by Matt
Taibbi
[...]
A 2005 Wall
Street Journal story by John Hechinger showed that the Department of
Education was projecting it would actually make money on students who defaulted
on loans, and would collect on average 100 percent of the principal, plus an
additional 20 percent in fees and payments.
Hechinger's
reporting would continue over the years to be borne out in official documents.
In 2010, for instance, the Obama White House projected the default recovery
rate for all forms of federal Stafford loans (one of the most common federally
backed loans for undergraduates and graduates) to be above 122 percent. The
most recent White House projection was slightly less aggressive, predicting a
recovery rate of between 104 percent and 109 percent for Stafford loans.
When Rolling
Stone reached out to the DOE to ask for an explanation of those numbers,
we got no answer. In the past, however, the federal government has responded to
such criticisms by insisting that it doesn't make a profit on defaults, arguing
that the government incurs costs farming out negligent accounts to collectors,
and also loses even more thanks to the opportunity cost of lost time. For
instance, the government claimed its projected recovery rate for one type of
defaulted Stafford loans in 2013 to be 109.8 percent, but after factoring in
collection costs, that number drops to 95.7 percent. Factor in the additional
cost of lost time, and the "net" projected recovery rate for these
Stafford loans is 81.8 percent.
Still, those
recovery numbers are extremely high, compared with, say, credit-card debt,
where recovery rates of 15 percent are not uncommon. Whether the recovery rate
is 110 percent or 80 percent, it seems doubtful that losses from defaults come
close to impacting the government's bottom line, since the state continues to
project massive earnings from its student-loan program. After the latest
compromise, the 10-year revenue projection for the DOE's lending programs is
$184,715,000,000, or $715 million higher than the old projection – underscoring
the fact that the latest deal, while perhaps rescuing students this coming year
from high rates, still expects to ding them hard down the road.
But the main
question is, how is the idea that the government might make profits on
defaulted loans even up for debate? The answer lies in the uniquely
blood-draining legal framework in which federal student loans are issued. First
of all, a high percentage of student borrowers enter into their loans having no
idea that they're signing up for a relationship as unbreakable as herpes. Not
only has Congress almost completely stripped students of their right to
disgorge their debts through bankruptcy (amazing, when one considers that even
gamblers can declare bankruptcy!), it has also restricted the students' ability
to refinance loans. Even Truth in Lending Act requirements – which normally
require lenders to fully disclose future costs to would-be customers – don't
cover certain student loans. That student lenders can escape from such
requirements is especially pernicious, given that their pool of borrowers are
typically one step removed from being children, but the law goes further than
that and tacitly permits lenders to deceive their teenage clients.
Not all
student borrowers have access to the same information. A 2008 federal education
law forced private lenders to disclose the Annual Percentage Rate (APR) to
prospective borrowers; APR is a more complex number that often includes fees
and other charges. But lenders of federally backed student loans do not have to
make the same disclosures.
"Only a
small minority of those who've been to college have been told very simple
things, like what their interest rate was," says Collinge. "A lot of
straight-up lies have been foisted on students."
Talk to any
of the 38 million Americans who have outstanding student-loan debt, and he or
she is likely to tell you a story about how a single moment in a financial-aid
office at the age of 18 or 19 – an age when most people can barely do a load of
laundry without help – ended up ruining his or her life. "I was 19 years
old," says 24-year-old Lyndsay Green, a graduate of the University of
Alabama, in a typical story. "I didn't understand what was going on, but
my mother was there. She had signed, and now it was my turn. So I did."
Six years later, she says, "I am nearly $45,000 in debt. . . . If I had
known what I was doing, I would never have gone to college."
"Nobody
sits down and explains to you what it all means," says 24-year-old Andrew
Geliebter, who took out loans to get what he calls "a degree in
bullshit"; he entered a public-relations program at Temple University. His
loan payments are now 50 percent of his gross income, leaving only about $100 a
week for groceries for his family of four.
Another
debtor, a 38-year-old attorney who suffered a pulmonary embolism and went into
default as a result, is now more than $100,000 in debt. Bedridden and fully
disabled, he accepts he will likely be in debt until his death. He asked that
his name be withheld because he doesn't want to incur the wrath of the
government by disclosing the awful punch line to his story: After he qualified
for federal disability payments in 2009, the Department of Education quickly
began garnishing $170 a month from his disability check.
"Student-loan
debt collectors have power that would make a mobster envious" is how Sen.
Elizabeth Warren put it. Collectors can garnish everything from wages to tax
returns to Social Security payments to, yes, disability checks. Debtors can
also be barred from the military, lose professional licenses and suffer other
consequences no private lender could possibly throw at a borrower.
