Nebraska v. Biden: The Amici Briefs

December, 2022

Lincoln —  There are many good reasons why Nebraska should drop its lawsuit against the Biden administration's student loan cancellations.  No court has yet agreed that Nebraska has standing to sue, and now comes the news that Nebraska's economy is headed into decline in 2023.  

A move by Nebraska leadership to withdraw the lawsuit would be a huge help to the Nebraska economy, a boost of billions of dollars in increased capacity for over two hundred thousand Nebraska borrowers to grow in-state roots, households, and families.  

This unavoidable point is being raised in one of several new amici curiae briefs presented to the U.S. Supreme Court.  A coalition of 21 amici writes:

Without cancellation, a borrower’s ability to pay for basic necessities, invest in affordable housing, or buy items like a car will be minimal; in contrast, cancellation allows borrowers to save for a down payment or make larger purchases. In turn, these purchases put money into the economy and provide more tax revenue to the Plaintiff States.   [Emphasis added]

These revenue benefits to the plaintiff states are more than enough for the Supreme Court to throw the case out for lack of any plaintiff''s standing.  The court may see this as an opportunity to signal potential state government plaintiffs, everywhere, that speculative, circuitous arguments about irreparable harm, merely to challenge policies states don't like — or want to politicize — will not be sufficient to upend decades of jurisprudence on requirements for standing.   

Another amici brief, from law school deans and constitutional lawyers across the country, pushed back against the idea that the Department of Education's cancellations raise "major questions" beyond what is already authorized by statute, as if the case were similar to what the high court recently determined on major questions in EPA v. West Virginia.  The constitutional scholars write:

The Department is not asserting jurisdiction over matters not previously within its purview or trying to regulate topics Congress never assigned to it; it is acting in the center of its statutory authority. The Secretary’s HEROES Act waiver and modification authority falls squarely within the responsibilities Congress has vested in the Secretary. For example, in tasking the Department of Education with carrying out the purposes of the federal student loan programs, Congress already authorized the Secretary to modify “any . . . provision of any note evidencing a loan” made under Title IV and to “compromise, waive, or release any right, title, claim, lien, or demand,” among other powers. 20 U.S.C. § 1087hh(1)-(2). Given that Congress expressly authorized the Secretary to modify, compromise, or release federal student loan debt, the Department’s use of its HEROES Act authority to do exactly that hardly represents a “transformative expansion” or “radical or fundamental change” in its power. West Virginia, 142 S. Ct. at 2609-10.... [Emphasis added]

This presents an opportunity for Chief Justice John Roberts to find a middle ground majority within the court for narrower rulings, as he has tried to do in the past, most notably in sustaining the Affordable Care Act by determining that Congress was properly using its power to tax when it established penalties against the uninsured.  Here, the question is much easier:  the HEROES Act aside, the Secretary of Education already has explicit statutory powers to cancel student loans.  Thus, this is the perfect opportunity for the court to put guard rails around its sweeping West Virginia decision.  

It should not be lost on anyone that dragging out this lawsuit also hurts the federal treasury.  The sooner it is resolved for borrowers, the sooner a majority of borrowers go back into loan repayment, many with more manageable debt that facilitates repayment, and the sooner borrower accounts can be closed if their balances are within the cancellation targeting limits. The longer it drags out, the more unmanageable the student loan program becomes and the more inequities arise.  Why should a repayment pause extension, to accommodate the Nebraska lawsuit, benefit higher income borrowers at the expense those who are victims of appallingly bad loan servicing and debt traps, and who badly need immediate remediation?  

Nebraska Governor-elect Jim Pillen is being left with many messes on his hands by his predecessor, not the least of which is a weakened economy that needs student loan cancellations to turn it around.  Moreover, without the cancellations, many borrowers will be leaving the state to seek better opportunities elsewhere, despite Pillen's rhetoric about keeping more Nebraskans at home.  Why stay in Nebraska, where water is increasingly poisoned by nitrates, where opposition to immigrants is holding back industry, where state government has become an instrument of one monied family, and where the attorney general spends his time looking for divisive, counterproductive lawsuits to join or to lead, like Nebraska v. Biden.   

Governor-elect Jim Pillen and Attorney General-elect Mike Hilgers should huddle and resolve to look for multiple-win opportunities in litigation.  Dropping the opposition to student loan cancellations would be a win for the Nebraska economy, for aggrieved borrowers, for equity, and for the federal treasury.  Seldom do any two Nebraskans have the chance to make such a positive contribution to the state and to the whole country.  

