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Jubilee for Student Debt

There is a movement – in its very early stages – for a debt jubilee. You may not have heard of it, but it has some people very worried. And I think there’s a good chance it will come to pass. Soon.

This is the second of a series of articles on a continuing political phenomenon important to people with debt. The first article is “Occupy Wall Street.”  The second article is Econ 101 or What Happens when the Bills Come Due.

What is a “Jubilee”?

A jubilee is the mass forgiveness of debt – a governmentally imposed wiping of the slate clean from all debt of any specific, or all, types of debt. You might think it could never happen here in the United States, but it has, historically, happened several times in various places. Never was it more appropriate than for student debt, in my opinion. Of course, other kinds of debt could also get thrown into the pot when things get going. Is it good? Is it likely? And if it happens, what will be the probable consequences?

Any talk of student loan jubilee should begin with what has happened in the past forty years. During that time, student loans have become not just popular, but essential for almost all students entering college or other formal, advanced education in the United States. In some countries in Europe, for example, schooling is free, but here it is expensive – very expensive. And it has been getting more so at a rate far exceeding the rate of inflation for the past forty years. This is because student loans, which had a noble publicly discussed purpose (making education available to all) had the unintended consequence of making education unaffordable to all. By relieving the price competition, it has allowed schools to increase tuition at a tremendous rate.

The schools and the banks have become filthy rich from the system. Student graduation rates have fallen, and average length of college has increased. And a whole generation of students have entered adult life with a crushing burden of debt.

Because of “special government protections,” bankruptcy is almost never any help to people with student debt. They declare bankruptcy and still end up paying everything they have for student loans that, all too often, were completely useless to them. Whatever you think of Trump’s tax cuts for the super-rich in 2017, the amount would have been enough to rid people of their student debt burdens, so it can be done. It’s just a question of who gets the money: the super rich 1%? Or the poverty stricken 99%?

This question is soon going to be coming to the fore.

Social Security is a Huge Issue

There’s another factor at play. The baby boomers – people born from roughly 1950 – 1965 – have plundered the resources of the past and future. They’ve given themselves tax cuts and embarked upon expensive wars while decimating the interest rates that allowed old people to live on their savings. And while guzzling the resources that could have given the young a start in life. Now they’re beginning to retire, assuming that Social Security will keep them in the comfort to which they are accustomed, for the rest of their long lives. When boomers started paying into Social Security, there were many workers per retiree, now there are less than half as many workers per retiree. Social Security is paid out of current tax revenues, so what that means is that the “surplus” people like to talk about for Social Security is an illusion – that surplus is made up of government bonds which are paid (or rolled forward to be paid later) out of current taxes. The millennials will be paying for the boomers’ retirement, if they choose to do so.

By election time in 2020, the baby boomers will no longer be the largest voting group in the country. Millennials will become the largest voting block, and they will be gaining electoral power for many years after that. It is going to occur to them that the boomers have pillaged their futures. It will occur to someone that the time is ripe for a jubilee to set thing straight. That person will find a passionate following of people who have never felt called-upon to vote. Politicians have pandered to the boomers for many years. They’ve ignored the millennials, and the millennials have ignored them.

That could change very suddenly. I think it will. Some people are in fact already talking about it.

What it Means

The change in electoral power and the likely shift in governmental focus could be huge. One could hope that the millennials will strive to set some priorities that the boomers never managed. In that scenario, student loans would be eliminated and free education installed (perhaps). Social Security would be managed in some way take care of the old without overburdening the young, and peace and harmony could descend forever and ever amen. Something has to change for that to happen, though. Either the super-rich will have to pay much more or the military, for example, will have to take much less. It could happen, but these are both deeply entrenched special interests with a lot of money and power.

An alternative scenario is less attractive but more likely. In that scenario, student debt is eliminated and there’s a lot of talk about cutting back on money to retirees and the military and of taxing the super-rich. What actually happens is more of what has been happening, though – the deficit balloons. The money is paid in depreciated dollars, and the debt is pushed down the line for the future to pay.

