Will Occupy Wall Street Shake Loose Some Change?
by Mark Kantrowitz
The Occupy Wall Street protest movement, which began in Lower Manhattan's Zuccotti Park on September 17, 2011, is difficult to define, but its core complaints concern corporate greed, corruption and income inequality. The protesters want companies and the federal government to put people and the planet before profit.
Occupy Wall Street counts student loan debt among its grievances. For example, the Declaration of the Occupation of New York City states "They have held students hostage with tens of thousands of dollars of debt on education, which is itself a human right." The protesters include many college graduates who are struggling to repay their student loans. More than a quarter the 3,300+ photos on the "We Are the 99 Percent" Tumblr blog display handwritten signs that list the individual's total education debt.
The Occupy Student Debt Campaign (not to be confused with Occupy Student Debt) has identified four principles that they believe will alleviate future student loan debt: forgiveness of all student loans, zero-interest student loans, free tuition at public colleges and universities, and greater transparency on how tuition dollars are spent at private non-profit and for-profit colleges and universities. The campaign launched three pledges on November 21, 2011, one for debtors and one each for college faculty and non-debtor supporters. Borrowers who sign the debtor pledge agree to stop making payments on their student loans after one million people have signed the pledge. Andrew Ross, a Professor of Social and Cultural Analysis at New York University (NYU) and a leader in the Occupy Student Debt Campaign, referred to student loan debt as "morally unsustainable."
So far the Occupy Student Debt Campaign has had little effect on education lenders as it won't result in any action by borrowers until one million borrowers have signed the pledge. After one month, fewer than 3,000 people have signed the pledge. It is unlikely that the Occupy Student Debt Campaign will reach its goal.
In contrast, Robert Applebaum, a New York attorney who founded the Facebook group "Cancel Student Loan Debt to Stimulate the Economy" and www.forgivestudentloandebt.com in early 2009, has been more successful with an online petition calling for forgiveness of all student loan debt. According to Businessweek, Mr. Applebaum graduated from Fordham Law School in 1998 owing $65,000 in student loans, and quit his job as an assistant district attorney in 2004 after five years in forbearance. (Public service loan forgiveness and income-based repayment, which help people in his position, didn't become available until October 1, 2007, and July 1, 2009, respectively.) His www.Signon.org petition, endorsing a proposed Congressional resolution calling for student loan forgiveness introduced by Rep. Hansen Clarke (D-MI-13), was launched on September 2, 2011 and has collected more than 659,500 signatures as of the end of 2011.
But perhaps the Occupy Student Debt Campaign has been less successful because the personal consequences of defaulting on student loans are particularly severe. Those promoting a mass default argue that borrowers will be protected by safety in numbers. But the reality is that such a mass default will hurt borrowers more than the federal government or private lenders.
The federal government has very strong powers to compel repayment. It can garnish up to 15% of take-home pay, offset income tax refunds without a court order, withhold up to 15% of Social Security disability and retirement benefit payments, and prevent the renewal of a professional license. Federal education loans cannot be discharged in bankruptcy unless the borrower can prove undue hardship in an adversarial proceeding, an incredibly harsh standard. A default ruins the borrower's credit, making it more difficult to get a credit card, auto loan, or home mortgage; rent an apartment; or get a job. According to the Office of Management and Budget, the federal government recovers 85% of defaulted student loan dollars on a net present value basis, after subtracting collection costs. The collection charges are paid by the defaulted borrower, so the average total amount paid by the borrower is 122% of the default claim.
The powers of private lenders to collect defaulted private student loans are not as strong. But private lenders can obtain a wage garnishment order and seize assets if they sue the defaulted borrower and get a court judgment against the borrower. Most private student loans have cosigners, so if the borrower defaults, the lender will seek repayment from the cosigners, usually the borrower's parents. Like federal student loans, private student loans are very difficult to discharge in bankruptcy, so a borrower can't walk away from these loans.
Occupy Wall Street protesters may feel a sense of collective empowerment, but there are less harmful ways to draw attention to increases in college costs and student loan debt than debtor immolation through mass default.
