FedLoan Servicing is accused of fraud. What did the Department of Education know about how FedLoan treated student debtors in the PSLF program?
As Alan White reported in Credit Slip yesterday, the U.S. Department of Education assigned the complex task of monitoring the Public Service Loan Forgiveness (PSLF) program to its worst-performing student-loan servicer--FedLoan Servicing (Fedloan). In 2017, DOE ranked FedLoan last among 9 student-loan servicers "based on delinquency rates and customer satisfaction survey results."
PSLF, created by Congress in 2007, is a federal program designed to make it easier for student-loan borrowers in public service jobs to pay off their loans. And it is a very big program. Almost 1.2 million people have applied to have their student loans certified for PSLF participation; and 890,000 borrowers have been approved so far.
PSLF borrowers are entitled to have their student loans forgiven after 120 on-time loan payments. The first PSLF participants became eligible for debt relief in September of last year. As of last month, 28,000 borrowers had applied for debt relief, but DOE had approved less than 100.
According to a federal lawsuit filed in Pennsylvania earlier this year, FedLoan has fraudulently administered the PSLF program to enrich itself at the expense of student borrowers (paragraphs 80-91). Plaintiffs in the suit claim FedLoan penalized borrowers who made extra payments by posting all subsequent payments as being paid late. Since late payments don't qualify toward the 120 on-time payments, student debtors who made extra payments in good faith actually increased the number of months they would have to make loan payments. Since FedLoan gets a service fee for managing student loans, the longer a borrower makes payments, the more money FedLoan earns in fees.
In addition, FedLoan reputedly made bookkeeping errors while administering the PSLF program; and when borrowers tried to straighten out these mistakes, FedLoan put their loans into forbearance. Student debtors whose loans are in forbearance do not get credit for loan payments they make, and this practice also extended the time borrowers are obligated to make student-loan payments.
Plaintiffs in the federal lawsuit allege FedLoan engaged in these activities to increase its revenues. And indeed, FedLoan is making a bundle of money in the debt collection business. According to the plaintiffs' complaint (paragraph 33), FedLoan earned net revenues of more than $220 million in 2014 and owns assets worth $700 million!
But here is a question the Pennsylvania plaintiffs did not ask: Why did DOE permit FedLoan to allegedly defraud student debtors?
After all, DOE must have known something was wrong based on the sheer volume of complaints that student borrowers were filing against FedLoan. All DOE would had to have done to bring FedLoan into line was write a letter telling it not to interpret the PSLF program in a way that harms PSLF participants.
I think DOE intentionally allowed FedLoan to operate the PSLF program so unfairly because DOE knows the PSLF program will cost the government billions if every PSLF applicant gets the debt relief the program promises. In other words, DOE knew exactly how FedLoan would behave if it got the PSLF servicing project, and that's why DOE chose FedLoan.
I hope a federal court ultimately finds FedLoan liable for defrauding PSLF participants. And if it does, then DOE should be named as a co-conspirator in a scandalous fraud.
Danielle Douglas-Gabriel. Watchdog agency blasts government contractor for mishandling student loan forgiveness program. Washington Post, June 27, 2017.
Betsy DeVos and the Republicans want to dump the Public Service Loan Forgiveness Program (PSLF) because the program is too expensive. According to the Department of Education's Inspector General, costs of the government's various loan forgiveness programs shot up from $1.4 billion in 2011 to $11.5 billion in 2015--about a nine-fold jump.
In fact, all the Department of Education's loan-forgiveness programs are bleeding red ink. As the Government Accounting Office reported in November 2016, the Department underestimated the cost of these programs. For one thing, DOE assumed that student-loan debtors would sign up for a repayment plan and not switch.
But that's not what happened. Many college borrowers tried to repay their loans under DOE's standard 10-year plan but couldn't find jobs that paid enough to service their monthly loan payments. Millions then switched to income-driven repayment plans (IDRs), which lowered their monthly payments, but those payments were not large enough to cover accruing interest. In my estimation, most of the people in IDRs will never pay back their loans because interest is accruing on loan balances with every passing month.
PSLFs have specific problems, which make them particularly expensive for taxpayers. First, the PSLF program, which was approved by Congress in 2007, defined eligibility far too broadly. Anyone working for the federal, state or local government and anyone working for a nonprofit charitable corporation is eligible. As Jason Delisle observed in a Brookings Institution report, about a quarter of America's entire workforce is eligible for a PSLF plan.
