Thursday, August 21, 2014

Reprint of Seven Ways to Provide Student Loan Debt Relief.

The National Association of Student Financial Aid Administrators originally published this article.   I am grateful to them for allowing me to reprint it here.
The original link for the article is here.

Seven Ways to Provide Student Loan Debt Relief
The current generation of students is leaving school with more debt than any previous generation. While postsecondary education remains a good investment for the average student loan borrower, some borrowers will never be able to repay their student loans in full. Moreover, current bankruptcy law and procedures make it very difficult for borrowers with student debt to ever obtain a fresh financial start.

At the federal level, there is some interest in policies that might alleviate student loan debt burdens. The desire to provide student debt relief to borrowers is tempered by concern about the cost to taxpayers when this government guaranteed debt isn’t fully repaid. In my view, it is possible to provide a modest level of student debt relief to borrowers without imposing substantial costs on taxpayers. This could be accomplished by modifying the Income Based Replacement (IBR) Loan Program and through changes to the bankruptcy code.

The IBR program, enacted in 2009, provides four benefits to student loan borrowers.
1.     Reduction in student loan payments when household income is low in relation to qualified student debt,
2.     Reduction in interest payments when IBR payments do not cover interest due,
3.     Limits on the capitalization of interest for loans in deferment or forbearance, and
4.     Forgiveness of a remaining loan balance 25 years after the student loan enters repayment.

In addition, some student loan borrowers who maintain payments through the IBR program will be able to utilize public loan forgiveness programs

The primary purpose of the IBR program is to prevent borrowers from defaulting on their student loan when their household income is low compared to qualified student loan debt. Only student loan borrowers with chronically low levels of household income can receive some debt forgiveness. Borrowers who receive lower payments through the IBR program will often pay more on their loan than if they remain in the standard 10-year payment plan.

The IBR program is complex and does not offer assistance to many overextended student loan borrowers. First, the IBR program does not cover PLUS loans made to parents, private loans, or consolidated loans that include a parent PLUS loan or a private student loan. The decision to consolidate 10-year loans into a 20-year loan could also make borrowers ineligible for the IBR program. To fully benefit from the IBR program, borrowers need to be aware of IBR rules long before they are aware that they will need IBR, when they are borrowing or consolidating federal student loans.

Second, the IBR program often provides little or no relief to a household that has high levels of both consumer debt and student loans. The IBR program is especially complex for married households.  A single person who qualifies for the reduced IBR loan payment could lose this benefit if he or she marries someone with high levels of consumer debt, even if household debt-to-income ratios increased after marriage. Married individuals could choose to file separate tax returns to take advantage of the IBR program, but that decision usually results in a larger tax obligation.

It is impossible to modify the IBR program to account for consumer debt without creating an incentive for additional borrowing.  Borrowers with high levels of student debt and consumer loans might seek relief in bankruptcy courts.  However, current bankruptcy laws and procedures offer little relief for borrowers with student loan debt.

There are two ways debtors can seek student loan debt relief in bankruptcy. First, the debtor could petition the court for a complete or partial discharge of student debt. Second, in a Chapter 13 bankruptcy the debtor could petition the court for a payment plan that favors the repayment of student loans over the repayment of other unsecured loans. Neither remedy is easily obtained.

To discharge student debt in bankruptcy, the borrower must prove that he or she has an “undue hardship.” Most courts require that the borrower show a “certainty of hopelessness” for his or her financial situation over the repayment term of the loan. A certainty for hopelessness is extremely difficult to demonstrate because there is some probability circumstances will improve, even for individuals in extremely dire circumstances. An August 31, 2012, New York Times article describing the petition of a legally blind, unemployed man illustrated the hurdles a student loan borrower must clear in order to have student debt discharged in bankruptcy.

Any proposal that makes it easy to discharge government guaranteed student loans in bankruptcy entails some additional cost to the taxpayer. However, it is easy to envision a less stringent student loan discharge rule that does not significantly increase taxpayer costs. Such a rule would rely on objective criteria rather than the subjective “undue hardship” concept. For example, student loan discharge could be limited to individuals with incomes near poverty level, contingent on participation in the IBR program, favor individuals with medical problems, and allow for partial, rather than full, loan cancellation.
Two other aspects of the bankruptcy code have a substantial impact on financial outcomes for student loan borrowers in bankruptcy and for the government agencies that hold or guarantee student debt.  First, financial outcomes are affected by the rules governing whether a debtor can obtain a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  Second, financial outcomes are affected by the rules governing repayment of student debt and other unsecured consumer loans under a Chapter 13 repayment plan.