A petition to forgive student loan debt on the We the People website, Forgive Student Loan Debt to Stimulate the Economy and Usher in a New Era of Innovation, Entrepreneurship and Prosperity, was the first to receive an official response from the White House. The Obama administration fast-tracked improvements in the income-based repayment (IBR) plan, cutting the monthly payments from 15% of discretionary income to 10% and providing forgiveness of the remaining debt after 20 years in repayment instead of 25 years. These changes were originally scheduled to go into effect for new borrowers on or after July 1, 2014. President Obama used his executive authority to make the changes available to students with at least one new federal student loan in 2012 or a subsequent year. This change provides meaningful relief to financially distressed borrowers, reducing their monthly loan payments by a third.
Unfortunately, the improvements are not available to borrowers who have already entered repayment or to borrowers who have defaulted on their loans (nor to borrowers of private or parent education loans). Still, the less-generous (15%) version of IBR can significantly help borrowers struggling to repay their federal student loans. A key benefit of President Obama's announcement is that it raises awareness about IBR, which became available in July 2009. Currently only about 2.25% of the 36 million federal student loan borrowers in repayment use IBR, even though as many as 10% of borrowers could potentially benefit from it.
The protesters argue that forgiving all student loans would stimulate the economy. However, annual student loan payments total about 5.6% of student loan debt outstanding, meaning that forgiving the $1 trillion in federal and private student loan debt would have a stimulative effect of at most $56 billion a year. That's about 0.4% of gross domestic product (GDP). There are more effective ways of stimulating the economy. For example, giving $10,000 to each of the 10 million U.S. families living in poverty would cost only $100 billion and would have double the immediate stimulative effect of forgiving all student loans. The focus should be on providing relief to financially distressed student loan borrowers, not on providing a handout to all borrowers, many of whom are capable of repaying their debts.
As noted by Judith Scott-Clayton in a New York Times column, "Student Loan Debt: Who Are the 1%?" protesters with six-figure student loan debt are not typical. Most of the 99% the protesters claim to represent graduated with much less debt. Given the low undergraduate federal loan limits, the only way to accumulate that much debt is through borrowing for graduate school, borrowing through private student loan programs or capitalizing interest during an extended period of nonpayment. However, it is clear that these borrowers are struggling to repay their debts and that their numbers are growing.
This also means that the Occupy Wall Street movement is not going to go away. People protest when they are personally affected. Many of the protesters claim high levels of education debt and difficulty getting jobs. Unemployment rates won't drop to pre-credit crisis norms for at least four more years, assuming the current economic downturn follows the pattern of previous recessions. But even after the economy recovers, the debt will continue. There are also ever-increasing numbers of students graduating with excessive debt each year, due to a failure of grants to keep pace with increases in college costs, inadequate counseling, and some students blindly following their dreams without contemplating the consequences of too much debt. Government cuts in spending on student financial aid make the problem worse, not better.
There is no magic bullet that will solve the problems highlighted by the Occupy Wall Street protest movement. Rather, Congress and colleges need to take several steps toward addressing the problem.
- Congress must repeal the exception to bankruptcy discharge for federal and private student loans. The anti-abuse provisions of the US Bankruptcy Code are sufficient to prevent able-bodied borrowers from discharging their debts immediately after graduation. If Congress feels that a five-year waiting period is necessary, it should be encoded both prospectively and retrospectively, such as by requiring the circumstances that prevent the borrower from repaying the debt to either have lasted for a continuous period of at least 60 months or be expected to persist for a continuous period of at least 60 months.
- The failure of need-based grants to keep pace with increases in college costs causes students to graduate with thousands of dollars of additional debt. The average Federal Pell Grant has slipped from covering a third of the cost of a bachelor's degree at public colleges and universities in 1986-87 to less than a fifth in 2007-08. The maximum Pell Grant has slipped from covering half of college costs at public 4-year colleges and universities to a third. Congress should immediately double the maximum Pell Grant to $11,000, with future increases indexed to the inflation rate (CPI-U) plus 1%. Eligibility for the Pell Grant should be limited to students with family adjusted gross income at or below 250% of the poverty line.
- Congress should make the improved income-based repayment plan available immediately for all federal student loan borrowers, including borrowers already in repayment.
- Congress should explore the tradeoffs involved in making the income-based repayment plan available to borrowers of Parent PLUS loans.
