What happened with Barack Obama on the student loan issue during his presidency? When he announced his candidacy in 2007, Obama looked like he could be the one to finally stand up to solve the student lending problem. Unfortunately, it could well be the worst element of his presidency.
He was one of only two members on the Senate Health, Education, Labor and Pensions (HELP) committee not to have taken money from the Sallie Mae PAC. His rhetoric on the campaign trail about making college “affordable” sounded great. The deletion of most every standard consumer protection (like bankruptcy and statutes of limitations) from student loans had caused a hyperinflationary market and a systemically predatory lending system that was wrecking lives and livelihoods of millions of people. It seemed like Obama “got it”. I had high hopes that he would fight, at a minimum, for the return of standard bankruptcy protections to student loans.
But he did nothing to bring back any standard consumer protections. His administration did nothing to curb the predatory collection powers of the student lending system. College prices increased faster than previously, and today the average undergraduate is now leaving school with $35,000 in debt, up from about $17,000 when Obama announced. What is worse, nearly $1 Trillion was added to the nation’s student debt tab on his watch.
What the Obama administration did do was great for the federal government, not the students. Obama federalized the system to where the government now profits immensely from both interest on loans it makes directly to students, and defaults. To say that the federal government now sits atop the most predatory lending system in our nation’s history is not an understatement.
To his credit, Obama did call for a study to examine the feasibility of returning bankruptcy protections to student loans, but it went nowhere. Meanwhile, his lawyers at the Education Department fought furiously behind the scenes to keep bankruptcy protections gone from student loans in order to protect their cash cow.
This all happened on Obama’s watch. He cannot avoid accountability for what is shaping up to be among the largest financial catastrophes this country has ever seen. That the people being hurt worst by this are the same people who got him through the primaries is really astonishing.
As a Constitutional Professor, Obama surely knows that Founding Fathers George Washington and Thomas Jefferson were in debt up to their eyeballs to British banks and merchants, and that they made it a point to require bankruptcy rights ahead of the power to raise an army, and even the power to declare war in Article I, Section 8 of the U.S. Constitution. Not the Bill of Rights, the Constitution itself. The student loan exception has proven their wisdom in spades.
The forgiveness programs that many point to instead of even discussing bankruptcy are failing miserably. The federal government clearly have no desire or intention of forgiving loans, as evidenced by the fact that as of 2015, a whopping 57% had been disqualified from the Income Based Repayment (IBR) for failure to verify their income- an annual, onerous process that the Department of Education could easily do on its own through the IRS, but chooses not to. This is only one of many grounds by which borrowers can be given the boot.
Assuming they aren’t ended, my best estimate is that only around 10% of those who enroll in these forgiveness plans will make it through. The rest will be expelled from the program and left owing far more than when they graduated. As we speak, the first borrowers in the Public Service Loan Forgiveness Program are due to have their loans forgiven. Most are in for a rude shock.
My research indicates strongly that the lending system has crossed the threshold of stability. In 2014, the number of defaulted borrowers jumped by 400,000. Last year this number skyrocketed by 1.1 million borrowers to a reported total of about 8 million people. But this total is wrong: The Department of Education has said that about 20% of defaulters rehabilitate their loans (a hugely harmful process where the borrowers sign for a new, much larger loan, and default again about 80% of the time). So the true number of defaulters at the end of the year was likely closer to 9.6 million, and by the end of this year, we will likely be close to 11 million people, or a quarter of all borrowers. Moreover, my best estimate is that something like 27 million of the 44 million borrowers in the country are unable to make payments on their loans, or at least aren’t making a dent in them.
President Obama should explain, truthfully, what happened while he was in office. I and the country would really like to get a debriefing about how a well-intentioned president got so played by the student loan swamp to the great harm of his base. Hopefully, he can find a few minutes between his million dollar speeches to do that.
Really, though, he should fight for HR 2366, a bipartisan bill that would return (at long last) standard bankruptcy protections to all student loans. I would say he owes us at least that.
Also by Alan Collinge:
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