Category Archives: US Debt

Student Loan Scam

Scam is a very good word for it.
WSJ 12/27/2017

After nationalizing student lending, the Obama Administration sought to reduce the government’s $1.3 trillion loan portfolio by allowing disgruntled borrowers to discharge their debt. Last week Education Secretary Betsy DeVos ended this fraud against taxpayers.

After driving Corinthian Colleges out of business in 2014, the Education Department implemented a haphazard process to forgive loans of students who claimed to have been ripped off by the defunct for-profit. Tens of thousands of claims poured in, overwhelming department staff.

The backlog of claims ballooned after predatory regulators forced the closure of ITT Technical Institute in 2016. Liberal groups urged the Obama Administration to forgive loans of borrowers who had attended other for-profits, spurring the department to initiate a “borrower defense” rule-making to allow students who purported misrepresentations by their colleges to discharge their loans. The midnight rule, finalized last November, authorized the Education Department to discharge debts on a class-wide basis—for instance, all borrowers who had attended a certain college within the last five years.

The Obama Administration approved roughly 15,000 claims between June 25, 2015 and January 1, 2017. During President Obama’s final three weeks in office, the department hurried out 16,000 approvals. No claims were denied. The total taxpayer tab for discharges: $450 million.

Obama officials left a backlog of 48,000 claims, many of which were flagged for rejection. But the Education Department had not developed a process for denying claims or a system to prevent fraud—to wit, borrowers who alleged misrepresentations by colleges despite suffering no apparent injury.

Enter the Trump Administration, which suspended claim approvals while the Inspector General reviewed the department’s procedures for discharging debt. In June Mrs. DeVos put the borrower-defense rule on ice and convened a committee of stakeholders to consider changes. The IG in a report this month describes systemic problems with the loan-forgiveness process. For instance, claim data was maintained on more than a thousand spreadsheets with “no controls to prevent or detect problems with the integrity.” This is an invitation to hackers. The Inspector General also found that “information on the status of loan discharges was not readily available” and that “it took [Federal Student Aid] at least 3 weeks to produce outcome data on the status of claims.” This is ironic because the Education Department cut off federal student aid to Corinthian—thus precipitating its bankruptcy—because of the college’s alleged slowness in responding to document requests.

Mrs. DeVos identified a bigger problem: The department was discharging debt carte blanche without accounting for the value students received from their education. Before awarding damages, judges are supposed to consider whether plaintiffs are harmed by alleged misrepresentations and then weigh the severity of their injury. Department adjudicators were doing neither.

A new department directive scales student loan relief based on college employment data. Borrowers who enrolled in programs whose grads earn less than the average of peer institutions will receive 100% debt relief. But those who attended programs with higher earnings will only be able to discharge some debt.

Education officials say this change will save taxpayers billions of dollars. Yet liberals are outraged that Mrs. DeVos is using earnings data that the department collected to punish forprofits to curb dubious claims for debt relief. The Trump Administration deserves credit for restoring due process and protecting taxpayers from another Obama-era student-loan scam.


Bankruptcy Options for Student-Loans??

Another MAJOR ‘wealth transfer’ from taxpayers, to non-payers. An absolute crock…
By Josh Mitchell And Katy Stech
March 10, 2015 12:17 p.m. ET

WASHINGTON—The White House said Tuesday it is weighing whether to make it easier for Americans to discharge student loans through bankruptcy, a major change that would effectively open the door for student debt being treated on par with credit-card debt and mortgages.

Federal law prohibits student loans—whether made by private lenders or the federal government—from being wiped out in bankruptcy, except in rare circumstances. Other forms of consumer credit, including mortgages, credit-card balances and auto loans, face looser requirements for being discharged in bankruptcy.

President Barack Obama , in a presidential memorandum Tuesday, directed administration officials to study whether to push for legislation to loosen the rules imposed on “all student loan borrowers” in the bankruptcy process. The White House released few details on how far the possible changes would go.

Some 40 million Americans currently hold student debt, the White House said, with total debt outstanding now roughly $1.3 trillion.

The effort was announced as part of a broad initiative the White House labeled a “Student Aid Bill of Rights.” The other steps under Mr. Obama’s plan include setting up a system for borrowers to register complaints about the companies, known as servicers, that collect student-loan payments on behalf of the government. The servicers would face stricter federal oversight and new rules designed to make them more proactive in reaching out to distressed borrowers and offering better repayment terms.

Any change to bankruptcy law for student-loan payments would likely drive up taxpayer and lending-industry costs. The government is the primary lender of student loans, making 90% of student loans annually. Private lenders such as Sallie Mae, Wells Fargo & Co. and Discover Financial Services make up about 10% of student loans.

Student loans are considered a risky form of debt because borrowers face only minimal credit checks when applying for federal student loans. Many borrowers have checkered histories and are often unemployed, or in part-time or low-paying jobs. The lending industry has argued that loosening the bankruptcy rules for student loans would increase the risk of losses and drive up borrowing costs, since lenders would raise rates to account for the additional risk of bankruptcy.