Eventually, that isn’t going to keep working.

Occupy Wall Street and Debt Jubilee

This article was originally written only about the Occupy Wall Street when that was a “thing.” For an instant in time, it looked like people might look up and notice the huge shift in wealth from the poor and working classes to the rich. And from the young generation (Millennials as they’re now called) to the Baby Boomers That moment has passed but the issues remain, and a large-scale disruption seems inevitable. The student loan picture has grown much worse, and combined with health care and retirement issues, might well bring on an inter-generational conflict of massive proportions.

I think it will likely take the form of a “debt jubilee.” And this, along with other economic policies, will have consequences.

Occupy Wall Street – The Beginnings of a Serious Movement

As always, I’m a little cautious when I bring an “outside” issue into the discussion of defending yourself from a lawsuit brought by a debt collector. But there are links: there is increasing resistance to the status quo of banks and debt collectors using the legal system to take things away from people without a lot of money. So far, this resistance hasn’t accomplished much (if anything) on the broader political scene, but it is beginning to create an energy that may affect what litigants and judges will do. It may also radically change the whole debt legal landscape.

And that brings the discussion within the legitimate scope of my analysis.

Here’s what I wrote about Occupy Wall Street, and then there’s a link to an article about debt jubilees.

Occupy Wall Street Is Just Getting Started

I am very happy to see the demonstrations. As I have mentioned before, there is certainly a “class war” going on, but that war is not in the words of the fringe politicians. It is in the actions of the political decision-makers, who have transferred trillions of dollars to the wealthiest people (by and large, these are the people who own the banks) through the bailouts and other policies. It is the working and middle class people who are and have been under fire. They pay the price of the bailouts to the rich, and they are the ones being sued for debt more than anybody else, who are losing their homes and groaning under big credit card balances with outrageous rates of interest.

They should be mad. Occupy Wall Street has started, like so many other social movements, among the young, but it is showing some signs of attracting the working and middle classes. There’s smoke. Will there be fire? I think that possibility certainly exists, and the persistence of the “occupation” has been impressive.

The Occupiers’ Message

It isn’t that I think the demands of Occupy Wall Street are coherent at this point. I haven’t been able to make out any sort of specific, consistent message from the things they have written, or that have been written about them. But that said, I do believe that they have a point. They know they’ve been screwed –they just don’t know how. Yet.

“Green Tea Party”

Last year I called for a “Green Tea Party.” Although the name was a little tongue-in-cheek, the thoughts behind it were quite serious. The Tea Party, with its calls for “smaller government” (but apparently without wanting to reduce American military adventurism around the globe or subsidies for corporations and other traditionally right wing interests) captures the imaginations and hopes of a lot of people who feel disenchanted by politicians. Occupy Wall Street, with their opposition to bailouts for the wealthy and other corporate “help” (but apparently with some faith in the trustworthiness and goodness of government), really are a sort of mirror image of the Tea Party.

There is a lot of antagonism between the two groups right now, but they both, actually, seem to want the same thing. Both groups want a world where people have a chance to survive and get ahead in life. Each identifies one side of the coin as the problem. And the coin is that we have a ruling class that uses government as a tool -to take money from the lower and middle classes and give it to the rich, and to expand their reach and power through the world.

A Combined Populist Movement

What would happen if Occupy Wall Street came, as many progressive organizations did during the Great Depression, to view big government as the problem rather than the solution? What would happen if the Tea Party, as Ron Paul clearly does, came to see the assertion of U.S. military power around the world as a form of big government opposed to personal freedom? or corporate bailouts as contrary to free market enterprise?

Then the Tea Party and Occupy Wall Street might come together with some real populist power. It would never be called the “Green Tea Party,” of course, but it might be called “The New America” movement or something like that. Something that might capture the urgent need for our country to move back towards real democracy, away from the on-going siphoning of resources to the wealthy, and away from the constantly expanding government that makes that possible.