PSLF advocates sometimes say the program was designed to encourage people to enter hard-to-fill public service jobs: police officers, fire fighters, ambulance drivers, and inner-city school teachers. But that description is misleading. Accountants, lawyers, public relations people--anyone working for the government or a non-profit--is eligible.
And there's a second problem with PSLFs: Congress put no cap on the amount a PSLF participant can borrow. DOE apparently calculated costs based on the assumption that most PSLF beneficiaries had relatively low loan balances. But a lot of people applying for the program are people who accumulated massive debt from attending graduate school. A typical lawyer, for example, graduates law school with an average of $140,000 in accumulated student loans.
PSLF participants--including lawyers, accountants and MBA graduates--will make monthly payments based on a percentage of their adjusted income for 10 years, with the unpaid balance being forgiven when their 10-year repayment plans expire. But most PSLF participants won't come close to paying off their loan balances after 10 years, and American taxpayers will be picking up the bill.
Thus, Trump and the Republicans have valid concerns about IDRs and PSLF programs.Nevertheless, I do not think these programs should be eliminated.
Why? Because 44 million Americans have student-loan debt and about half of them will never pay it back. Congress has blocked bankruptcy relief for most of these people, which means they have two choices: default or sign up for an income-based repayment plan.
In my view, then, DOE's income-based repayment plans and the PSLF program should be continued because the only other option for millions of distressed college borrowers is default.
But ultimately, there is only one way out of the student-loan morass. First. we must either allow insolvent student borrowers to discharge their college loans in bankruptcy or we must forgive the debt en masse. Second, we must shut down the venal and corrupt federal student-loan program and allow all Americans to get a free undergraduate education at a public college or university.
I realize this is a hard reality, which our government is refusing to face. But face reality it must; and the longer it waits to do so, the more people will be harmed by a student-loan program that is totally out of control.
Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment programs, overhaul federal financial aid. Washington Post, December 1, 2017.
Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, & Marshall Steinbaum. The Macroeconomic Effects of Student Loan Cancellation. Levy Economics Institute. Bard College, February 2018.
Amanda Palleschi. Student Loans Are Too Expensive To Forgive. fivethirtyeight.com, March 27, 2018.
The White House wants to kill the Public Service Loan Forgiveness Program: But who can stop a tidal wave?
A billionaire president and billionaire education secretary, neither of whom spent a single day of their lives in public service before stumbling their way into positions of immense power, are targeting a program that's basically meant to make life in underpaid government work a little more tenable.
But in fact the issue of whether the PSLF program should be eliminated is a little more complicated than Weissmann described. To get a clear understanding of what is at stake, people should read Jason Delisle's brief report on PSLF (only 5 pages of text) prepared for the Brookings Institution.
As Delisle explains,Congress initiated the PSLF program in 2007 along with the Income-Based Repayment Plan. (IBR). Student-loan borrowers who take public-service jobs are eligible to have their student loans forgiven after 10 years of loan payments. Furthermore, under IBR, student-loan borrowers' monthly payments were initially set at 15 percent of their gross adjusted income.
The PSLF program defines eligible public service broadly to include employment with a nonprofit agency or any federal, state, or local government. In fact, as Delisle points out, 25 percent of the American workforce qualify for PSLF under this definition of public service (p. 3).
As generous as the PSLF program was in 2007, the program became significantly more generous when the Obama administration introduced PAYE and REPAYE--two repayment plans that required borrowers to make monthly loan payments totally only 10 percent of their adjusted gross income rather than 15 percent. As Delisle explains, "Had the [Obama] administration left the original IBR program in place, borrowers would have paid 50 percent more before having their remaining debt forgiven under PSLF" (p. 3).
Significantly, the PSLF program set no cap on the amount students can borrow for their studies. Apparently, Congress did not anticipate that a high percentage of PSLF participants would be graduate students who would rack up six-figure student-loan debt to enroll in expensive graduate programs: law school, MBA programs, etc.
As Delisle explains, policy makers "who thought PSLF would be a small-scale program likely did not foresee that borrowers enrolled in PSLF would have some of the highest loan balances in the federal student loan program. In fact, "[t]he median debt load of those enrolled in PSLF exceeds $60,000, and nearly 30 percent of PSLF enrollees borrowed over $100,000."
In short, as Delisle accurately summarizes, "[t]he high loan balances among enrollees helps to expose that PSLF is really a de facto loan forgiveness program for graduate students, who can borrow without limit" (p. 4, emphasis and italics supplied).
