Posted on May
8, 2019 by Yves
Smith
The infamous HAMP program,
which the Administration revised so many times on the fly as to give
incompetent and mendacious mortgage servicers air cover for failing to modify
mortgages, at least had a stealth purpose. As Treasury Secretary Timothy
Geithner said to the SIGTARP’s Neil Barofsky, it was to foam the runway for
banks by spreading out foreclosures over time. But that still doesn’t excuse
servicers for their favorite gimmick for not bothering with HAMP applications,
which was to pretend they’d never received them.
But it’s not clear what the
thinking was behind the 2007 Student Loan Forgiveness Program, except to create
better eyewash. The ostensible goal was to give student debt relief for
borrowers who went into socially useful but not>well remunerated lines of
work. But not only were the eligible employers (note employers, not job types)
poorly specified as “public service” which includes some highly paid employees
at not-for-profits, other elements of the program were also drafted badly.
Throw in lousy servicers, revisions to an already confusing program, and
conservative sabotage into the mix, and you’ve created conditions where many
make what they think are the qualifying 120 payments, only to have their
application for forgiveness nixed. Only 1% of 73,000 applicants have gotten
relief.
Admittedly, 25% of the
rejections were due to “missing information,” which means some might eventually
be approved. But as of June 30 last year, 29,000 applications had been reviewed and only 1% were approved,
with 28% needing more information. You’d think by now that if a meaningful
percentage of the then 28% with gaps had had them filled, the proportion being
approved would be rising over time.
The broad outlines of the
abject failure of this scheme aren’t new but the Wall Street Journal provides a
useful overview and update. The program, launched in 2007, created a series of
conditions for eligibility. Per the Journal:
To qualify for forgiveness,
borrowers must work for a government entity or nonprofit, hold a certain type
of loan, enroll in one of several specific repayment plans and make 120 full
and on-time monthly payments, or 10 years’ worth. Falling short on almost any
of these requirements can mean disqualification.
The article describes a litany
of problems. First, only students who had Federal student loans qualified, not
ones with private Federally guaranteed loans. Servicers too often enrolled
borrowers into forgiveness programs for which they did not qualify or gave
incorrect payment amounts.
And even though the Trump
Administration has made its antipathy for the program evident by eliminating it
in its budget announced in March, it’s not as if the Obama Administration did
all that much to make it work. Again from the Journal:
At that point, with the first
borrowers not eligible for forgiveness for seven years, the Obama
administration put off specific steps that would have helped the program run
smoothly. Officials didn’t advertise the program or establish a platform to
guide borrowers through its requirements. They didn’t draw up clear guidance on
which employers should qualify as public-service organizations—now a subject of
litigation. A government investigation last year found that officials didn’t
even produce a guidebook for the servicing company they hired, Fed Loan, to
implement the program.
And measures designed to make
borrowers whole for program screw-ups that did them harm have wound up being
close to moribund:
[Public librarian] Ms.
[Bonnie] Svitavsky hit her first snag in 2013, when she submitted a form to
ensure her employer qualified her for loan forgiveness. It did, but that step
revealed another problem: For the prior 23 months, her servicer, like with so
many other borrowers, had her on a plan known as extended repayment, which
charges standard monthly payments over 25 years. Those payments were now all
ineligible toward her payment count.
The improper payment plan
issue raised particular concern in Washington, where members of Congress, led
by Sen. Elizabeth Warren (D., Mass.), in 2018 created a temporary fund of $700
million to reimburse borrowers who had mistakenly enrolled in ineligible
repayment plans but otherwise qualified. The program has so far granted loan
relief to 442 additional people.
If you generously assume an
average borrower put $10,000 into the extended repayment scheme, only $4
million of the $700 million set aside has been deployed.
Mind you, this isn’t even the
complete litany of things that can or have gone wrong with this program.
Readers have described how they were encourage to consolidate loans to help qualify
for the program…..only to find the new loan wasn’t eligible and had higher
interest charges.
It is distressing to see the
intensity of the hostility in the Wall Street Journal comments section to the
idea giving a break to borrowers. There’s no acknowledgment that students could
have had their employment prospects up ended by the crisis or been misled by
their university about how realistic it would be for them to earn enough to
repay their loans. A few readers did point out the escalating cost of higher
education was the real problem, but the “how could you be so stupid as to get
advanced degrees and then become a librarian?” viewpoint drown it out (never
mind that a Harvard College colleague said the degree she got later in library
science was the most useful education she’d ever gotten; she parlayed that into
a research job at Bain and later a position as head of white label research at
one of the major international equity firms).
I hope large scale debt
forgiveness doesn’t wind up falling into the Maine category of “You can’t get
there from here.” But the experience to date is not encouraging. The fact that
so many hurdles were set up to make sure that only very deserving candidates
could qualify illustrates how few better off individuals are willing to
consider that stagnant real incomes, rising housing, medical and education
costs, and high job instability means that most people go from paycheck to
paycheck and can’t build up a savings buffer. They are one mishap away from
needing to borrow to get by. If they aren’t lucky enough to be able to get the
funds from family or friends, the bank supplied sources range from pricey
(credit cards) to punitive (payday loans). And if you miss a payment due to a
second mishap, it’s well-nigh impossible to get off the treadmill of penalty
rates.
But as long as the well-off
can convince themselves that overburdened borrowers were irresponsible, as
opposed to unlucky, nothing much will change until pitchfork sales go way up.
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