Public Response

The response to both the Tea Party and Occupy Wall Street has been “instructive.” It’s actually very similar to the initial response to “Arab Spring,” the movement which has toppled dictators in the Middle East and continues to reshape politics over there. The financial press ignored Occupy Wall Street as long as possible, and since then have been, almost uniformly, contemptuous or patronizing. Politicians have either ignored the group or tried to co-opt them. And the police response has mirrored what we saw in the Middle East out of the dictators: brutal and arrogant.

Meanwhile, more and more people are gravitating towards the marchers.

There has been criticism of the Tea Party that they were, in fact, co-opted by the Republican Party, and I think that is partially true. It has been a platform for the anti-intellectual side of the party, no doubt. But this co-optation is certainly not complete, as the Tea Party candidates have shown that they do have their own agenda that is not always under the control of the rest of the party. If the Tea Party and Occupy Wall Street could somehow see beyond their differences and develop the broad common ground they share, the resulting movement would, I believe, be beyond the power of either political party to co-opt.

Now a new phase of this movement is beginning – a call for “debt jubilee,” where student loans will simply be wiped off the books. How will this happen and what will it do? Click here for article on Debt Jubilee. The movement will dramatically affect everything in the U.S., from schooling to Social Security and beyond. And there will be consequences.

 

Case Study on Student Loans – Hixson

The Choices Facing Hixson

Sometimes people wonder how their payments get out of control so quickly. And many people have a wrong idea about how interest rates on big loans work. This article is designed to help explain the choice one person made, as revealed in a bankruptcy case. This case is In re Hixson, 450 B.R. 9 (S.D.N.Y. 2011), Hixson tried to get rid of just some of his debt – the part represented by his ex-wife, who wasn’t paying, and never had paid, a cent on their joint debt.

Hixson graduated from the Julliard School of Music with a Ph.D. in clarinet in 1998. His student loans at the time were 91 thousand dollars and change. He was married to a woman about whom not much is said – but she had loans totalling about $47,500. That’s all we really know, so what follows is a mixture of guess-work and hypotheticals. But it is intended to be realistic and to show the situation the couple faced.

Let’s suppose that Hixson had several loans with an average interest rate of 7%. This is the way they’re done – every year is a different loan in most programs, and they can have different interest rates. Applying the loan calculator, this is what he faced, more or less. We’re going to guess that he had agreed to a ten-year payment plan. Using our favorite loan calculator (click here for an explanation of how to use it, if you need one), we plug in $91,000, interest at 7% and “120 payments” and we get…

He was on the hook for $1,056.59 per month. That’s pretty much, but if you have a pretty good job it would at least be possible. But who would want to? Hixson, whose degree was in clarinet, was probably counting on getting a university position. This apparently did not happen.

Now let’s consider his then-wife, who had about $47,500 in loans. We’ll just say they averaged 8% interest, and that she, too, was going to pay them over the course of ten years. Here’s what she was looking at:

She was on the hook for $576.31, so together the couple was looking at ten years of payments at a little over $1,600 per month. Again – possible if one or both were in teaching positions. We don’t know what her degree was in, or what it was. What we do know is that the couple didn’t like what they were facing, because they agreed to consolidate their loans. Let’s figure they got a slightly better rate by doing so. We’ll say that the rate on the consolidated loan was 6%, although again we emphasize we do not know what it really was. If that was so, and they kept their payment schedule to a “new” schedule of ten years, here’s what they faced:

Not much savings there, so it is possible we have got some of the numbers wrong. No matter, because what happened afterwards is really more important. In the seventeen months following this loan consolidation, Hixson made 12 payments of approximately $440 each. It isn’t clear why the payments were that size, and Hixson’s wife made no payments – then, or ever.

About 18 months after consolidating their debts, Hixson and his wife divorced. This means that they were both on the hook for the total amount due, but they were no longer married. It would appear from the case, though vaguely, that the ex-wife agreed to pay her loans, but that she never did. In any event, Hixson stopped paying, too, in December 2000. No payments were made until the Department of Education caught up with Hixson and began garnishing wages in October of 2004. They garnished him for between two hundred and six hundred dollars for a year before he declared bankruptcy. The DOE never made any attempt to collect from Hixson’s ex-wife. Hixson was not a clarinet professor – he was apparently a computer internet sales person.

