Trump is pushing the student loan system to the brink of failure
The first four months of the Trump administration have, among other things, seen repeated assaults on the nation’s student loan borrowers. Education Secretary Betsy DeVos came into office and reimposed a 16 percent fee on defaulted loans. Her department then warned that letters to borrowers affirming good standing in the Public Service Loan Forgiveness Program were invalid. The president’s budget, meanwhile, calls for the elimination of the program entirely, as well as the elimination of interest breaks for students while in school and in deferment. All these moves make loans more expensive to the borrowers, and more lucrative for the government and its contractors.
To be clear: The student loan crisis was escalating quickly before Trump took over. Under President Obama, nearly $1 trillion was added to the nation’s student debt tab to a current total of almost $1.5 trillion. Last year, 1.1 million people were added to the default roles, a huge increase from the 400,000 added the year before. At this rate, more than 25 percent of all borrowers will be in default when the mid-term elections happen next year.
A study following 2005 graduates — who borrowed half as much as today’s graduates — found that a whopping 63 percent were either in default, forbearance, or deferment, or were delinquent, by 2010. The Wall Street Journal reported last year that the same percentage of all borrowers are currently not able to pay their loans down. This is 27 million people of the 44 million who carry student debt.
Interest alone on this $1.5 trillion comes to about $90 billion per year. Bankers like Jamie Dimon of JP Morgan Chase and William Dudley at the New York Federal Reserve have begun to complain publicly that student debt is stifling home, auto, and other major purchases.
Make no mistake: The federal government loves this lending system. In 2012 the Department of Education profited more than $50 billion per year from student loans. This has surely increased. Disturbingly, years of White House budget data confirm that unlike credit card companies, who recover about 10 cents on the dollar for defaulted accounts, the federal government actually recovers more than book value on its defaulted student loans.
Furthermore, the Education Department has been administering the various forgiveness programs in bad faith. Two years ago, it was reported that 57 percent of the people in Income Based Repayment (IBR) had been expelled on just one of the many grounds the department has to disqualify borrowers. If even 20 percent of the people in these programs actually make it through, it will be surprising. The rest will wish they had never signed up.
These predatory behaviors by the department and its contractors predate Trump by decades, and are rooted in the wholesale removal of core consumer protections. For example, the Founding Fathers demanded a “uniform system of bankruptcies” ahead of the power to declare war in the constitution. Student loans, however, are uniquely vacant of this protection, and have also been stripped of statutes of limitations, fair debt collection laws, and other consumer protections that exist for every other type of loan in this country. Interestingly, the Education Department fights tooth-and-nail behind the scenes to keep bankruptcy gone from student loans.
This cannot continue. The entire student loan lending system could well vanish in a mist of illegitimacy if Trump continues to allow inhabitants of the student loan “swamp” to have their way with him. As a businessman, Trump understands firsthand the systemic value of bankruptcy protections to fair lending and rational pricing. He should work to return them to student loans, and demonstrate to the citizens that he is serious about “draining the swamp,” standing up to big government, and actually fixing this problem.
Alan Collinge is founder of StudentLoanJustice.Org and the author of
“The Student Loan Scam” (Beacon Press).