They should announce now that they will drop the lawsuit.   

  

Nebraska AG: Please Drop the Lawsuit

November, 2022

Lincoln — As a Nebraskan, I want to make a case for Nebraska to withdraw as a plaintiff in the current student loan cancellation lawsuit, Nebraska v. Biden, which is headed to the U.S. Supreme Court.  Instead, our state attorney general should follow his statutory duty to protect student loan borrowers under Nebraska consumer protection law.  

First, Nebraska does not have standing as a plaintiff, according to a recent federal district court decision in the Eastern District of Missouri, where the case was filed.  The Eighth Circuit, on appeal, did not take issue with this ruling; instead, it found that another plaintiff may have standing and therefore proceeded with the case on that basis, not on Nebraska's standing.

The district court judge ruled that standing must involve irreparable harm to the plaintiff, beyond speculation.  The Nebraska attorney general, Doug Peterson, unconvincingly claimed that state government pensioners in Nebraska would be hurt by loan cancellations because the Nebraska Investment Council (NIC) would lose money on student loan investments known as SLABS.  He cited a Bloomberg news service article as authority, but clearly the article only suggests investors are likely to shift their investments, not suffer losses.  An obviously better authority is Fitch Ratings, an established Wall Street ratings firm, which explains that the Biden loan cancellations are likely to be helpful to SLABS investors, as they reduce maturity risks. 

Did the attorney general actually discuss his views with the NIC, and did the NIC concur?  That would be good to know.    

Other harms that might befall Nebraska, Peterson argued in vain, were associated with the amount of the cancellations not being taxable, diminishing Nebraska's potential state tax revenues.  Presumably Nebraska could tax them as income if it wanted, but has chosen not to, and for good reason.  Does Nebraska want to tax loan cancellations of the lowest earners, the disabled, the defrauded, the deceased?  Surely not.  This harm argument is not only speculative, it comes at a time when Nebraska's tax coffers are in record surplus, due primarily to federal tax stimulus programs associated with the pandemic.  

Second, consider what the Nebraska attorney general is trying to stop with his lawsuit: student loan relief well-targeted to an estimated 232,100 or more Nebraska borrowers, amounting up to $2.72 billion for Pell grant recipients, at $20,000 per borrower, and up to an additional $96.1 million for other lower and middle income borrowers, at $10,000 apiece.   

These cancellations would help Nebraskans who invested in themselves through education, who have experienced difficulty paying for college because of tuition levels never faced by previous generations, which enjoyed greater tax subsidies keeping tuition moderate.  The cancellations would be good for the Nebraska economy, as low and middle income borrowers begin to get out from under their student loan debts to start families, buy homes, establish businesses, and put away funds for their own children's education.  

Any apocryphal cases of blue-collar taxpayers paying, through loan cancellation, for the education of high-income, white-collar professionals, are de minimus because of the targeting, especially to the Pell population.  Do those who make such arguments against cancellation also object to college tuition charges without means tests?  Again, surely not.  (Where do their children go to college?)

Let's also take a closer look at the debt borrowers have accrued, to understand more of the real issues behind the need for loan cancellations.  A significant part of the debt is not what borrowers took on to pay for tuition, but debt that has been added to their accounts for higher than necessary interest, interest capitalization when borrowers needed temporary relief from monthly payments, negative amortizations when borrowers entered into income-based repayment programs, and excessively high fees associated with loan administration.  The number of borrowers who have paid off more than their original principal, but still owe more than they originally borrowed, illustrates the problem.  

It is not well-known or properly appreciated that until the pandemic repayment pause, borrowers had actually paid $114 billion into the federal treasury above the cost of the loan programs.  That borrowers could now get some of this back in cancellation should be considered a rebate for overcharges.  The overall effect of the Biden cancellations on the federal budget, if a rebate is factored in, is only 10% to 20% of the cost of the 2017 Tax Cut, the benefits of which were targeted to those in the upper incomes.  

Nor is it well-known, although thoroughly documented by government auditors, that many borrowers have been misinformed, deceived, and defrauded by their loan servicers.  I have reviewed the paperwork of borrowers who fall into this category; they have tried conscientiously to resolve their issues, but have been stonewalled at every turn.  I have also personally* tried to solve problems on their behalf, without success, so I know how impossible it can be to get out of student loan hell when no one will act to make things right.  