After declaring bankruptcy, Hixson apparently stopped paying on the debt for another four years (although this isn’t clear). What is clear is that in December 2006, Hixson was facing a debt now totalling approximately $195,000. He tried to get it discharged.

At the time relevant to the case, Hixson was making about $40,000 take-home pay per year and living in NYC. His ex-wife had never paid a cent, and the DOE was after Hixson for it all. He faced two options: ten years of payments about $2100 per month (more than all of the money he had, after necessaries) or 21 years of $808/month payments. The bankruptcy court found that Hixson’s situation was not “undue hardship” that would allow any of the debt to be reduced. It also found that, because Hixson had not been making payments, he had not satisfied the “good-faith” test that the courts require for there to be any right to relief at all.

The Point of this Article

We do not know what Hixson did, or “how it all turned out.” We seriously doubt it turned out well for anybody other than the university which sold Hixson a nearly useless degree that took him at least six years to earn, cost whatever out of pocket (or in work) that Hixson had already paid before the case began, plus the $100,000 in loans Hixson got stuck with. Hixson’s total projected payments (not counting anything paid before the bankruptcy court’s ruling): about $350,000.  And these are after-tax dollars – so they likely imply a real cost more like $500,000.

After paying enough to buy a mansion, Hixson will, if he manages, be left with nothing but his degree. We simply wish to point out what a disaster this probably was for Hixson. Be very careful before taking on a student loan!

Link to a Loan Calculator

We have no connection to this calculator, but it will allow you to put in payment terms (number and interest rate) and determine how much money you could borrow; or it can help you take the loan principle and figure out how much you will have to pay – over a length of time you can set – to pay it off. In other words, this program lets you get a realistic handle on the amount of blood, sweat and tears your educational loan will cost. We hope it makes you take a hard look at the universities and their tuition rates.

 For Help with Student Loans

If you are either considering signing or co-signing for a student loan, or if you are at any stage in student loan repayment, you may be interested in our report on student loans.

For More on student loans and the probable political consequences, read Occupy Wall Street and Debt Jubilee.

Repaying Student Loans

The only sure way to avoid trouble with student loans is not to get into it. Be careful and know what you’re doing.

A Simplified Explanation of Student Loan Repayment

 Why they get out of control so quickly

Sometimes people wonder how their payments get out of control so quickly. And many people have a wrong idea about how interest rates on big loans work. This article is designed to help with that, and it comes in large part from our Report on Student Loans and our discussion of a case everyone considering signing up for a student loan, and especially considering loan consolidation with another person, should read carefully. This case is In re Hixson, 450 B.R. 9 (S.D.N.Y. 2011),

A Simplified Student Loan Scenario

Suppose you borrow $100 at 10% interest and you agree to make one payment per year. At the end of year one, you will owe $110. To make any progress, you must pay more than ten dollars (the interest); since it’s a student loan with a 100-year maturity, your payment is $11. It isn’t magic or fancy book-keeping. To make progress you must pay more than the interest, otherwise it gets added to the principle. Your $11 payment will reduce the total owed by only one dollar.

Times are rough, though, so you seek and get a deferment of that first payment. At the end of year 2, you now owe $121. Your $11 payment will not make any headway on the principle, but it will hold things steady. If you need a second deferment, you are now on a downward spiral – even if you make all your scheduled payments till doomsday, you will still get further and further behind.

This won’t happen. Instead, your payments will rise. After a few deferments your payments will be significantly higher and will stretch out just as far into the future as ever. In other words, deferments in which the interest continues to run are extremely dangerous and are to be avoided if possible. If you renegotiate the deal (consolidating your loans, for example), you can possibly change the payments back, but you will do this at the price of increasing the number of payments unless you can get a lower rate of interest, which is not likely for student loans.

Leverage and the Idea behind Student Loans

The idea behind student loans is simple: you pay one price for an asset that should help you in many ways over a long term. Inflation should help, too, because although your income should go up over time simply because of inflation (as well as your increasing experience), your payments will remain constant. Thus your payments should, in theory, go down relative to your income.

