “I am the chief of sinners!” Kind of joking, kind of not, but seriously- it takes practice. My wife Christina and I, when we were first married took 3 months to just get started doing a budget (this is what happens when your marriage consists of two oldest children who are recovering perfectionists). We attended financial seminars, read budgeting books, used online forms and sought out advice from those that we wanted to mimic financially as we grew up together; however, it was not until we went through a Financial Peace University class (that was hosted by our Senior Pastor at our home church in South Carolina) that we actually did and lived on a budget on a consistent regular monthly basis. Are we perfect now, “No!” Some months we do not start until the month is almost halfway over, but we now build grace into our budgeting lives, remind ourselves to push pause, start where you are and face the reality of where you are in the month and what remains.

Make doing a budget simple. I have heard it said that budgeting is like a marathon. As a runner, this is ridiculous –  a marathon only lasts 26.2 miles and is one day. Budgeting is more like an Ultra Race that lasts your entire life! All kidding aside, find a basic budgeting spreadsheet or plan that works for you and your family and KEEP IT SIMPLE.  With time you can add more depth, but first you will need to pace yourself for the many miles of budgeting yet to go. If you really want to make a budget stick and see lasting results, ask for help from a budgeting coach. This needs to be someone who has a track record of helping others, the heart of a teacher AND can help keep you accountable, no matter how much you whine or try to make up an air tight, theological excuse of, “Why?” your situation is different especially as a seminary student (pointing a finger at myself here). As Dave Ramsey is fond of saying about a young, novice baker who is frustrated that his vanilla cake keeps turning out chocolate, “If you are not happy with the results you are getting, change the recipe.”

You can touch base with Josh at joshuathecollier@gmail.com. If your church would like to host a Financial Peace University class, he would also be a good contact for you. Thanks for reading! Sorry for any abuses of the king’s English – this is a transcript of a recorded conversation.

Emotional reaction to financial risk

Recently while driving I glanced back in the rear-view mirror to see the familiar sight of a police car merging behind me in traffic. Police rearviewEven though I was pretty sure I was breaking the speed limit by the socially acceptable amount, my heart still raced.

Why does that happen? Why does our “fight or flight” kick in at the prospect of a very affordable traffic ticket?

The bigger question: Why doesn’t our heart race the same way when faced with a financial risk over 100x greater – taking out a car loan or $40k in student loan debt?

The short answer is that we are very poorly designed to properly calculate risk.

Research Findings

graph graphicOne of the ATS partner divinity schools did a comprehensive survey to learn more about the financial realities of their students. Here are some of their findings:

  • Length of time to degree completion does not appear to significantly affect debt levels (though we had a very small sample on this question).
  • Students over 31 years of age were significantly (almost 3x) more likely to borrow high levels of debt (over $50k).
  • Underrepresented minorities (Hispanics, Black or African American, American Indian or Alaskan Native, Native Hawaiian or other Pacific Islander, or those with two or more races) were significantly more likely to report high levels of debt ($50k or more).
  • Married/Partnered students were significantly more likely to report no debt when compared to students who are single, separated, or divorced.
  • Students with dependents were more likely to report high levels of debt (over $50k) compared to their peers with zero dependents.
  • Whether a student owns or rents their residence did not have a significant effect on debt levels.
  • Students who lived with roommates and shared expenses were significantly less likely to report high levels of debt (over $50k) when compared to students who live alone.
  • Respondents with high levels of debt (over $50k) indicated they expect a higher salary than their low debt peers.
  • Over 50% of respondents indicate they have zero consumer debt, and the vast majority (83%) of those with consumer debt indicate that the debt is under $20,000.
  • 44% of respondents plan to be bi-vocational following graduation.
  • 76% agree or strongly agree that they will be able to repay their debt.
  • 65.6% indicate that their level of debt is acceptable or very acceptable.
  • 77% of respondents plan to use a standard loan repayment plan, 42% plan to use PAYE or income based repayment plans, and 8% either have no plan for repayment or do not plan to repay.
  • Students with high debt (over $50k) are significantly less likely than their lower-debt peers to indicate that their level of debt is acceptable when considering the quality of the graduate education received.

I think it raises interesting questions about segments of the populace who are financially vulnerable.

Five Things I Did Right

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My undergrad experience was riddled with moronic behavior. I fact, I left a real Sherman’s March of damage to my spirit, relationships and brain cells. But I was fortunate, by very little providence of my own, to graduate with a manageable amount of student loan debt.

My heart breaks for students graduating with tremendous debt loads because I know the struggle that lies in their future. While I haven’t done everything right, there were five specific things I did that made my post graduate life far easier than if I had graduated with the large amounts of debt common to students today.

First, I went to a Community College for a year before transferring to a traditional liberal arts college. Many people go to a Community College for two years, then transfer – I think that’s great. With the low costs of Community College and the financial aid (not loans) available based on income, many local Community Colleges are, or nearly, free to attend. Because I took very generic prerequisite type classes at the Community College, those credits all transferred, and I was able to take more major specific classes at my liberal arts college.

In his book “Debt Free U”, author Zac Bissonnette recommends this route as a way to cash flow the entire college experience. Two years of Community College gives additional time to shop for a College to transfer into, time to refine your choice of major, time to work and save, and essentially reduce the cost of attending a state university by half.

Second, I chose a school based on cost. I applied to a handful of schools, and ultimately chose one that offered a very good package of grants and scholarships. It wasn’t the cheapest school based on advertised price, but it was one of the most affordable after I had met with the school and received their financial package offer. The idea that you have to go to a particular school because of a specific major they offer, or a geographical constraint, or their football team is just stupid if it’s going to double the cost.

Third, I graduated on time. For me that was one year at the Community College, and three years at the liberal arts college. The costs of education, not just in tuition but in time, are very high. An extra year or two in school when you could be making 30-50k a year is a luxury most of us can’t afford. Graduating with a degree is far more important than graduating with a particular major. Even if you decide to change trajectories midway through your education, it’s often easier to graduate, get a job, then take additional classes in the new bend. There is no such thing as a ‘perfect’ major for most – some estimates have the average employee changing fields about 7 times in their career.

Fourth, I strongly recommend working through school. I did the work-study program while classes were in session, and I worked a variety of full time jobs over the summers. I worked second shift in a radiator factory, I worked in commission sales in the electronics department of a department store, and I worked in the marketing department of a pool table manufacturer. Studies show students earn better grades if they work while in school, and in my experience this is true.

Lastly, once I graduated my wife and I made paying off our student loans a high priority. I’m not sure I can take a lot of credit for this. I was raised assuming that paying off your debt as fast as possible was the smart way to go. One of my financial principles is capturing your ‘unexpected lumps’ of money – not just letting those monies slip through your finances. Because we had predetermined that being debt free was a priority, my wife and I were able to take the majority of the money from our wedding, our first few tax returns, and a work bonus and put a big dent in our student loans. Because this was ‘unexpected’ money, not spending it didn’t affect our lifestyle at all. Now a decade after paying off those loans, being debt free has had a tremendous effect on our life.

This is an incomplete list – more of a personal reflection on a couple of things I did that correlate with what financial experts are teaching. It worked for me, and I would encourage others to follow my example –perhaps on these five things as opposed to my model of brain cell management.