Too many of us think that borrowers took on their loans willingly to pay tuition, with full confidence and knowledge of the terms of the loan programs, so they should simply pay them back — end of story.  But even those who take this view, like Nebraska congressman Mike Flood, allow that relief may be owed to borrowers who have been "gouged," as he put it.  

That would be a good place for Nebraska attorney general-elect Mike Hilgers to start his term of office.  He should drop Nebraska from the lawsuit against cancellations and, instead, follow the lead of other state attorneys general who have used their consumer protection laws to help borrowers out of messes that have been created through no fault of their own.  Such lawsuits have helped to drive corrupt and abusive servicers like Navient and PHEAA from business as federal contractors.  

That is my request as a Nebraska taxpayer.  There is no good reason why Nebraska taxpayers should be paying the salary of an attorney general to block justified loan relief for hundreds of thousands of Nebraska borrowers, let alone millions of borrowers across the nation.  Keeping people in debt with the mistaken idea that it makes money for state government is not the attorney general's job.  He should instead be Nebraska borrowers' advocate against a loan system run amok.  

Finally, it does not reflect well on Nebraskans that there is every appearance that Nebraska v. Biden is driven by politics, not policy.   The case has turned into a political sideshow, as if the current and future financial viability of many thousands of Nebraska individuals and households can be ignored.  The right thing for Mike Hilgers to do is to demonstrate that he will be an attorney general for all Nebraskans, not a political puppet driven by a national dark-money agenda, and withdraw Nebraska from the lawsuit accordingly.  The case should go forward with other plaintiffs, if they can establish** standing, and eventually be sorted out without misuse of Nebraska taxpayer dollars.   

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*Borrowers as a last resort have occasionally asked me for help, as they are aware of my years of litigation working against fraud and abuse in student loan programs.  See blogposts here and here, and Dan E. Moldea, Money, Politics, and Corruption in U.S. Higher Education, 2020.  

**The Eighth Circuit enjoined the Biden loan cancellations this month because a three judge panel concluded that Missouri might have standing as a plaintiff out of its relationship with the loan servicer MOHELA.  However, MOHELA is not an arm of the state of Missouri under a Fourth Circuit precedent that provides a four part test for determination.  See U.S. ex rel. Oberg v. PHEAA, 2015.  The Supreme Court carefully reviewed the case, asking the U.S. Solicitor General for guidance, then denied cert to PHEAA in January, 2017.  





Midterm Predictions 2022

November, 2022

Washington — Being a political scientist, I am sometimes asked for election predictions.  This has become more frequent since I correctly forecasted both the 2016 and 2020 presidential race outcomes. Most others missed badly on at least one of them.  

My success could be the result of what I hope is careful attention to empirical evidence, rather than randomness.  If I have any bias, it is an overabundance of willingness to seek out views contrary to my own to determine what might be resonating, for good or ill, with the voting public.  

The main prediction I'll make for the 2022 midterm elections is that many Democrats will lose races they should have won, because of faulty campaign strategies.  Their failure to be competitive in culturally rural precincts will doom many of them.  It is not that they will lose in these areas, but that they will lose by such wide margins that they cannot make up for the losses elsewhere.  

A corollary prediction is that post-campaign analysts and pundits will either blame other factors, such as not campaigning more ideologically to the left or to the right, or that it is impossible to compete for such votes anyway.  

They are wrong.  Many voters do not have a firm grasp of left and right, but make their candidate choices on the basis of factors that do not match up with what they profess ideologically.  Attractive candidates who listen and relate to voters will be competitive, because remarkably few voters pay much attention to political theory.  Intentional, anti-ideological pragmatism would go a long way toward closing these election gaps, if offered.  

As to the impossibility of Democrats competing in culturally rural areas, such thinking needs to be challenged by candidates who know where Republicans are vulnerable.  Republican shortcomings are truly profound throughout culturally rural areas.  Their failed agricultural policies have driven farmers off the land, weakened small towns, closed hospitals and nursing homes, increased cancers and dietary diseases, and led to alarming numbers of deaths of despair.  Democrats who don't understand this and neglect to address these weaknesses have sealed their own fate. 

A final prediction is that Democrats will once again fail to understand that pushing policy positions before their time has come, before groundwork is carefully laid, can be counterproductive to achieving the election victories necessary for their adoption.  Many worthy Democratic goals and causes will be going down to defeat in this election because of counterproductive strategies.  This is not a call to go slow, but to learn how to get things done successfully.  

