Wall Street

An Open Letter to Josh Mitchell of the Wall Street Journal

Dear Mr. Mitchell,

After reading your article entitled, “Grad-School Loan Binge Fans Debt Worries,” it became clear that you are misinformed regarding the reality that millions of graduate students face when deciding to pursue a master’s or professional degree in the United States. Whether your misinformed view of this crisis is a result of willful ignorance or lazy reporting will remain a mystery.

In the media-biased world we all live in, The Wall Street Journal is still revered as a reliable and relatively unbiased news source. The Wall Street Journal provides sophisticated readers with some of the most pertinent business and political news in America. In fact, in 2007, ABC News reported that three-quarters of your readers have earned a college degree and have a median household income of $234,909. And it will come as no surprise that higher education levels lead to higher news readership.

When your customers are overwhelmingly educated beyond high school, the bar for reporting is raised. As such, I feel it is my obligation to illuminate the truth behind the assertions in your article in the hope that after reading my analysis of your missteps, you might be inclined to be more empathetic and thoughtful about the American student loan crisis as it specifically relates to graduate and professional students. My goal is that you are reminded that each of the millions of students that you have vilified are living, breathing humans, many of which are struggling to make ends meet because of their student loan debt. Every American will be affected by the student loan crisis, including you and your readers.

The long-term implications of the perpetual economic hardship of millions of Americans will have a dire effect on every facet of our economy. Studies show that students with substantial debt are delaying or foregoing buying a home, purchasing cars, and in some cases, deciding not to have children because of their student loan payments.

This crisis has ripple effects the likes of which we have never seen. People have even resorted to ending their lives—or deciding not to end their lives—because of student debt. Your cavalier approach to this crisis is insulting to, as you noted, millions of Americans (and their families) struggling with student loan debt.

To err is human; to forgive, divine. ~Alexander Pope

First things first. You stated, “Federal student loans cannot be discharged in bankruptcy.” This is false. Although it is a difficult process, and discharge is the exception rather than the rule, student loans can be discharged in bankruptcy.  Research, read, revise—it is kind of your job.

One of the most harmful impediments to realistic student loan and higher education reform is the borrower-blaming rhetoric that you and countless other journalists have perpetuated. By blaming student borrowers you do nothing more than obfuscate the reasons for the student loan crisis and stir a divisive (and frankly poorly-informed) conversation.

When you describe Virginia Murphy’s student loan story, you categorize her—and others like her—as an “expanding breed of American borrower: those who owe at least $100,000 in student debt but have no expectation of paying it back.” I can guarantee that the reason Ms. Murphy has “no expectation” of paying off her student loan balance is not because she wants to cheat the government or the taxpayers. I speak from experience.

I am a student loan borrower. I have earned an MBA and a JD. I never needed a student loan until I entered graduate school (I was one of the few fortunate athletes in this country that earned an athletic scholarship to cover the cost of my tuition). I only attended state schools and I never took out a private loan. I also never received a scholarship even though I was at the top of my respective classes. Yes, I am of the same breed as Ms. Murphy.

You are correct that the public service forgiveness program will allow a student who commits his/herself to 10 years of public service, and by default, lower salaries than their counterparts in the private sector. You note that Ms. Murphy’s loan balance of $256,000 will “swell” to $300,000 in the next seven years it will take her to have her loans forgiven through the public service forgiveness program. To qualify for the forgiveness program, she must maintain her $330 monthly payments for the next seven years. Assuming her monthly obligation stays the same, she will have paid $27,720 over a seven year period. Yet, the obscene interest rates on her loans (mine range from 6.5-7.9%) will ensure that the $27,720 she pays will never touch her principal because it will have ballooned by over 17% in just seven years.

If you know of any seven-year bonds that have a 17% rate of return (2% compounded monthly, to be specific), sign me up.

Private sector workers, however, are not in an even similar position when it comes to “forgiveness” of their loans. You stated that private sector workers “can generally have balances forgiven after 20 years.” While you used the appropriate verbiage to characterize the federal income based repayment plan, the word “forgiveness” is not accurate.