Under a Chapter 7 bankruptcy, the bankruptcy court will immediately discharge most unsecured consumer loans. In a Chapter 13 bankruptcy plan, debtors must file repayment plans with the bankruptcy court. The repayment plan determines how much debtors can repay creditors and the amount received by each creditor. Prior to the 2005 bankruptcy law, debtors could choose to either file under Chapter 7 or Chapter 13. The 2005 bankruptcy law created a means test that required many individuals with incomes over the household median to file Chapter 13 rather than Chapter 7.

When student loans are dismissed under Chapter 7 bankruptcy, the borrower gets an immediate fresh start and can use all the newly available funds for the repayment of student debt. A borrower who obtained a deferment prior to bankruptcy can immediately renew payments on his or her student loan. By contrast, when borrowers are placed into a Chapter 13 repayment plan, the amount allocated to the payment of student loans might not even cover interest and, in many circumstances, the debtor will leave bankruptcy with a substantial student debt intact.

Student loan borrowers in Chapter 13 can petition the bankruptcy court to allocate a greater amount of their payment plan to the repayment of student loans and a lower amount to the repayment of other unsecured credit card debt. However, most courts tend to favor a payment plan that does not discriminate against any class of unsecured creditors. As a result, many student loan debtors emerge from the bankruptcy process five years older with a substantial amount of unpaid student loans. Many individuals experience decreases in income and have fewer job prospects after age 50. A delay in repayment of student loans caused by a forced entry into a Chapter 7 bankruptcy plan will increase financial exposure to taxpayers, increase student loan default rates, and decrease collection rates.

A revision of Chapter 13 bankruptcy rules that gives priority to student debt payments over other unsecured debt payments in bankruptcy would provide student loan debtors with a fresh financial start and would ultimately reduce taxpayer losses. Unsecured creditors would still enjoy greater collection rights than existed prior to the 2005 bankruptcy law.

Under current law, very little debt relief is offered to overextended student loan borrowers experiencing substantial economic hardship. Several policy changes might provide modest debt relief to these borrowers, maintain strong incentives against default, and protect taxpayer interests.  These policies include:

·      Allowing married couples to obtain IBR debt reduction without having to actually file separate tax returns,
·      Making PLUS loans to parents and consolidated student loans with a PLUS loan eligible for the IBR loan program,
·      Allowing private student loans to be discharged in bankruptcy,
·      Basing the decision to discharge student loans in bankruptcy on objective criteria pertaining to the economic status of the bankruptcy applicant rather than the subjective “undue hardship”  concept,
·      Allowing for quicker loan forgiveness under the IBR program for individuals in dire economic circumstances,
·      Repealing or modify the Chapter 13 means test, 
·      Providing priority to student debt over other unsecured loans in Chapter 13.

The goal of debt forgiveness policies inside and outside of bankruptcy is to balance two competing objectives: providing overextended borrowers a fresh start, and fair treatment towards creditors. The pendulum may have swung too close to the creditor, especially with regard to the treatment of student debt.

The author is a retired economist who worked in the Office of Economic Policy of the U.S. Treasury from 1988 to 2012. He publishes a blog

Tuesday, August 19, 2014

Is Facebook a bully?

I found this article about how Facebook and Instagram are threatening a small start up named Evergram disturbing.

thoughts on using lawyers to bully.

there needs to be penalties against firms that use deep pockets to bully competition in court.


Friday, August 8, 2014

Political Energy in Iowa and the Iowa Senate Race.

Political energy in Iowa and the Iowa Senate Race

Republican Presidential aspirants are flocking to Iowa.   Democratic Presidential aspirants are AWOL.

Recent polls have Joni Ernst leading Bruce Braley in the Senate race. 

The Presidential contest is already energizing Republicans and Independents in Iowa.   This energy gap could be the difference in the 2014 election and in 2016.

Republicans are building a grass roots organization in Iowa.  Hillary hasn’t been in the state since 2008. 

I wrote this note as to why anointing Hillary is a disaster some time ago.  I will update it soon.


What does it mean to compromise?

What does compromise mean?

President Obama in a recent press conference stated that when Republicans and Democrats agree on 80% of what needs to be done on an issue there should be agreement on the 80% and no action on the other 20% of items.   I believe this formula is a recipe for capitulation rather than compromise.