The White House said the efforts announced Tuesday are designed to stem defaults among borrowers and ease the nation’s student-loan burden. Consumer advocates have long argued that many Americans remain burdened by unsustainable student-debt loans for years, sometimes decades, and that bankruptcy should be an alternative.

“The agencies will develop recommendations for regulatory and legislative changes for all student loan borrowers, including possible changes to the treatment of loans in bankruptcy proceedings and when they were borrowed under fraudulent circumstances,” the White House said in a statement.

Fewer than 1,000 people try to get rid of their student loans every year using bankruptcy.

Bankruptcy experts say that attempting to discharge the loans in bankruptcy is both expensive and uncertain. The process involves filing a lawsuit in federal court, and lawyers typically charge several thousand dollars upfront for that work. A Wall Street Journal analysis found 713 such lawsuits were filed last year.

Many bankruptcy lawyers say they are hesitant to take on these cases because of the wide range of rulings that judges have handed down. In court, lawyers for a bankrupt student-loan borrower have to convince the judge that the borrower will never be able to afford their monthly payments—a difficult case to make.

Starting in 1976, federal loans were automatically dischargeable after five years of repayment, but borrowers could get out of them earlier if they proved that repaying them would cause an “undue hardship.” But that benefit was gradually removed, and student loan borrowers now need to establish “undue hardship” no matter how many years of federal loan payments they have made.

In 2005, Congress passed a sweeping bankruptcy overhaul for consumers that made private student loans non-dischargeable as well.


The Troubling Numbers in the Obama Budget

I think the key item Galston brings up is that in the past much Federal spending contributed to infrastructure improves – these provided a real multiplier impact. Spending on consumption.. not at all.
When he was governor of New York, Mario Cuomo famously remarked that “You campaign in poetry; you govern in prose.” To which he might well have added, “And you budget in numbers.” Although President Obama’s fiscal 2015 budget is professedly aspirational, its numbers reveal—as its prose does not—the path on which our country is now embarked. Americans of every persuasion should ask themselves whether this is the path they want.

In the decade between 2014 and 2024, if the president’s budget became law, spending for defense and nondefense “discretionary” programs—the outlays subject to annual appropriations—would barely budge. By contrast, Social Security spending would rise by $644 billion, Medicare by $350 billion, and Medicaid by $243 billion. During that same period, interest on the government’s debt would nearly quadruple to $812 billion, from $223 billion, becoming the third-largest line item in the budget.

Corrected for inflation, the differences are even more dramatic. While discretionary spending would fall by more than 20%, Social Security, Medicare, and Medicaid would increase by more than 20%, and debt payments would nearly triple.

Here’s the third, perhaps most revealing, view of what’s happening. The president’s budget projects that federal spending in 2014 will be 21.5% of GDP, not much different from today’s share. But the composition of that spending changes radically. In the fiscal year ending October 2013, in the aggregate we spent 10.8% of gross domestic product on Social Security, Medicare, Medicaid and interest payments combined. By 2024, that total would rise to 13.5%. In contrast, we spent 3.8% of GDP on defense in 2013, with that spending projected to drop to 2.3% in 2024. Meanwhile, nondefense discretionary spending would fall to 2.2%, from 3.2%. Even with these reductions, the debt stabilizes as a share of GDP only because revenues rise by 2.6 percentage points of GDP over the next decade.

This trajectory is not peculiar to Mr. Obama’s budget. The Congressional Budget Office’s baseline projections, which reflect current policy, show a very similar pattern over the next decade. Even if the president’s proposals were accepted in full, they would change the country’s path only marginally.

So what? Maybe that trajectory is right for us, or at least better than the feasible alternatives. I doubt it, and here’s one big reason why. As many analysts (including the president’s own representatives) have pointed out, discretionary spending is slated to fall to its lowest share of GDP in more than half a century. If that were to happen, we would put at risk both national security and the economy.

Early signs of these problems are already emerging. Given the realities of personnel costs in the all-volunteer armed forces, tough budget targets can be met only by reducing troop levels significantly. Given the importance of cutting-edge technology to the military, qualitative superiority can be maintained only by reducing the number of weapons systems procured.

Worse, local considerations and the quest for short-term political advantage give members of Congress perverse incentives to resist the least-damaging cuts, such as closing redundant military bases. Defense Secretary Chuck Hagel’s recent force-reduction proposals are the harbinger of even deeper and less popular cuts in the future. Forget about the two-war doctrine. The question a decade hence is whether we’ll be able to wage even one.

As for the president’s 2015 budget provisions for investment, the fine print tells the story. The document trumpets Mr. Obama’s commitment to research and development, but the numbers don’t back it up. Corrected for inflation, overall spending for R&D is flat, while funding for basic research actually declines by 2%.

That last figure is especially troubling because basic research doesn’t lend itself to being precisely targeted: By definition, we don’t know where the next big breakthrough in medicine, information, energy or other sectors will occur. We might get lucky, of course. But history suggests that if we want to increase the pace of path-breaking innovation, boosting the overall level of investment is essential. And history confirms what economic theory predicts. Without vigorous public participation, the private market will not produce an adequate amount of basic research—especially in a hypercompetitive global market.

