Submitted by Mike "Mish" Shedlock of MishTalk

Department of Education Wonders “Why 40% of Student Borrowers Don’t Make Payments”; Blame Bush (Seriously)!

Over 40 percent of those in student loan programs have stopped making payments. Many borrowers have never made any payments.

The department of education (a useless body that I would eliminate in one second if given the chance), cannot figure out why this is happening.

“We obviously have not cracked that nut but we want to keep working on it,” said Ted Mitchell, the Education Department’s under secretary.

The Wall Street Journal reports More Than 40% of Student Borrowers Aren’t Making Payments.

More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay. While most have since left school and joined the workforce, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio. About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment. Three million more owing roughly $66 billion were at least a month behind. Meantime, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment. The figures exclude borrowers still in school and those with government-guaranteed private loans. Navient Corp. , which services student loans and offers payment plans tied to income, says it attempts to reach each borrower on average 230 to 300 times—through letters, emails, calls and text messages—in the year leading up to his or her default. Ninety percent of those borrowers, which include federal borrowers as well as those who hold private loans, never respond and more than half never make a single payment before they default, the company says.

Crisis Easy to Explain

Carlo Salerno, an economist who studies higher education and has consulted for the private student-lending industry, noted that the government imposes virtually no credit checks on borrowers, requires no cosigners and doesn’t screen people for their preparedness for college-level course work. “On what planet does a financing vehicle with those kinds of terms and those kinds of performance metrics make sense,” he said.

I could easily come up with numerous reasons off the top of my head.

Being in the workforce and having a job are two different things. Having a job and making enough money to pay back hundreds of thousands of dollars is yet another thing. Some feel cheated by the system, as well they should. Many have figured out the consequences of default are small. The worst that can happen is wage garnishment. Should that happen, one can always find another low-paying job, buying time until they are discovered again. Some never intended to pay back the loans in the first place. To those borrowers, it’s all free money for a few years. They will stay in school as long as they can. If by some miracle they actually graduate (or are kicked out), they never make a payment.

Blame Bush!

A large portion of the blame for this mess goes to George W. Bush. Seriously.

The Bankruptcy Abuse Prevention and Consumer Protection Act enacted April 20, 2005 made it much more difficult to discharge debts in bankruptcy.

Among other things, “BAPCPA amended the law to broaden the types of educational (“student”) loans that cannot be discharged in bankruptcy absent proof of “undue hardship.” The nature of the lender became irrelevant. Even loans from “for-profit” or “non-governmental” entities are not dischargeable.

The Deflation Guarantee Act of 2005

I predicted this mess when Bush signed the bill. As proof, I offer The Deflation Guarantee Act of 2005.

Here are my lead paragraphs as I wrote them at the time.

Today Congress passed the “The Deflation Guarantee Act of 2005” currently known as the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”. Twenty years from now economists are going to be studying legislation from this Congress and signed by this administration and be wondering: “What the * were they thinking?”. Consumer Protection Act? LMAO Anytime this administration passes a law with the “protection” in it, assume it will do just the opposite.

Student Debt Highly Deflationary

I have wanted to refer back to that post on numerous occasions.

I had not done so previously because I strongly dislike my writing style in those days. I frequently used chat room talk like “LMAO” (laughing my ass off), in those early posts.

There are other aspects of my 2005 post that I dislike as well. However, I nailed the idea correctly. Student debt is a hugely deflationary force.

In the wake of that act (albeit with a bit of a delay), we saw massive amounts of seemingly reckless lending to students. Because of government guarantees, lenders did not give a damn who they lent to.

For profit universities flourished. Abuses at the University of Phoenix became rampant. And because of various lending programs that followed, education costs soared as well.

Those debts cannot be paid back, and household formation has gone into reverse. Students moved back home after graduation, and attitudes on debt have changed.

These are all debt deflation forces.

Modest Fee Request

The Department of Education will no doubt waste millions of taxpayer dollars studying this issue, only to come up with the wrong answers because students will lie.

Will anyone realistically admit “I never intended to pay back these loans”?

My modest fee for this analysis is a mere $250,000. Of that amount, I pledge $249,999.99 to the Khan Academy.

All I ask is a penny for my thoughts, saving taxpayers countless millions in useless department of education studies.

For more on the Khan Academy please see Teaching Revolution: Online, Accredited, Free; Start Learning Now!

Obama’s Role

President Obama does not escape criticism for his efforts to fuel the problem.

Here’s my blast at Obama: For Profit Schools Turn Students Into Debt Zombies; It’s Time To Kill The Entire Pell Grant Program.

There is plenty of blame to go around, but I have not seen a single person take this crisis back to the logical origin, the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” making student debt non-dischargeable in bankruptcy.