The process of negotiation leading to a compromise somewhere in the middle requires that initial positions must be based in reality.    Consider a negotiation over the price of a house.  Buyer wants to pay $800,000 and seller wants $1,000,000.   Let’s assume they meet at $900,000.   Alternatively buyer wants $800,000 and seller wants $2,000,000.  Does this mean they should meet at $1,400,000.  I don’t think so!

The best way to illustrate the fact that the passage of areas of common agreement is not equivalent to compromise is to discuss examples.

Social Security:  Democrats want to bring the Social Security system towards balance by cutting benefits and providing new revenue.   Democrats presumably want guarantees that reductions in benefits if enacted now will not lead to even more reductions in benefits in the future.   Democrats oppose private accounts and want to insure that Social Security remain a defined benefit pension plan.

Republicans favor benefit cuts but do not favor additional revenue.   Republicans favor private accounts and do not want to guarantee the existence of a defined benefit plan in the future.

Both President Obama and many Republicans support a reduction in the CPI COLA.   I have argued that there are merits to this type of budget cut. 

However, the Social Security COLA would only marginally delay future mandated cuts in the Social Security program because the full impact of the impact of the Social Security COLA would not be realized for many years in the future.

A reduction in the Social Security COLA would reduce retirement security for many Americans.  Unless this benefit cut was tied to other changes in the Social Security program it would hasten the demise of the program and lead to additional support for private accounts a Republican priority.

From the perspective of a progressive, the COLA cut only makes sense if it helps shore up the Social Security system and helps insure that a defined benefit program will persist in the future.    Agreement on a subset of items cutting benefits but not strengthening the system in the long run is capitulation not compromise.

The ACA:  Advocates of health care reform had several goals – (1) reduce the number of uninsured, (2) reduce the likelihood of people going into bankruptcy due to medical costs, (3) reduce premiums, (4) provide an alternative to employer sponsored insurance, (5) control medical costs …..

President Obama did compromise on the ACA.   

He refused to push for government options favored by many in his own party.

The ACA plan allows higher deductibles and copays than favored by most Democrats.

The ACA uses state exchanges as an alternative to employer sponsored insurance – the approach favored by Republicans.

The Administration delayed the employer mandate a stipulation opposed by Republicans.  (Republicans opposed the delay of the mandate even though they oppose its existence.   Rather than work with the Administration on a reform of ACA that strengthens the ACA and replaces or modifies the mandate the Republicans seek quick political points.)

The ACA includes cuts to Medicare.  Republicans take full advantage even though they favor such cuts.

Republicans vilify needed discussion of end-of-life health care costs by calling provisions “death panels”

Compromise requires that parties take genuine positions rather than fake positions.    Responding to Republican demands on health care is a bit like a buyer and seller splitting the difference after the seller posts an asking price that is double appraised value.

Keystone:   It is not secret that many Democrats want the Keystone pipeline built because it would help assure U.S. energy independence.  Keystone would also raise baseline carbon emissions.  Democrats want energy independence + future emission reductions.   Republicans want energy independence and no restrictions of fossil fuels.  The approval of the Keystone pipeline without strong measures to protect the environment leads us to continued dependence of fossil fuels.   Again, this is capitulation not compromise.

Concluding thoughts:  I believe that President Obama is a very good man.  I support many of his initiatives.   But I wonder if he is tough enough as President.

President Obama is being threatened with impeachment.  He is being pushed around.   Republicans are giving support to our foreign enemies --- Putin and ISIS by attacking our President.    His enemies both domestic and foreign believe President Obama is weak and will seek compromise, even a poor one.   Many of his current problems would not exist had he gone over the fiscal cliff at the beginning of his second term.

#Social Security
#Keystone pipeline
#President Obama

Monday, July 28, 2014

Thoughts on downed airplanes and regulation

Thoughts on the downed airplanes and regulation

Downed Airplanes:

The whole situation in the Ukraine is surreal.  President Obama’s response has been weak but it is hard to blame him because even the Ukrainian government appears indifferent to what the Russians are doing.

I Googled flights between Kiev and Moscow

Google listed a bunch of options including Expedia below.

Is this possible?   Russia invades Ukraine, takes Crimea, and arms insurgents who commit mass murder.  Ukraine does not even declare war.  Air travel between Moscow and Kiev is uninterrupted.  

The Europeans are more concerned about natural gas supplies that are transported through Ukraine than the murder of their citizens.

Many of the civilian airlines running through Ukranian air space are Russian airlines.  Aeroflot being one.  It was probably not an accident that the downed plane was not Russian.


It makes sense to me that planes should avoid war zones.  However, there is no legal restriction that private airlines do so.  The airline industry argued that they were not responsible for the loss of the plane because this was the government’s call.