Short-term thinking in the service of political advantage is hardly a new phenomenon. In the past, however, the U.S. has been able to balance such thinking with programs that helped build a better future for everyone—the long list includes land-grant colleges, interstate highways and the postwar explosion of publicly funded scientific research that has transformed the world.

If we want to move from today’s slow growth and wage stagnation to a path of vigorous growth and job creation, there’s no choice. We must embark on a new generation of public investment that responds not to the demands of today but to the needs of tomorrow. The challenge is stark. If we cannot summon the will to mobilize new resources for investment, we condemn ourselves to decline at home and abroad.

William A. Galston: The Troubling Numbers in the Obama Budget –


Henninger: Escape From Spending Hell

Well, have something to add?
So it looks like we’ve all been sentenced to spending at least two more years in budget hell with Barack Obama. Under the rules of budget hell set the past four years by the prince of Pennsylvania Avenue, you’re not allowed to do anything real about federal spending. You can only fight over federal spending. Forever.

Paul Ryan on Tuesday tossed his third House GOP budget into this void. He hopes to reduce long-term spending to an average of 19.5% of GDP. The Beltway press called it an opening “salvo.” Yesterday his Senate counterpart, new Budget Committee Chair Patty Murray, introduced the Democrats’ budget, teeing up what the Washington Post called a “budget duel.” Welcome to the Obama street-fighting army, Sen. Murray.

All hope is not lost. Amid the sequester smackdown with the White House, Republicans did something off-script: They called the Obama bluff. They let the sequester’s spending cuts occur, and the apocalypse didn’t descend. The only thing that cracked was the president’s approval rating.

The sequester’s big discovery was that spending reduction isn’t a political third rail. But if the winds are starting to shift, Republicans are going to need all the help they can get to convince the American people that more cuts in spending will preserve and protect their economy.

Help is at hand—economist Alberto Alesina.

Mr. Alesina, a professor at Harvard University, may be the last economist that Democrats want to deal with at the moment Americans are finding sympathy for spending cuts.

Ever since Ronald Reagan legitimized the efficacy of tax cuts, Democrats have sought to discredit his idea and restore the New Deal theory of a Keynesian multiplier, which dates to 1931. It holds that more public spending will revive a struggling economy.

No president has believed more in the miracle of the multiplier than Barack Obama. Across four years he has led the country on a kind of Keynesian death march, pushing federal spending to 25% of GDP and producing weak growth. We’re looking at four more years before the Keynesian mast unless the Republicans can offer an intellectually respectable alternative.

Mr. Alesina has identified the alternative. His, and others’, work the past decade with how struggling economies revive suggests that the Obama spend-more solution is the opposite of what the U.S. should be doing.

There is general agreement on at least two things about the current U.S. economy. It is emerging from the deepest recession since the Great Depression, and its debt level is unsustainable. The path back to stronger growth, argues Mr. Alesina, is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any.

This view isn’t born of “right-wing” ideology. Mr. Alesina is an Italian, as are many of his co-authors. As Europeans, Mr. Alesina and his colleagues were forced to confront the biggest challenge facing Western economies the past 40 years. Europe rose from the ashes of war, but how would it rise from the ashes of debt, as benevolent postwar spending programs outstripped revenue?

Mr. Alesina and his colleagues wanted to answer the most basic question: What works?

They sought the answer (which they published in an August 2012 paper on “fiscal consolidations” for the National Bureau of Economic Research) by analyzing an International Monetary Fund history of all the fiscal plans that 17 OECD governments enacted between 1978 and 2009, including the U.S., Canada and Japan. Together, these countries tried everything to grow—raise spending, cut spending, raise taxes or cut them, in endless combinations. What helped?

“Adjustments based upon spending cuts,” the economists concluded, “are much less costly in terms of output losses than tax-based ones. Spending-based adjustments”—that is, cuts—”have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments”—tax increases—”have been associated with prolonged and deep recessions.”

The debate over “failed austerity” is misleading because it emphasizes spending cuts but rarely mentions tax increases. “Austerity” plans, the Alesina studies suggest, fail to revive growth when they too heavily rely on raising taxes on income and capital—as across Europe and now in the U.S.

There is no magic ride back to prosperity. The Alesina team is describing the least-bad antidote for the long-term poison of destructive national debt. Fiscal plans based on large, permanent spending cuts are associated with renewed growth more than any alternative policy mix that has been tried. Indeed, spending cuts without big tax increases look to be the only thing that really works. The leading example the past 15 years is . . . Canada. And just an observation: The Dow proceeded to its high after the sequester happened. The cuts were the first credible step in rebuilding private-sector confidence.

The Patty Murray budget: A $975 billion spending cut and a $975 billion tax increase.

The Paul Ryan budget: $4.6 trillion of spending cuts and no new taxes beyond the fiscal-cliff increases.

Neither budget is anything the world has never seen. The available record suggests which of the two is the road to perdition.

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Henninger: Escape From Spending Hell –