If you still have a balance on your loans at the end of what could be a quarter of a century of crushing monthly student loan payments, you are taxed on the remaining balance, plus your income. This is not how the public service repayment plan works. Here is a great explanation of this phenomenon by Jantz Hoffman of Advantage Group, “Let’s say your debt has grown to $180,000 over 20 years, and by that point, you’re making $120,000[.] If $180,000 is being forgiven, then you are looking at paying taxes on $300,000 in total income in one year. At that point, you’re over the $250,000 income category, my friend.”

If this is “one of the nation’s fastest growing entitlements,” I must be confused as to what you consider an entitlement to be. To the millions of student borrowers out there, the entitlement seems to rest with those college students that have the financial means to avoid the student loan trap. And make no mistake; we do not blame these students. We envy these students. They, unlike us, will have the time and the grace to make mistakes—the kind of mistakes one makes by virtue of growing up. They have more financial leeway to change careers, buy homes and cars, and raise children.  Judging by the tone of your article and the comments that followed it, students without debt are entitled to one more thing. . . Your respect.

The Predators and the Prey

As you noted, in 2005, Congress lifted the limit on how much a student could borrow in federal loans for graduate school by creating Grad PLUS loans, “which cover any expenses after graduate students hit the Stafford [Loan] ceiling.” Before 2005, a graduate student was limited to borrowing a total of $138,500 including their undergraduate debt.

You state, “The measure helped students bypass private lenders, which student advocates said charged high interest rates and did too little to protect borrowers who fell on hard times.”

In the same piece, however, you also state, “The program also helped lawmakers in their quest to cut the federal deficit, because the government charges grad students higher interest rates than undergraduates. Grad PLUS was included in a deficit-reduction package passed by the Republican-controlled Congress in 2005 and signed [into law] by President George W. Bush in 2006.” And, “The federal student-loan programs are designed to generate revenue for tax payers, and they do.”

To summarize, you obviously acknowledge that graduate student loans were effectively de-regulated in order to make money for the federal government. This is the same government that ballooned the national deficit through the “Bush tax-cuts” and borrowed trillions of dollars to maintain the wars in Afghanistan and Iraq. The Watson Institute at Brown University reports, “The United States federal government has spent or obligated 4.4 trillion dollars on the wars in Afghanistan, Pakistan, and Iraq.” The estimated interest payments due on this debt by 2053 will be $7 trillion.

Confusingly, though, you seem extremely concerned about the tax payers’ comparatively paltry burden from the “forgiveness” of federal student loans: “But the surging enrollment in the debt-forgiveness programs recently prompted the government to increase by $22 billion its estimate of the long-term cost of the provisions;” “And a recent move to expand the most generous repayment program to millions more borrowers will cost an estimated $15.3 billion.” “Generous” is a huge overstatement and these figures are dwarfed by the long-term tax-payer burdens set into motion during the Bush presidency. The Center on Budget and Policy Priorities reported:

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for nearly $6 trillion in deficits in 2009 through 2019 (including associated debt-service costs of $1.4 trillion).  By 2019, we estimate that these two policies will account for almost half — over $8 trillion — of the $17 trillion in debt that will be owed under current policies.

What concerns me more than your feigned interest for the welfare of the tax payers is that you unabashedly ignore the elephant in the room: the United States Government, after borrowing $4.4 trillion for two wars, also unilaterally decided to commit $700 billion of taxpayer dollars to fund the Wall Street bailout. But the actual cost of the bailout has been estimated to exceed $14.1 trillion.

Start two wars in the Middle East with borrowed money? Forgiven.

Use tax payer money to bail out major banks that gambled with peoples’ homes and retirement accounts leading to the worst American financial crash in recent history? Forgiven.

Lower the tax revenues realized by the federal government each year by giving unprecedented tax cuts to millionaires and large corporations at the expense of the middle class? Forgiven.