The upshot
of all this is that the government can essentially lend without fear, because
its strong-arm collection powers dictate that one way or another, the money
will come back. Even a very high default rate may not dissuade the government
from continuing to make mountains of credit available to naive young people.
"If the
DOE had any skin in the game," says Collinge, "if they actually saw
significant loss from defaulted loans, they would years ago have said, 'Whoa,
we need to freeze lending,' or, 'We need to kick 100 schools out of the lending
program.'"
Turning down
the credit spigot would force schools to compete by bringing prices down. It
would help to weed out crappy schools that hawked worthless "degrees in
bullshit." It would also force prospective students to meet higher
standards – not just anyone would get student loans, which is maybe the way it
should be.
But that's
not how it is. For one thing, the check on crappy schools and sleazy
"diploma mill" institutions is essentially broken thanks to a corrupt
dynamic similar to the way credit-rating agencies have failed in the finance
world. Schools must be accredited institutions to receive tuition via federal
student loans, but the accrediting agencies are nongovernmental captives of the
education industry. "The government has outsourced its responsibilities
for ensuring quality to weak, nonprofit organizations that are essentially
owned and run by existing colleges," says Carey.
Fly-by-night,
for-profit schools can be some of the most aggressive in lobbying for the
raising of federal-loan limits. The reason is simple – some of them subsist
almost entirely on federal loans. There's actually a law prohibiting these
schools from having more than 90 percent of their tuition income come from
federally backed loans. It would seem to amaze that any school would come even
close to depending that much on taxpayers, but Carey notes with disdain that
some schools use loopholes to go beyond the limit (for instance, loans to
servicemen are technically issued through the Department of Defense, so they
don't count toward the 90 percent figure).
Bottomless
credit equals inflated prices equals more money for colleges and universities,
more hidden taxes for the government to collect and, perhaps most important, a
bigger and more dangerous debt bomb on the backs of the adult working
population.
The stats on
the latter are now undeniable. Having passed credit cards to became the largest
pile of owed money in America outside of the real-estate market, outstanding
student debt topped $1 trillion by the end of 2011. Last November, the New York
Fed reported an amazing statistic: During just the third quarter of 2012,
non-real-estate household debt rose nationally by 2.3 percent, or a staggering
$62 billion. And an equally staggering $42 billion of that was student-loan
debt.
The
exploding-debt scenario is such a conspicuous problem that the Federal Advisory
Council – a group of bankers who advise the Federal Reserve Board of Governors
– has compared it to the mortgage crash, warning that "recent growth in
student-loan debt . . . has parallels to the housing crisis." Agreeing
with activists like Collinge, it cited a "significant growth of subsidized
lending" as a major factor in the student-debt mess.
One final,
eerie similarity to the mortgage crisis is that while analysts on both the left
and the right agree that the ballooning student-debt mess can be blamed on too
much easy credit, there is sharp disagreement about the reason for the
existence of that easy credit.
Many finance-sector analysts see the problem as
being founded in ill-considered social engineering, an unrealistic desire to
put as many kids into college as possible that mirrors the state's home-ownership
goals that many conservatives still believe fueled the mortgage crisis.
"These problems are the result of government officials pushing a social
good – i.e., broader college attendance" is how libertarian writer Steven
Greenhut put it.
Others,
however, view the easy money as the massive subsidy for an education industry,
which spent between $88 million and $110 million lobbying government in each of
the past six years, and historically has spent recklessly no matter who
happened to be footing the bill – parents, states, the federal government,
young people, whomever.
Carey talks
about how colleges spend a lot of energy on what he calls "gilding" –
pouring money into superficial symbols of prestige, everything from new
buildings to celebrity professors, as part of a "never-ending race for
positional status."
"What
you see is that spending on education hasn't really gone up all that
much," he says. "It's spending on things like buildings and
administration. . . . Lots and lots of people getting paid $200,000, $300,000 a
year to do . . . something."
Once upon a
time, when the economy was healthier, it was parents who paid for these
excesses. "But eventually those people ran out of money," Carey says,
"so they had to start borrowing."
If federal
loan programs aren't being swallowed up by greedy schools for expensive and
useless gilding, they're being manipulated by the federal government itself.
The massive earnings the government gets on student-loan programs amount to a
crude backdoor tax increase disguised by cynical legislators (who hesitate to
ask constituents with more powerful lobbies to help cut the deficit) as an
investment in America's youth.
"It's
basically a $185 billion tax hike on middle-income and low-income citizens and
their families," says Warren Gunnels, senior policy adviser for Vermont's
Sen. Bernie Sanders, one of the few legislators critical of the recent
congressional student-loan compromise.
[...]