Because I make these predictions doesn't mean I like them, or that I'm unwilling to entertain contrary views.  I'd welcome analyses that challenge any of the above.  



 

A Possible Way to Reverse the FFEL 'Betrayal'

October, 2022

Washington —  Although the Biden administration's student loan cancellation plan has, so far, survived several attempts to kill it in court, it has come at a high price.   Hundreds of thousands of FFEL borrowers feel betrayed that they will see no relief because, to counter plaintiffs' claims of standing to sue, the Biden administration abruptly took away FFEL borrowers' eligibility to claim cancellation benefits after consolidating their loans from FFEL into DL.  The FFEL borrowers had been assured that they were eligible right up to the very day the promised benefits were withdrawn.   

This "gut-punch" to FFEL borrowers may have been needless.  Standing has a high bar, as Judge Henry Edward Autrey explained in his decision to dismiss six states' requests for injunctive relief against the cancellations.  Plaintiffs must "show a concrete and particularized injury for the purposes of standing," he wrote, pointing out four times that "speculative" injury did not qualify for standing.  

Make no mistake: any injury to the plaintiffs from FFEL consolidations and cancellations is highly speculative.  Fitch Ratings, the Wall Street company that rates student loan asset-based securities (SLABS), even considers the Biden plan to be "positive" for SLAB owners like the plaintiffs.  Why DOJ did not make this argument for the Biden administration is inexplicable.  It is commonly understood in industry; cancellations will reduce maturity risk.  

During oral argument, at 1:06 onward, Judge Autrey even tossed up a softball question to DOJ, inviting a full swing at how speculative the plaintiff's alleged injuries were, in reality.  DOJ instead touted the argument that it was cutting off borrowers' benefits, needlessly giving credibility to the plaintiff's assertions that cancellations would be bad for SLABS.  In his written decision, unfortunately, Judge Autrey conformed to DOJ's sole argument that removing the borrower benefits settled the question.  

This will make it all that much harder for the Biden administration to make amends with the FFEL borrowers, as it says it wants to do.  

There is a possible way back, to undo the damage.  First, when the case is appealed, DOJ needs to make the case that the standing question is not solely a function of making FFEL borrowers abruptly ineligible.  

Second, there is the matter of statutory parity between FFEL and DL programs.  Parity prevents termination of FFEL benefits if DL borrowers are eligible for them.  

A new case on the parity question, Rosenberg v. Deutsche Bank, has been filed in the Southern District of New York.  It cites 20 U.S.C. 1087e(a)(1)-(2) of the Higher Education Act:

Notwithstanding any other provision of this part, loans made to borrowers under this part that, except as otherwise specified in this part, have the same terms, conditions, and benefits as loans made to borrowers under section 1078 of this title [FFEL Loan Program], shall be known as “Federal Direct Stafford/Ford Loans”.

And argues:

...the United States Court of Appeals has ruled that, by enacting the statutory parity provisions in the HEA requiring that all federal student loans under the FFEL Loan Program and the Direct Loan Program “shall have the same terms, conditions, and benefits”, it is clear that (a) “Congress created a policy of inter program uniformity” between the FFEL Loan Program and the Direct Loan Program and (b) “Congress’s instructions to the DOE on how to implement the student loan statutes carry this unmistakable command: Establish a set of rules that will apply across the board.” See Chae v. SLM Corp., 593 F.3d 936, 944-45 (9th Cir. 2010).  [Case 1:22-cv-07567 Rosenberg v. Deutsche Bank, Southern District of New York] 

This is also the historical position of the Education Department.  It would be good to return to it.

Time is short before an upcoming appeal of Judge Autrey's decision in the Eighth Circuit, but DOJ should also draw a distinction between the amount of cancellations at issue and the cost of cancellations to taxpayers.  There is a huge difference, as explained in a previous blog post.  This is potentially important in determining whether the cancellations cross a "major questions" line.  Judge Autrey suggested that the case brought by the six states might succeed on the merits, if the plaintiffs had standing, but his rationale was based on the assumption that taxpayers would be bearing all of the costs.  That assumption is speculative and unwarranted.   

Weak State AG Arguments for Standing

October, 2022

Washington — Six state attorneys general have asked a federal district court in Missouri for injunctive relief to prevent President Biden's announced student loan cancellations from harming the financial interests of lenders, loan servicers, and investors in their states. They have suggested various injuries in an attempt to demonstrate that they have legal standing to bring their case.