To its credit, the Obama administration recognized that the PSLF program would soon be hemorrhaging money and needed to be revised to reduce the program's enormous costs. The administration proposed a cap of $57,000 on the amount that can be forgiven under PSLF and removing the cap on the amount of monthly payments. The Congressional Budge Office originally estimated these reforms would save the government about $400 million and then revised that estimate to $12 billion.
But the Obama reforms were never implemented, and the Trump administration inherited a program that is basically providing free graduation education to most PSLF participants.
How much will PSLF cost American taxpayers? No one knows. Approximately 432,000 people were officially certified to participate in PSLF according to government data Delisle reviewed in his 2016 paper. An article in the New York Times, published less than two months ago, reported a figure of 550,000 certified PSLF participants--25 percent higher than the number Delisle's paper reported.
But the number of PSLF participants could be considerably higher than any number reported so far because, as Delisle pointed out, people are not required to be get pre-certified as a condition of participating in the program. That's right, borrowers can apply to the PSLF program retroactively.
The PSLF program is now ten years old, and the first group of PSLF borrowers will be eligible to have their loans forgiven by the end of this year. As Delisle explained so cogently in his Brookings essay, PSLF has turned out to be a bonanza for people to borrow unlimited amounts of money to go to graduate school. Because participants are only required to make token payments equal to 10 percent of their adjusted gross income for ten years, most PSLF participants are making payments so low that their payments are less than accruing interest.
Basically, the PSLF program is a tidal wave bearing down on the Trump administration.The White House has responded by defunding the program in its proposed budget, but shutting down PSLF may be politically impossible. After all, as Weissmann pointed out, a lot of people went to graduate school based on the reasonable assumption that they were entitled to enroll in PSLF. It would be unfair to shut down the PSLF program precipitously, leaving thousands of student borrowers in the lurch.
In any event, who can stop a tidal wave?
The brutal reality is this: No matter what this presidential administration does about the PSLF program, it is going to cost taxpayers tens of billions of dollars.
Gordon Long authored an essay for MATASII.com (reposted on the Zero Hedge blog site) that contains some profound observations about the Millennial generation. As Long points out, Millennials now surpass Baby Boomers as the nation's largest generation. In 2015, there were 74.9 Baby Boomers (ages 51-69), while there were 75.4 million Millennials (ages 18-34). And of course, Baby Boomers will shrink as a percentage of the nation's entire population as they grow older and die.
Gordon argues that Millennials have a larger sense of entitlement than Baby Boomers, who, after all, were raised by people from the notoriously self-reliant Greatest Generation. My late parents, for example, lived through the Great Depression and World War II, and they didn't believe anyone was entitled to anything; and I suppose some of that philosophy was passed on to me. My children are Millennials; and I think they believe that everyone living in a prosperous society is entitled to health care and a basic level of education. If so, I agree with them.
Gordon made two observations about Millennials that have important political implications. First, millennials make about 20 percent less than the Baby Boomers did at their age--they are poorer as a whole than my generation was when we were young.
Second, a lot of Millennials believe student loans should be forgiven. And why shouldn't they hold that view? After all, I paid a pittance for a fine law degree when I was young and immediately got a well-paying job. Millions of Millennials are burdened with student loans and are struggling to find good jobs in a weak job market.
Long believes the Millennials' support for Bernie Sanders during the 2016 presidential election can be largely explained by Bernie's impassioned call for a free college education for everyone. This is a very appealing proposal to a generation of Americans who hold billions of dollars in student debt.
So what are the political implications of Long's observations? Simply this: the Millennials will not put up with the status quo in terms of the federal student program. Our political and media elites seem to think young Americans will continue borrowing more and more money for postsecondary education and will be content to enter into income-driven repayment plans that last as long as a quarter of a century. But the elites are delusional.
In the next presidential election and every election thereafter, the Millennials and the generations coming after them will flock to any candidate who calls for student loan forgiveness and free postsecondary education. They will become one-issue voters.
So far at least, President Trump and Secretary of Education Betsy DeVos are tone deaf to the student loan crisis. The Department of Education is mishandling the Public Service Loan Forgiveness program, and it nullified a decision by the Obama administration to ban student loan collection agencies from slapping huge penalties on student borrowers who defaulted on their loans. Apparently, DeVos is seeking advice from the for-profit college industry rather than the student debtors who were victimized by that industry.
The student loan crisis grows worse by the month, and the politicians who step forward with solutions will win the vote of the Millennials and a lot of other Americans. If our current President doesn't understand that, he will be a one-termer.
Editorial, The Wrong Move on Student Loans. New York Times, April 76, 2017.