Student Loans are Just That . . . Loans. Defaulting is a Risky Proposition – Part II

In part one of this column I described how borrowers of student loans get into trouble and how collection agencies, on behalf of the federal government often make their lives miserable. But just how do the debt collectors go about it?

According to an excellent article by Andrew Martin (“Debt Collectors Cashing in on Student Loan Roundup”) in the September 9, 2012 New York Times, they often start with trolling the Internet for databases that contain information on respective debtors. When they find a suspect, they contact their prey. If a debtor refuses to cooperate, is employed, the agency will try to garnishee their wages. And the government is tenacious. It usually gives a collection agency just six months before transferring the case to another agency.

The article tells the story of Arthur Chaskin of Michigan, who borrowed $3,500 in the 1970s. By last January the debt, along with interest and penalties, had grown to 19 grand. When a government-contracted lawyer tracked him down, he garnisheed Chaskin’s brokerage account. A judge reduced the debt to $8,200, 25 percent of which went to the lawyer. The object lesson here is that student loan defaulters never know who is looking for them, when the hunters will strike, and how deep in doo-doo the debtors may find themselves. And, as a reminder, repayment may even come in the form of deductions from Social Security payments – not a pleasant prospect for those on fixed incomes.

Martin reports, “Government officials estimate that they still collect 76-82 cents on every dollar of loans made in fiscal 2013 that end up in default. That does not include collection costs that are billed to the borrowers and paid to the collection agencies.” A 2007 MIT study, however, estimates that Uncle Sam collects something closer to 50 percent of debt. The bad news for student debtors – but good news for taxpayers – is that the government, year to year, is growing ever more efficient at getting its money back – an 18 percent one-year improvement last fiscal year, totaling $12 billion.

Student debt demonstration, Washington, DC, April 4, 2012 – Photo – campusprogress.org

Many defaulters are in dire straits. They received schooling and then got caught in the quagmire known as the Great Recession, unable to find work. Some are ill. Some are in over their heads with all types of accumulated debt. But with little chance of shedding their government debt through bankruptcy, they find themselves between a rock and hard place.

And even in cases where a person is broke and either ill, disabled, or unemployed, it’s not easy to incentivize collection agencies to help those debtors get into a program that either allows gradual payment – say through gradual income-based repayment – or to forebear on collecting until the debtors are back on their feet. That’s because the collectors make more money by collecting than by merely preventing default.

The creditors and debt collectors frequently don’t tell the borrowers about programs to ease the repayment burden, or the requirements for qualifying are so daunting that they give up in frustration.

Even President Obama acknowledged, “Too few borrowers are aware of the options available to them to help manage their student loan debt,” in a June memo.

Good news for borrowers may be on the horizon. Congress and the Department of Education are considering regulations that would require debt collectors to offer student loan delinquents an affordable income repayment plan. And the department has promised to do a better job of publicizing such plans, starting with those who are still in school. As part of the proposals, monthly payments would be limited to 10 percent of discretionary income.

But, according to Andrew Martin, “Efforts to change the incentive [reimbursement] structure for guarantee agencies have stalled. And the Obama administration’s efforts to impose new regulations on profit-making colleges were initially watered down and then significantly weakened by a federal judge.”

So while some folks are so deeply in debt that foreclosure and/or bankruptcy are the only ways out from under crushing debt, it will be almost impossible for them to shake off their student loan obligations.

Unless Congress (you know, the government branch with a 9 percent voter approval rating), gets head out of it’s a_ _ _ _ _ e, many of those students who made some big mistakes a long time ago will suffer for a long time to come. Congratulations to those collection agencies that care more about money than humaneness.

 

Student Loans are Just that . . . Loans. Defaulting is a Risky Proposition – Part I

Millions of Americans are up to their wallets in debt for money they borrowed way back when and thought they’d get around to paying off . . . well . . . eventually. Good luck with that.

Almost 6 million people are at least a year behind in paying off their student loans for post-secondary education. And with new-graduate unemployment as high as it is, the prospects are getting worse. A September 9, 2012 article in the New York Times paints a pretty bleak picture. Sixteen percent of all those with outstanding balances—representing a whopping $76 billion—are in default. So what’s the upshot?

Many of the defaulters are being hunted down, not by the FBI or the local sheriff, but by collection agencies. This is ironic because in my last blog post I discussed the need to regulate collection agencies. Who should regulate them? The federal government (as well as the states). Who is hiring them? The federal government. So while the Consumer Financial Protection Bureau (CFPB) is taking steps to protect debtors from unsavory collection practices, the U.S. Department of Education (DOE) is hiring some of those same agencies the CFPB is trying to get in line. In the last fiscal year, the DOE paid $1.4 billion to collection agencies and other “bounty hunters” in order to recoup its losses.

Many years ago, there was a TV commercial for Chiffon margarine that ended with the catch phrase, “It’s not nice to fool Mother Nature.” Learning she had been fooled into thinking Chiffon was butter, Mom would summon up a thunderbolt. Substitute the U.S. government for Mother Nature and collection agencies for the thunderbolt, and you get a picture of what defaulters are up against. Unlike pitiful little banks and lame mortgage lenders, the fed can muster up some pretty loud thunderbolts of its own. The Times article tells the story of 29-year-old single mother Amanda Cordeiro of Florida, who is in the red on a student loan to the tune of 55 grand. She has had two tax refunds seized (private companies can’t do that) and has changed her phone number several times in the last year to avoid the harassing phone calls the CFPB is trying to put a stop to.