That’s the theory. It’s easier to see in something tangible, like a house. Suppose you buy a house for $100,000 with an interest rate of 5%. You pay $10,000 down and agree to pay $100/month for as long as it takes. If the price of the house goes up 10% in the first year, you have made a great bargain: the house is now worth $110,000. The amount you spent to get that house was only $11,200, so you have made $8,800. If your income has kept up with inflation, your hundred dollar payment will be easier to pay than it was at the start, too.

Student loans theoretically work the same way. You pay something down and take out loans for tuition, and you get a sort of two-faced asset: your education and a job using that education. The job, hopefully, is better than you would have gotten without the education, and it should also appreciate over time, so the value of your assets will rise, while inflation will reduce the real impact of your loan payments.

Not So Fast

The theory behind taking loans is easy, so why did so many homeowners go broke in the early 2000s? Because the home-buying spree, like student loans, were based on a premise that isn’t always right. The asset you buy isn’t always worth it – and prices don’t always go up. If prices go down, or if the educational asset does not result in financial gain, and if inflation is low, the leverage can cut the other way. The payments remain constant (or go up if payments are missed), while the ability to pay goes down.

And this is what has happened to so many people in the 2000s. Our Report on Student Loans discusses the way bankruptcy law has affected the equation and makes some suggestions about what to do if you are struggling with student loan payments. For help with the math of your loan, we suggest that you use a loan calculator, and you will find the link to that in the side panel. For a case study of the choices and issues facing one real person who took out student loans, please read A Case Study: The Choices Facing Hixson.

How to Calculate Student Loans

Are you considering getting a student loan? Do you have one already and happen to be considering your alternatives? You will be well-advised to use a loan calculator. This will allow you to determine the size of the payment you can live with – and we highly recommend you try not to underestimate how much misery loan payments can bring you.

How to Use the Calculator

We somewhat arbitrarily took $200 as the maximum monthly payment that would be tolerable. This number is based upon our own experience and what we’ve observed. Note that the payment schedule is for ten years. Considering what we’ve said about leverage, if you have a good job, it can make sense to make your payments over this long, or even longer, a period. But we hated every minute of ours, and the world is unpredictable, so the longer period exposes you more to the risk of losing your job or other changes. You could sign up for a longer period and make extra payments, and that is what we did.

In any event, in the example above, we chose $200 as the monthly payment, a 9% interest rate, and a ten year period (120 payments) and clicked on “calculate.” The calculator returned the “Loan Amount = $15,788.34” And so we know that we could not get a loan larger than that, on those terms without exceeding the $200 per month payment.

What if we could get a better interest rate, though? Suppose we got an interest rate of 5%? That seems almost free compared to the rates for credit cards! How big a loan could we get without going over our $200 payment ceiling?

As you can see, that yielded a loan total of $18,856.27. As we point out in our Student Loan Report, that’s about a fourth of the cost of one year at Harvard or Yale. So what if you ignored our warnings about length of payment schedule and went with a repayment period of 20 years (this would likely be half of your entire work life, so we almost hate even to mention it). How much could you borrow then?

We made the change by changing number of payments from “120” to “240.” In other words, you can borrow $30,305.06 if you agree to repay for twenty years. That’s still less than half a year’s cost of the Ivy League Schools, and under a year’s out-of-state tuition for most state universities. So let’s flex one last time, and consider doubling our acceptable payment amounts to $400 per month for twenty years. That’s way too much, in our opinion, but here are the calculations:

With a simple rate of interest, doubling the payments allows you to borrow twice as much. And so, for the price of $400 per month for twenty years, you can almost afford a year at an Ivy League school.

We deliberately presented the  information this way so that you would feel every cent and every minute. It is our belief that there are almost no circumstances where agreeing to anything like this makes sense. To see the real-life calculations facing the plaintiff (bankrupt person) in the Hixson case we refer to in our article on repaying student loans, please read A Case Study: The Choices Facing Hixson. In Hixson, the student got out of school with approximately $100,000 in debt and no job in his subject. It’s a pretty sad tale, but every person contemplating a student loan should consider it.

