Editor’s note: This post has been revised.
It was reported last week that in 2016, 1.1 million people were put into default on their student loans. This is an unprecedented increase from the year before when 400,000 people were added to the default roles. What the press doesn’t know and didn’t report, however, is that according to the Department of Education, about 20% of defaulted borrowers put their loans through rehabilitation. So while there are currently about 8 million people in default on the books, the actual number of defaulters is closer to 9.6 million people. If this trend continues, we will see this number swell to 12 million people by the end of the year.
It was also reported last week that Education Secretary Betsy DeVos had hired Robert Eitel, a seasoned lawyer from the for-profit college sector as her “special assistant.” For-profit colleges make about 90% of their revenue from the federal student loan program. They’ve been found to be recruiting from homeless shelters. They spend more money on advertising than on running their schools, and their default rates are well over 60%, probably closer to 80% these days. Frankly, most if not all of these schools should have been shuttered years ago, but it now appears as though they will be defended and allowed to thrive under the Trump administration.
But the most interesting news last week:, a “Dear Colleague Letter” was issued by Lynn Mahaffie, Deputy Assistant Secretary at the Department of Education, that re-imposed a 16% fee on defaulted student loans where borrowers quickly attempt to rehabilitate their loans. This money goes to guarantors, which are typically state, governmental or quasi-governmental agencies which historically have made penalties and fees on defaulted student loans their main source of revenue. It is important to note that loan rehabilitation requires a defaulted borrower to make ten months worth of payments (none of which goes to principal or interest), and then sign for a new, much larger loan. Rehabilitated loans default at a percentage rate three to four times higher than typical loans, according to Moody’s.
This week, a familial conflict pertaining to one of the guarantors and another member of Betsy DeVos’ staff was reported by Bloomberg. Apparently, the son of the president of the guarantor USA Funds, Bill Hansen (himself a former Deputy Secretary of Education) was one of DeVos’ close advisors, until he abruptly resigned the day after the DCL was written. An early “Father’s Day Gift” in the Hansen Household, to be sure.
I suspect that President Trump doesn’t realize it yet, but the student loan swamp is having its way with him. Mahaffie is a Department of Education Lifer who in the past has fought viciously to keep bankruptcy protections gone from student loans. Hansen’s ties to beltway lending interests like the Education Finance Council, Collection companies like ACS (which actually runs the Department of Education’s Ombudsman’s office last I checked), guarantors, etc. are too convoluted to describe well here. Eitel made his living prior to coming to the Education Department defending these schools, some of which were forced into a $31 million settlement for misleading their students about the cost of their loans. Suffice it to say this is the student loan swamp hard at work, and these giveaways to the lending system come at great cost to the citizens, many who voted for Trump.
During his run for office, Mr. Trump criticized the profiteering of the government on the student loan program. And he was right. The Department of Education is sitting on close to $1.5 Trillion in loans and is booking some $50 Billion in profit per year on the program, probably far more than that in more recent years. What is worse: In the absence of bankruptcy protections, statutes of limitations, and other bedrock consumer protections, the federal government is actually making a profit on defaulted student loans- something that no other lender for any other type of loan can claim. And make no mistake: The Department fights tooth-and-nail behind the scenes to keep bankruptcy gone from student loans, thanks to the work of bureaucrats like Mahaffie.
President Trump knows the reasons for the bankruptcy system in this country. He knows firsthand that bankruptcy is a critical mechanism for ensuring fair lending, rational pricing, and good faith in a lending relationship. That the Founders demanded a uniform system of bankruptcies ahead of the power to raise an army, coin currency, and even declare war when they wrote the U.S. Constitution demonstrates the importance of bankruptcy rights, and the student loan exception proves their wisdom in spades.
Trump should join a growing chorus of conservatives like Jeb Bush, David Brooks, and the Cato Institute, and do what should have been one a long time ago: call on Congress to return standard bankruptcy protections to student loans by repealing 11 USC 523(a)(8). This will put the Department of Education and its partners in check, and compel them to crack the whip on the schools to lower their prices, tighten the federal lending limits (or impose them where currently there are none), and administer the lending system in a fair, good-faith manner. It will also endear him to tens of millions of people who desperately need to know that free-market mechanisms can and should work for the little guy, particularly in the face of a big-government monstrosity such as what the Department of Education has become.
More by Alan Collinge here on GMP:
Student loan debt has skyrocketed past credit card debt, yet Trump’s silence is deafening.
It’s all about making money. Big money.
Thom Hartmann interviews Alan Collinge of Student Loan Justice
The student loan system has become a big-government, predatory beast.
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