Other defaulters have had Social Security payments garnisheed. This makes life miserable for a lot of former students, especially those who have taken pricey courses at private for-profit schools, like University of Phoenix, ITT Technical Institute, Kaplan University and DeVry University. Many of these schools specialize in Internet coursework with disappointing completion rates for students and less-than-stellar job placement records. The educational institutes frequently coach students into taking out the loans, which are paid directly to the schools. Often, those who fail to find well-paying employment take it on the lam because they have no way to pay back the loans. Students who attended profit-making schools –about 11 percent of all students – account for nearly half of all defaults. Dropouts were nearly four times as likely to default as those who graduate.

While there are programs available to help desperate students pay off their loans over an extended period, with outstanding balance forgiveness at the end of that term, the companies that administer the loans for the government frequently fail to inform the borrowers of those programs. Mounting penalties and accumulating interest rates can lead to huge debt and ruined credit ratings, making life even more difficult when defaulters tries to take out a loan on a car or home, or when they apply for credit cards.

It is very difficult to wipe out government loans through bankruptcy, and they have no statute of limitations. The government has been able to recoup a whopping 80 percent of defaulted debt, about four times the rate of nongovernment lenders.

You may know the acronym ARM as standing for “adjustable rate mortgage.” ARM can also mean “accounts receivable management,” as debt collectors call themselves. The ARM industry is booming thanks to defaulted student loans. ARM companies seek government contracts because of their high rate of return.

When borrowers are delinquent paying for a year, the lender (Uncle Sam) declares them in default. If it cannot find the debtors, the government sics collection agencies on them.

 I leave you and those you care about with a checklist:

  •   Be very, very careful about taking courses from Internet post-secondary schools (see my column of July 17, 2012);
  •  Don’t take out a student loan unless you are damned sure you are going to finish your course of study;
  •  If you do apply for a student loan, get all the information up front about programs to help students who are having trouble paying off their loans;
  •  If you are already delinquent, go to the agency through whom you acquired the loan and ask for the information on extended payback programs;
  • And finally, if you are in debt up to your neck, don’t go making babies, or you’ll be asking for a heap of grief.

To be continued. “See” you in part 2.

Student debt, costly education, and lots of students – California may be creating yet another model for the nation

We recently learned that student debt in the United States has surpassed $1 trillion. What is a trillion anyway? Well, if you don’t know, it’s the same as a million people each owing a million dollars; or a billion people each owing a thousand bucks. In short, the people who owe this enormous sum are folks who attended an institution of “higher learning” (more on the quotes in a moment) and are now stuck with the bill.

How did this happen? In my other blog – which I co-author with the Consumer Gal (Cheryl Levinosn) we have discussed one major reason in our posts as well as in our book Enough of Us. If parents have kids and hope that their kids will one day go to college, they have to start planning for that eventuality. It makes our blood boil when parents of modest means don’t scrimp and save from the moment they become aware of the pregnancy. No smart phones, cable TV, or expensive gadgets. Forget the plans for upscale vacations or cars for the teens. That money belongs to the college-bound.

We live in the Bay Area; San Jose, to be exact. While the state is in terrible financial condition, it’s still a great place to live (ah, the weather!) But many educators, experts, and general Golden State residents worry about the future of California’s two great state university systems.

The education powers-that-be, including the governor and state legislature, are working desperately on higher education problems. The Cal Grant program helps low- and middle-income students pay for college. The state has formulated performance standards by which schools are eligible to receive funds that have been borrowed by students only if a quarter of students they graduate are able to pay off their loans in a reasonable amount of time.  This standard is an indicator that the schools are graduating young adults with usable skills that lead to jobs.

Unfortunately, not all so-called institutions of higher learning are what they purport to be. There is a spate of schools that promise advanced education and good jobs in fields where openings go begging. They advertise heavily on the Internet and TV. The problem is that they frequently draw their potential students from families that can’t afford to pay the tuition. Those students usually have to borrow from a variety of government sponsored sources. According to California Assemblymember Bob Wieckowski, about 90 percent of these schools’ funding come from Stafford Loans, Pell Grants, G.I. Bill Grants, and the state’s Cal Grants.

University of Phoenix Spokane Campus

California Assemblymember Bob Wieckowski

          The companies that run these schools netted $3.5 billion in 2009 and paid executive salaries of $41 million. Wall Street ain’t the only place where the governments get played for suckers. So while the execs rake in the bucks, most of the students gain few useful skills, have trouble – if any luck at all – finding relevant jobs, and are now burdened with heavy debt. As Wieckowski puts it, “We can’t continue to shovel taxpayer money into shareholder pockets, instead of adequately preparing students for their careers.”

          When Assemblyman Wieckowski introduced legislation this year requiring the schools to meet more stringent criteria in order to receive state grants,  the schools stepped up their lobbying efforts and managed to kill the bill in committee. The legislature never even got to vote on it. However, a coalition of reformers was able to make reforms in the budget process by cutting grants for high-priced schools, raised graduation-rate requirements, “and cracked down on schools with high loan default rates.”

In the meantime, both California State University and University of California systems, as well as the state’s community colleges, need more bucks. Perhaps with the reforms, there will be more state and federal financial benefits available.

This brings us back to the opening dilemma. Why aren’t parents providing for their kids’ higher education? If it’s because they can’t afford the costs, how can they afford the kids? This raises questions like:

  • Did they have more children than they could provide for?
  • Did they overspend on indulgences while the kids were growing up?
  • Would it be more realistic for their kids to attend junior colleges and after graduating look for higher education opportunities?
  • Should the kids work part time to help foot the bill while attending school?

And finally, when people who can afford to pay their share of taxes get significant tax deduction and a free K-12 scholarship for each kid, are we encouraging a system that is forever going to have trouble funding higher education. We go into this in some detail in Enough of Us. We need to consider whether or not we can afford to lower taxes for those families that will be asking the most help funding their children’s higher education.

Think about it and weigh in with your opinion.