Went to law or medical school to try to improve your future financial and professional prospects, save lives, or preserve freedom? Unforgivable.

We are not the predators in this jungle of higher education. Regardless of your flawed analysis, students attending graduate school did not cause the student loan crisis. Our financial struggles and our exploding student debt is the result of a system designed by our nation’s leaders that commodifies and preys on the integrity of higher education and our most financially-vulnerable students.

The Rising Cost of College

Throughout your article, you emphasize that the swelling student loan debt burden of law and medical students, in particular, has been something that has grown at a record-setting pace.   For example:

  1. “The effects of loosened credit are most evident among graduates of medical and law schools . . . whose debt burdens have skyrocketed in the past decade.”
  2. “As graduate-school enrollment swelled over the past decade, the number of Americans owing at least $100,000 in student debt more than quintupled to 1.82 million as of Jan. 1 . . .”
  3. “The typical medical-school graduate owed $161,772 in student debt at graduation in 2012 . . . That figure rose an inflation-adjusted 31% over eight years. Debt growth was even sharper among law-school graduates. The typical student who borrowed left law school owing $140,616 in 2012, up 59% from eight years earlier.”
  4. As of 2012, “Those earning a master’s [degree] typically owed between $50,000 and $60,000; law degrees, $141,000; and medical degrees, $162,000.” Only “0.3% of undergrads owed six-figure debts,” “[b]ut among graduate and professional school students, 15% owed at least $100,000 upon graduation—more than double the share just four years earlier.”

“According to data from the Labor Department, the price index for college tuition grew by nearly 80 percent between August 2003 and August 2013. That is nearly twice as fast as growth in costs in medical care, another area widely recognized for fast-rising prices. It’s also more than twice as fast as the overall consumer price index during that same period.”

widemodern_collegechart_102313

The combination of tuition hikes and the depletion of state spending for higher education made paying for one’s college tuition without loan assistance exponentially more difficult. Unemployment was high, retirement accounts had been carelessly squandered by Wall Street, and kids’ whose parents may have had savings intended to put students through college, now needed that money to live.

The solution? First, increase tuition. Second, charge graduate and professional students more to get an advanced degree. Then, blame those same students who have been caught in a lifelong financial trap created by a group of mostly white, rich men—most of whom have graduate and professional degrees. They never needed a student loan to get a degree, after all. How fortunate for them, and how very unfortunate for us.

Warning: Moral Hazard

“Critics say offering unlimited loans to students, with the prospect of forgiveness, creates a moral hazard by allowing borrowers to amass debts they have little hope or intention of repaying, all while enriching institutions and leaving tax payers to pick up the tab.”

Wow.

Other than the atrocity that is this sentence, I noticed that you failed to provide any information or attribution to these so called “critics” you are paraphrasing. Journalism fail.

To be clear, the moral hazard of the American student loan program is not the borrower’s ability to amass enormous debts in order to fund an education. Rather, the “moral hazard” is sentencing our best and brightest to 20-25 years of financial atonement for the crime of trying to pursue their American Dream through higher education.

I must pause here and thank you. When you say, “. . . postgraduate borrowers . . . now account for roughly 40% of all student debt but represent just 14% of students in higher education[,]” you have helped me make my point.  If this statistic did not shock you, it should have. You assert that student loan debt has doubled since the recession to a total of $1.19 trillion.

In addition to common sense, the numbers you cite in your article tell us that the more expensive college is, the number of students needing student financial aid increases. At the same time, the amount of financial aid that these students need to cover higher fees increases as well.

Forty percent of $1.19 trillion is $476 billion and we have thrust this burden on 14% of our best and brightest students—the doctors who save our lives and the lawyers who preserve our liberty, for example. And just like your uninformed reporting, that is the real moral hazard.

The Real World

You discuss Bonnie Kurowski-Alicea. Bonnie is a 40-year old woman with a $209,000 student loan balance. “She pays $1,060 per month but plans to take advantage of the . . . proposal to allow borrowers with older loans to set payments at 10% of discretionary income.” She stated, “I’ll be the retiree that’s getting Social Security garnished[.]”

