The financial ticking time bomb politicians want to ignore – OpEd – Eurasia Review


By Kevin Van Elswyk*

The media claim that this debt is preventing economic recovery. Chuck Schumer would erase it with the pen stroke. Elizabeth Warren would remove it to free up students’ ability to buy a home and start a family. Janet Yellen believes paying off student loan debt (SLD) will free up risk capital. Alexandria Ocasio-Cortez says the proposed Biden plan is inadequate.

The complexities of SLD are simplified for the audience by shifting the details into an abyss of aggregates; “average student debt”, “average unemployment” and “average salary” title without context. Political and media appeals for money drown out a simple question: Should taxpayers save students from student loans?

The Department of Education (DOE) oversees reviews of the student loan program. The current proposal is explained on their website: “The U.S. Department of Education will provide up to $20,000 in debt forgiveness to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt forgiveness to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is below $125,000 or $250,000 for households.

It’s a rescue plan for something we don’t understand and can’t be easily and clearly explained. The student loan program is mismanaged and widely misunderstood. Casual accounting and limited underwriting controls have created a student-like-ATM monster that feeds universities. If this calamity was a crime scene, there would be a host of suspects leaving their DNA behind.

The personal impact of SLD was a topic on Occupy Wall Street in 2011. Married Ivy League graduate students with master’s degrees in fields such as sociology expressed their fears to a reporter: “Are we eating beans for the rest of our lives to pay $100,000? ?” In 2022, a TikTok video showed a woman behind a sign that read “BA in Fine Arts, $29,000 in debt and no job.”

Federal education funding has a noble beginning. Demobilization after the end of World War II created an army of workers. Large-scale federal funding for education and training began in 1944 with the success of the Military Readjustment Act, commonly known as the GI Bill; it funded trades education, high school diplomas, and college diplomas for veterans.

The National Defense Education Act (NDEA) was passed in 1958 in response to the Soviet acceleration of the space race. The law funded programs to “ensure a skilled workforce of sufficient quality and quantity to meet National Defense needs of the United States” (emphasis mine). The NDEA has bolstered modern science, math, and foreign language education by offering low interest rates for student loans.

The intent of the original acts was to build human and therefore national capital to solve future problems. Total SLD is now reported at $1.74 trillion on Fed G.19 reports. However, the $1.74 trillion debt is a ghost. The magnitude of student loans receivable is overestimated. Keeping the amount of debt high creates headlines and a sense of urgency; such a big number requests congress action!

Yet portions of this figure are overdue, defaulted or not yet due.

Private lenders hold 8% of student debt, or $131 billion. Parent PLUS loans total $107 billion. Best estimates of graduate student debt show that about 25% of all graduate borrowers carry 46% of total debt. Removing Graduate, Parent PLUS, and Private Student Loans Leaves About $750-850 Billion in True undergraduate federal student loan debt.

Also, the $800 billion figure is not entirely due now. Calculations have not been adjusted for loans not yet in repayment, which begin six months after graduation, a grace period that covid has extended by two years. Being a part-time student also suspends the payment of baccalaureate loans. Debt incurred six to eight years ago was accounted for before payment was even due!

What has been the return on our investment so far?

Nationally, only 60 percent of all students enrolled in college finish in six years. Another 11 percent remain enrolled; 28% leave and never return. Dropouts keep their debt. Ten percent of graduates are in default when they begin to repay.

Inside Higher Ed summarized a recent report from the Federal Reserve of New York: “About 41% of recent college graduates – and 33.8% of all college graduates – are underemployed to the extent that they work in jobs that do not do not require a university degree.

The Education Data Initiative offers insights from graduates. “At a rate of 26.33%, arts and humanities students who attended non-selective schools are the most likely to default on their student loans. Student borrowers with law degrees are most likely to become delinquent.

In February 2021, the New York Fed identified employment and underemployment numbers for seventy-two college programs. Fine arts, performing arts, social sciences, and anthropology degrees had the lowest salaries and the highest rates of unemployment and underemployment.

LTC totals include subsidized and unsubsidized direct loans and Parent Plus loans. Undergraduate loans cost 3.73%, graduate loans cost 5.28%, and Parent PLUS loans disbursed between July 1, 2021 and June 30, 2022 cost 6.28%.

Several programs operate within the existing student debt repayment plan. These repayment plans create uncertainty in the projection of repayment cash flows. These are billed as forgiveness plans; they also hide bad loan dollars.

The two most common plans are the income-based repayment plan (IDR) and the income-based repayment plan (IBR). Both schemes allow debtors to pay a percentage based on their discretionary income. As originally implemented, the protected income was based on a multiplier of 150 on the poverty wage. Discretionary income is what remains after deducting safe income from gross income. The minimum payment would be 15% of this discretionary income.

Barack Obama reduced the percentage to 10% and claimed savings of more than $60 million when he federalized the student loan program in 2011. The Biden plan further reduces that minimum payment to 5% and will use a higher multiplier to further reduce discretionary income. These plans can then be incorporated into the Civil Service Loan Cancellation Plan (PSFL), which erases remaining debt after ten years of approved employment.

Because these changes are in addition to existing reimbursement plans, they may not be subject to legal challenge. The cost projections of the Biden plan are blind darts in a crowded bar. No estimate of the Ministry of Education is credible.

These changes send a strong signal to current and future students: “Incur debt and you may not need to pay it all back. And if you suspected mismanagement of funds in the past, in July 2022 the Government Accountability Office confirmed a miscalculation of $320 million. Instead of $114 million of positive cash flow from payments, there is a deficit of $197 million.

Yes, The Student Loan Debt Problem Is A Looming Disaster

The short tenure of the last three chief operating officers responsible for administering the student loan program provides some office-level insight and perhaps clues for future solutions. In 2017 James Runcie stepped down; he was appointed in 2011 to oversee the federalization of the student loan program under the Obama era. Prior to his appointment, he was an investment banker. His resignation cited staff cuts and interference by then Education Secretary Betsy Voss. Chief among his complaints was that Voss was considering moving the program to the Treasury Department and his insistence that Runie testify before a congressional oversight committee.

Appointed chief operating officer in 2017, Wayne Johnson resigned at the end of 2019. Prior to his federal appointment, he was an executive at Deloitte and Visa. In a phone call with Yahoo Finance, he described the student loan program as “an abomination in plain sight” and “rotten to the core”. Some of his suggestions simultaneously met with bipartisan support and objections.

In early 2019, Mark Brown stepped in to replace Johnson. Mr. Brown is a retired Air Force general who led the Air Force Education and Training Command; he was chief financial officer of the Air Force Materiel Command. He resigned after facing sustained criticism from student debt forgiveness advocates.

In May 2021, Richard Cordray was appointed as the new COO. He had served six years as director of the Consumer Finance Protection Bureau; previously, he was Ohio’s attorney general and the Ohio Democratic Party’s 2018 gubernatorial nominee.

Examination of DNA at this crime scene reveals management turnover, a loan-as-welfare management mindset, willful ignoring of bad debts, and intentional obfuscation of portfolio results.

*About the Author: Kevin graduated from Wheaton College (Illinois) with a BA in Literature and Philosophy. He earned an MBA from City University and did post-graduate studies over the years. After more than 40 years with international risk and business risk management companies, Kevin retired in 2018. His most recent industry roles were in data aggregation and predictive modeling. As a consultant for the past four years, he has advised on operational and legal issues for various clients. Kevin has been an adjunct associate professor for 10 years at the Global Campus at the University of Maryland. He lives in Brookfield, Wisconsin and has time to read, fish, think and write.

Source: This article was published by the MISES Institute

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