- Congress should end the offset of Social Security disability benefit payments for defaulted borrowers. This is a morally bankrupt policy, as it places the recovery of government debt ahead of compassion for victims of misfortune. Congress should freeze the loans of these disabled borrowers for the duration of the disability, so that no new interest accrues. A borrower who has received Social Security disability benefits for five years or is expected to receive these benefits for at least five years should have their student loan debt permanently discharged.
- Congress should apply the affordable debt restrictions from the new gainful employment rules to all colleges and universities, not just for-profit colleges. When a student borrows money to pay for college, there is an expectation that the student will earn enough money after graduation to be able to afford to repay the debt.
- Congress should provide colleges and universities with the authority to reduce annual and aggregate loan limits based on field of study, degree program and enrollment status. The statutory requirement that adjustments to loan certifications be made on a case-by-case basis precludes colleges and universities from adopting policies that prescribe lower loan limits based on factors that contribute to excessive debt. For example, students in 2-year associate's degree programs have the same aggregate loan limits as students in 4-year bachelor's degree programs. Guidance published by the US Department of Education also precludes colleges and universities from limiting unsubsidized Stafford loan borrowing by independent students from limiting loans to institutional charges.
- Congress should require all qualified education loans, including private student loans, to be school certified. This will give college financial aid administrators the opportunity to counsel students about smarter borrowing and avoiding excessive debt. Lenders should be required to report all private education loans to the National Student Loan Data System (NSLDS), not just federal education loans, to permit better tracking of the total student loan debt burden.
- Colleges and universities must take steps to prevent students from graduating with excessive debt. Institutions must do a better job of counseling students about debt even if it means that some students enroll at other lower-cost institutions. The best interests of students and their families must always come first.
- Colleges and universities must help families make informed decisions concerning college affordability by providing clear and comparable college cost and financial aid disclosures. A lack of clarity concerning the real cost of college contributes to over-borrowing. Net price, the difference between the total cost of attendance and only grants and gift aid, is a more realistic measure of the true bottom-line cost of college. It is the amount of money the family must pay from savings, income, or loans to cover college costs.
- Colleges and universities should require every incoming student to participate in a financial literacy mini-course during orientation or their first semester. Institutions should also work with local secondary schools to add financial literacy and problem solving to the secondary school curricula. Not only will this help students make smarter borrowing decisions and minimize their debt, but it will also help them succeed after they graduate by teaching them how to manage their money.
- Students must accept personal responsibility for the debt they incur to pay for a college education. Nobody forces them to sign a promissory note. As part of annual debt counseling, students should be required to read and sign a statement about their cumulative debt before they can borrow more money. For example: "You have borrowed a total of $______ so far to pay for your education. If you continue borrowing at the same rate, your debt at the start of repayment (including capitalized interest) will total $______. This money is a loan and must be repaid with interest. The loan payments are estimated to be $_____ a month, assuming level repayment with a standard ten-year repayment term. You are responsible for repaying this loan even if you aren't satisfied with the quality of the education you received or are unable to get a good job after graduation."
- Limit collection charges on defaulted borrowers to the actual collection costs as opposed to the average. It doesn't seem fair for a defaulted borrower who immediately begins repaying to pay the same amount as a borrower who doesn't pay for years and had to be tracked down through skip tracing. Somehow collection charges of 25% of the payments doesn't seem to be the "reasonable collection costs" from HEA section 484A(b)(1).
- Exclude the 20-year or 25-year forgiveness in income-based repayment from income, making it tax-free like the 10-year public service loan forgiveness.
- Allow 529 college savings plans to be used to pay down student loan debt. Currently borrowers must take an unqualified distribution, which requires paying income taxes and a 10% tax penalty on the earnings portion of the distribution. Adding student loan debt as a qualified expense will fix this. Rep. Melissa Bean had introduced a proposal to do this, but it was never reported out of committee.
The Occupy Wall Street protesters have drawn attention to the growth of student loan debt, which is an important issue that must be addressed. Their call to forgive all student loan debt may be unrealistic, but there are meaningful and practical steps that the federal government and colleges can take to improve college affordability and alleviate the debt burden of college graduates who are struggling to repay their student loans.
Mark Kantrowitz is the publisher of Fastweb.com and FinAid.org.
The opinions offered and statements made in Student Aid Perspectives articles do not imply endorsement by NASFAA or guarantee the accuracy of information presented.
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