This is horrifying. You state that Ms. Kurowski-Alicea makes $80,000/year at her job. Most people would agree that $80,000 per year is a strong salary in a moderately-priced market. She pays $1,060 per month toward her student loans—$12,720/year—leaving her with $67,280 of gross income before taxes. Her student loan payments account for approximately 16% of her gross annual earnings. Still, she has to find room in her budget to support at least two people (her and her husband), save for retirement, pay for housing, insurance, vehicles, gas, etc. I am sure even you can agree, that this presents a number of logistical and budgeting concerns for her family.

Yet, you continue. “But a number of recent studies show the benefits are largely going to people who need them the least—doctors and many lawyers who will end up making six-figure salaries[;]” “Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to pay.” Once again, you have provided no citation or support for these assertions and they are patently false in light of real data.

Salaries in the United States, when adjusted for inflation, have been stagnant or declining across the board for decades.

Per_capita_US_income

Lawyers and doctors are not immune from this particular economic trend even though you seem to believe that the majority of lawyers and doctors earn six-figure salaries. I cannot speak for the doctors, but I can speak for the lawyers.

Attorney salaries have been tumbling for some time. In 2014, CNN reported,

 Back in 2008, associates at big firms made $125,000 straight out of school. But by last year, that had dropped to $95,000. And the vast majority of lawyers actually work at small firms for much less money. Local prosecutors, for instance, make about $50,000 in their first year, while those with 15 years of experience only earn $80,000.

Most of us are not wealthy. Most of us are just like you. We pursued higher education to create a better life for ourselves. While you specifically are not the problem, your aloof approach to reporting on this particular issue is a problem. Your article’s inability to clarify the root cause, and by extension, assign blame to the appropriate parties responsible for the student loan crisis is a problem. It is a problem to continue to deny, either implicitly or explicitly, that the American approach to financing higher education is predatory and unjust.

I leave you with this quote by John Adams:

“Laws for the liberal education of youth, especially of the lower class of people, are so extremely wise and useful, that, to a humane and generous mind, no expense for this purpose would be thought extravagant.”

Let’s talk about Debt, Baby: Student Loan Series Vol. I

What do student loans, the 2008 bank bailout and credit card debt have in common? They all have cost Americans dearly. What are their differences? In America, if you are a banker on Wall Street that crashes the global economy or a person who cannot pay off their credit card bill, we’ll bail you out and forgive you for your sins.  If, however, you are a college graduate with student loan debt:

Good luck

2008 Wall Street Bailout

During the most recent financial crisis there were a number of players involved.  This was the perfect storm where willful ignorance and overconfidence that the fast rising market would never crash, combined with good old fashioned American greed to create one of the worst financial crises in history.  There were warnings of a storm off the horizon, and much like a hurricane, those who heard the warnings could have prevented catastrophic loss by boarding up their financial “windows.”  Instead, they looked to the sky and thought about how it had not rained on Wall Street for over a decade, and it was unlikely to ever rain again.

In 2008, our government approved a tax-payer-financed-bailout plan to save huge, unregulated banks that gutted private and public sector retirement accounts and made speculative bets against everyday Americans’ ability to pay their mortgages just to make a profit. By the time all relief programs had been rolled out by the federal government, the total estimated cost of the Wall Street bailout was $14.4 trillion.  And although most banks who took bailout money have paid back the government back, those payments are merely a drop in the bucket.

What exactly did Wall Street do that almost tanked the global financial markets? The answer is relatively complex, but not impossible, so I will attempt to break it down here.

First, America was in a pattern of stable growth and low interest rates. This seems to have caused the old white guys on Wall Street to have a false sense of security and banks began handing out mortgages to millions of people who would not otherwise qualify for the amount borrowed. In other words, if you make $50,000/year, you probably cannot afford a $300,000 house. During this time, though, variable interest rates on mortgages were at an all-time low. But the problem with variable interest rates is that they vary! As interest rates rose, more and more people could not afford the mortgage payment that they never should have been approved for in the first place.