I think this argument is pure BULLSHIT!!!!!!

Governments can’t or won’t make tough calls on banning flights over war zones.    The recent reversal of a flight ban to Israel despite the existence of rocket fire suggests that it is politically impossible for governments to prohibit travel. 

The primary purpose of having governments not airlines make safety calls is to shield industry from litigation.

This benefit from regulation is not unique to the airline industry.   FDA approval and DOT safety tests help reduce respective industry exposure to litigation.  Bank regulations of mortgages reduce the scope of anti-predatory lending laws. 

Most economists will oppose banning travels through war zones even if the downing of planes becomes routine.  This is because the economic benefits from air travel and the economic costs associated with it disruption are huge.

Interestingly, economists also tend to argue against regulations requiring the use of technology that will help planes evade regulations.  Also, many economists vigorously argue against strict measures to contain pandemics either because they view the probability of a pandemic to be very low or the cost of the foregone activity to be too high. 

Cost benefit analysis is a subjective exercise because both cost and benefit estimates are imprecise.  Costs often not fully considered include the loss of credibility and the consumer confidence. 

Tuesday, July 22, 2014

Decision in ACA court case.

A decision on the ACA tax credit:

An ACA court case that I described in a previous post has been decided.

My thoughts from the time this case was filed are presented below. 

I have moved to Denver and am still unpacking.  One of my first posts next week will be on the ramifications of this case.

More ACA litigation

This article on litigation brought by business groups attempting to overturn key aspects of the ACA is fascinating. This post provides a quick summary of the litigation and my comments.

Summary:  Plaintiffs in at least two court cases argue that tax credits for the purchase of health insurance in state exchanges are only available for insurance sold on health exchanges established by the state.   According to this argument, tax credits are not allowed in states that refused to set up an exchange and left the task to the federal government.

Plaintiffs argue that the lack of a tax credit for the purchase of health insurance in certain states makes other key aspects of the ACA invalid or less applicable.

o   Since penalties imposed on employers who fail to provide health insurance are only triggered if employees received tax credits the employer mandate does not exist in states that do not create an exchange.

o   The individual mandate does not pertain to households if health insurance is unaffordable.  A policy is deemed unaffordable if premiums exceed 8.0% of income.  The lack of a tax credit would result in health insurance premiums exceeding the 8.0% threshold.  These households are not required to purchase health insurance.

This situation arose because the Senate version of the ACA was enacted after the Democrats lost the Massachusetts Senate seat. The Plaintiffs argue that this interpretation accurately reflects the intent of the Senate bill, which became the basis for the ACA.  The IRS has argued that Congress intended the tax credit to apply both to states that created their own exchange and states where exchanges were created by the Federal government.  The plaintiffs argue the plain language of the law states otherwise.


Comment One:  Very clever!!!

Comment Two: If the plaintiffs win their case states would still be subject to rules banning pre-existing conditions and underwriting based on health status.  However, a key subsidy for mitigating the costs associated these changes would not be available in states that did not establish an exchange.

Comment Three:  Is this the way laws are made in Washington?   What is the gang of eight currently putting in the immigration bill?  Would the Administration also capitulate on key language in order to achieve a comprehensive budget deal?  I hope that the progressive Democrats in the Senate are willing to scuttle the immigration law and a budget deal or any future legislation unless there is clarity on key provisions.

Comment Four:  There have been a number of instances where the IRS has had to interpret aspects of the ACA.  (Instances include regulations governing eligibility for a tax credit when small employers offer health insurance and rules governing the value of benefits that a large firm must offer.)  The IRS tends to argue that the plain language of the statute requires them to rule in a narrow way.  In this case, the IRS rules they had authority to more broadly interpret the statute.  I tend to find that previous IRS rulings lacked credibility and common sense.

Comment Five:  The business groups arguing this case want to deny the citizens of their state a valuable tax credit; thereby, increasing the cost of health insurance for individuals in their state.  A ruling overturning tax credits and the employer mandate could actually benefit the Democrats politically. Opponents of the ACA that are bringing this court case need to be careful what they wish for!!!!

Comment Six:  The DC circuit court could play the key role in deciding this case.   Last I heard there were four vacancies on this court.  This is not payback for Bork.  This is unprecedented.  Senator Reid and President Obama need to take a stand on their judicial nominees.  The time for compromise on this issue is long past.  Senate rules need must be modified to allow up or down vote for judicial nominations after a certain point in time.

#DC circuit
#Affordable Care Act