Link to a Loan Calculator

We have no connection to this calculator, but it will allow you to put in payment terms (number and interest rate) and determine how much money you could borrow; or it can help you take the loan principle and figure out how much you will have to pay – over a length of time you can set – to pay it off. In other words, this program lets you get a realistic handle on the amount of blood, sweat and tears your educational loan will cost. We hope it makes you take a hard look at the universities and their tuition rates.

 

More Legal Research

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Programs that may help with student loans

There is unfortunately little you can do in talking to student loan collectors. Most of the time, the debt collectors themselves really have little right to negotiate with you. The law behind student loans is that they are not dischargeable in bankruptcy absent “extraordinary” circumstances and “undue hardship,” and the cases discussing the issue have been extremely unpromising, to say the very least, about what circumstances must be in order for them to be “extraordinary.” “Undue hardship” has been interpreted to mean “no likelihood of ever being able to pay the debt,” an almost unprovable burden. On the bright side, there are increasing numbers of organizations and programs out there to help, and the lending institutions have not seemed eager to sue anybody.

One of the programs that might help you deal with student loans (not a negotiation) is an “income-based” payment (IBR) program. The plans call for a payment “cap” of a certain percentage of discretionary income and provide for loan “forgiveness” after a certain period of time. The program seems, at first sight, to be very reasonable, with a limit on payments and amount of time that will be required. They are for federal loans.

Another sort of help is available if you are doing some sorts of public or nonprofit service as your job, you may be able to get help from the federal government. Click here for the link that will take you to the government site discussing that help. This program is designed for only certain kinds of loans. Here’s what the government says about it:

Only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for PSLF. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible for PSLF.

If you have FFEL Program or Perkins Loan Program loans, you may consolidate them into a Direct Consolidation Loan to take advantage of PSLF. However, only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for PSLF. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count as qualifying PSLF payments.

There are serious limits to the kind of help this offers, but for some people this will be a way out of difficulty. Click here for more information.

Another, similar program, the “Pay as You Earn”  program, is, like the IBR program above, based on a type of financial hardship. The program provides for payment caps and loan forgiveness if your payments would be too much for you to be able to afford under the standards established by the program. You can find out about that here: Pay as You Earn.

For more help on student loans, you should check out the Project on Student Debt. If you aren’t sure what kind of loans you have, check out the National Student Loan Database System for Students and select “Financial Aid Review” for a list of all the federal loans to you. Click each individual loan to see who the servicer is for that loan (this is the company that collects payments from you). Remember that system shows only your federal student loans, however, and not your private or state student loans. Contact your school to see whether you have non-federal loans if you are in doubt about that, as they keep a record of them.

For more information on student loans and repayment, check out consumer finance. If you are active-duty military, there may be benefits helpful to you under the Service Members Civil Relief Act. If you’re not in the military and have private loans, you have fewer options, but take a look at: Paying for College. For an article on reducing student debt without paying for it or click here for a free ebook on ways to get rid of student loans without paying for them

One of the options we found interesting was the public service type loan forgiveness program that also helps with state or private loans

Negotiating Student Loans with Debt Collectors

Unfortunately, there’s really very little or even no negotiating with debt collectors on student loans, as we said above. There seem to be no market pressures on them to settle at all – they aren’t worried about the debt expiring, the companies that issue the debt are large and government-subsidized, and “educational loans” are one of the last great sacred cows in our country.

The positive side of dealing with student loans, however, is that while the collectors will call and bug you, somebody in the collection department usually does seem to take notice of the actual financial reality you are facing. If you tell them that you do not have the money to pay, they will often – usually even, it seems, refuse to agree to partial payments – but then they usually don’t take any type of collection action, either, and they only very rarely sue anybody. The downside here is still significant, however, as the information might very well end up on your credit report and cost you that way. And eventually the lender might get around to suing you after all if they find out you have property, so they may create problems if you own your home.