Next, in an effort to continue the American tradition of making something out of nothing, financial experts began “pooling” these bad mortgages together with other mortgages. It was like a Goldie Locks-type of arrangement. The pools of mortgages were then used to secure collateralized debt obligations (the details of which are not important for our discussion) and divided into tranches of (1) the risk and the likelihood of default is too high; a.k.a. the soup is too hot; (2) the risk is a little lower, but the return is not expected to be high enough, a.k.a. the soup is too cold; and (3) the risk of default looks low, but the returns look high, a.k.a. the soup is just right.

What happened, though, was that although these tranches looked “just right,” nobody actually tasted the soup to see if that was true. Rather, they relied on a credit rating agency to tell them what kind of soup they were eating and if the temperature was appropriate. So, Wall Street, instead of trying the soup, opted to have it fed through a tube in their stomachs. They had no idea how hot or cold the soup was that was being pumped into their system. When they recommended the soup to other investors, the investors assumed that Wall Street had tested their soup. They themselves did not taste the soup; rather, more feeding tubes were inserted as the soup was passed around the market. This pattern flooded our markets and eventually, it turned out that the soup was not worth the ingredients used to make it. The soup was toxic.

As all of our soup connoisseurs began to realize that their soup was not worth a thing, they began taking out insurance policies to protect the value of their soup stockpiles called credit default swaps. Enter AIG. When it was discovered that the soup was worthless, AIG could not afford to pay all of the insurance accounts that now had a claim. There were too many people with spoiled soup. AIG did not have enough money to cover the tab.  “In effect they had bet on themselves with borrowed money, a gamble that had paid off in good times but proved catastrophic in bad.”

This is not where our story ends, though. Uncle Sam rode in on a white horse and promised billions of tax payer dollars. Uncle Sam exclaimed,

“Old white men of Wall Street, it doesn’t matter what you do.

We’ll bail you out, we’ll figure it out. We don’t care about all those you screwed.

You’re too big to fail and we need you too much.

We’ll front you some money to use as a crutch.

The tax payers have your back, and we know they’ll agree,

America: where white men can steal and get off scot-free.”

~Lindsey Mears, 2015

Crash the global economy with your greed? Forgiven.

Credit Card Debt in America

Credit card debt in the United States is valued at approximately $60 billion. What happens to ordinary American people who spend too much money on their credit cards and cannot pay it back? If you spend recklessly (or out of necessity) on your credit card, there are a variety of programs available in order to lower, and even absolve, your debt. You can renegotiate your interest rates, stop making monthly payments until the credit card company deems your account to be “uncollectible,” offer a settlement to your credit card company or collections agency, or file for bankruptcy and have your debt eliminated entirely. Sure, if you file for bankruptcy, your credit will be ruined for seven years and this is not something to take lightly. Compared to 25 years, however, it seems like a walk in the park.

Can’t afford your credit card payments? Forgiven.

The Hand That Holds Us Down

Federal student loan debt, on the other hand, can only be forgiven in four practical ways. I will cover the details of the various repayment options on student loans in a later post but the four following options have the most practical applicability for most students wanting to have their student loan debt forgiven.

1. Student loans may be forgiven after 10 years of public service work. Some of the jobs that qualify for this program are public school teachers, police officers, public defenders, etc.

2. Die. Death will absolve federal student loans (assuming your parents did not cosign).

3. A student can attempt to have her loans eliminated through the bankruptcy process. But unlike credit card debt, it is extremely difficult to have your student loan debt forgiven through bankruptcy. Unlike a bankruptcy proceeding involving credit card debt, however, in addition to filing for bankruptcy, a student must undertake another separate process for the discharge of her student loans.  This increases the cost of the bankruptcy proceeding. Then, to make matters worse, the student must then show “undue hardship” to have their loans forgiven. Three factors are considered to show undue hardship.

  1. If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
  2. There is evidence that this hardship will continue for a significant portion of the loan repayment period.
  3. You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

The problems with this test are readily apparent. What is a “minimal standard of living,” who gets to decide what is minimally acceptable? What evidence can a person present that hardship will continue for a “significant portion of the loan repayment period”? What is significant and insignificant? Are we not just asking students to predict their own future? Finally, did you make a “good-faith effort” to repay your loan—for at least five years—before you filed for bankruptcy? Does that mean all of the payments have to be on time? Or, does that mean that you just really tried to make those payments for five years even if you never succeeded?

Each judge presented with these factors attempts to apply them with the best of their ability, but inconsistency is rampant in this area of the law. And some brave judges are writing new rules of their own. Unfortunately, it is still the rare exception and not the rule.

4. A student may switch to an income based repayment plan that forgives the remaining debt balance at the end of a 20-25 year repayment period. Even though these new repayment options have been touted by the Obama administration, this law does not do what you think.

If you still have a balance on your loans at the end of that term, you are taxed on the remaining balance, plus your income. Here is a great explanation of this phenomenon by Jantz Hoffman of Advantage Group, “Let’s say your debt has grown to $180,000 over 20 years, and by that point, you’re making $120,000[.] If $180,000 is being forgiven, then you are looking at paying taxes on $300,000 in total income in one year. At that point, you’re over the $250,000 income category, my friend.”

By using current tax rates, a single student who makes $120,000/year and has a remaining student loan balance of $180,000, that student’s out-of-pocket tax liability would be approximately $33,166. I married student’s tax burden would be approximately $39,710.

Lindsey Mears, 2015

Lindsey Mears, 2015

Remember, that on your $120,000 salary, you are having taxes withheld from your paycheck and most people do not owe more taxes in April. Instead, most Americans look forward to their tax refund every year. Thus, in addition to the taxes you have withheld every pay check, you would owe an additional $35,000+ in taxes the year that your student loans are finally “forgiven.” Who has that kind of cash lying around?

There is literally no escaping this debt for the majority of students. We came out of school in debt because we could not afford our tuition. If we cannot afford to pay off our loans we may have our balance “forgiven” so long as we follow the strict rules in place to achieve this goal.  In the meantime, we will hope that we stay healthy, that we can continue to work. We will abstain from taking vacation and will work ourselves to the bone trying to make ends meet.

Then, if we can make it 20-25 years in this pattern without keeling over, the U.S. government will finally “forgive” our ballooned student loan balance. Then, to add insult to injury, the federal government will tax our forgiven balance as income.

The structure of this program tells you everything you need to know about the higher education crisis in America. A remaining student loan balance at the end of a 25-year repayment term–a quarter of a century–is a product of financial distress over a 20-25 year period. We have millions of college students that will still be paying their student loans off well into their forties and fifties. How can we expect them to ever save for retirement, raise children, invest in real estate and purchase more than bare essentials?

If we finally get desperate enough and file for bankruptcy, we run the risk of ruining our credit scores and walking out of the court room with an unchanged student loan balance. Where else do you go if you have already been through the arduous process of bankruptcy to find relief? A judge has decided you are not suffering quite enough yet to be forgiven for your crime of seeking an education. Don’t let the door hit ya’ where the good Lord split ya’.

How Big is this Problem?

Student loan debt in America is estimated to exceed $1.2 trillion and the cost of college tuition is still rising at an alarming rate. To illustrate how obscene that number is, credit card debt in this country is equal to 5% of $1.2 trillion.  If we invested in bailing out all Americans with student loans, it would cost approximately 8% of the total price of the Wall Street bailout.

Lindsey Mears, 2015

Lindsey Mears, 2015

They may not be able to put you in jail for defaulting on your student loans, but in America needing help to pay for a college education is an offense punishable by a lifetime of insurmountable debt. College students have committed no crime by seeking an education. Unlike Wall Street, we have done nothing that warrants punitive consequences.

It is time to send a message. WE are too big to fail.