Among the alleged irreparable harms are potentially fewer loans to service, more loan consolidations from commercial- to government-held loans, and decreased income from investments in student loan asset-based securities, or SLABS. The six AGs' argument is that borrowers should be kept in their current debt status to avoid loss of revenue streams to those who hold, service, and invest in that debt.

It is important here to take note that other, more consumer-oriented state attorneys general — and the federal Consumer Financial Protection Bureau — have successfully brought suits against several student loan holders and servicers for the benefit of borrowers, taxpayers, and better program management.  They have been able easily to distinguish between perpetrators and actual victims.  

A question of immediate importance, as the new case goes to court in Missouri, is whether any alleged future harm has been offset by federal assistance that continues to benefit the entities identified by the six plaintiffs. A look at the record shows that past and ongoing federal help has been extraordinarily solicitous to these lender, servicer, and investor interests.

• Loan consolidations. Historically, many loan consolidations were in the reverse direction of the plaintiffs' alleged harm. For several years, private lenders, through the use of direct marketing to borrowers, moved billions of dollars of loans from federal to private ownership, generating federal subsidies for the new owners. Although direct marketing tapered off by the time of the Great Recession, in part because of evidence that industry marketers were improperly accessing the U.S. Department of Education's NSLDS lists of borrowers, many of these consolidation loans still populate current SLAB investments. Federal authorities eventually determined that borrowers were often misled by misinformation from the marketers — misuse of federal logos, for example — but no remediations were ever made to borrowers or taxpayers. If the Biden actions now encourage borrowers to consolidate loans in the other direction, any harm must be weighed against this history, as well as the fact that consolidation and call risk are inherent constants in the securities markets.  Some experts even say that SLABS will be helped by the cancellations.*

• False subsidy claims. Beginning as early as 2002 and continuing for several years, many student loan holders made false subsidy claims by moving new loans in and out of older, more lucrative bond issues. The Education Department (ED), after its Inspector General determined that the practice was illegal, ceased paying the false claims but only prospectively, allowing claimants to keep years of illegal proceeds, estimated at the time to total $600-$800 million. Among the loan holders keeping proceeds were those in Iowa, Missouri, and Arkansas, states that now claim harm from future loan cancellations.

Iowa. When the Iowa Student Loan Liquidity Corporation (ISLLC) was independently audited by Kearney & Co., it was found to have been making claims on loan principal of $412 million rather than the legally eligible $78 million. This was not a surprise because ISLLC had been identified several years earlier by ED's regional reviewers for making false claims. Those findings were overruled by ED political appointees, however, and remained out of public sight until discovered much later in litigation.

Missouri. When the Missouri Higher Education Loan Authority (MOHELA) was audited by Kearney & Co., it was found to have been making claims on $226 million principal rather than the legally eligible $43 million. In agreeing with the audit findings, the MOHELA CEO wrote to the auditor: "MOHELA will work diligently to assure corrective measures are taken regarding this issue. Below is a statement from AES/PHEAA..," (another servicer which he went on to blame for causing the false claims). Although professing innocence and corrective action, MOHELA did not return any of the illegal proceeds because ED, incredulously, did not require it.** When PHEAA's many servicing troubles finally caught up with it in 2021 and its federal servicing contracts ended, MOHELA became the new servicer for many of PHEAA's loans, gaining major new contracts from ED. This greatly expands MOHELA's servicing revenues at the same time the Missouri attorney general alleges harm to MOHELA in the new lawsuit.

Arkansas. The Arkansas Student Loan Authority (ASLA) asked not to be audited by an independent auditor for its false claims, on the condition that it would end all future claims for the more lucrative subsidy. ASLA returned approximately $6 million in false claims to the U.S. Treasury, out of an estimated $12 million at issue.

• ECASLA. During the Great Recession, student loan securities markets collapsed despite federal guaranties backing the loans. In order to provide liquidity for borrowers in the bank-based FFEL system, Congress in 2008 authorized the Secretary of Education to provide assistance to the industry. ED offered several different financing opportunities, which resulted in over $100 billion of FFEL loan volume to save the industry. 

• Pre-emption. In 2018, after a federal appeals court ruled that state student loan authorities were not protected by sovereign immunity, opening the door to lawsuits from borrowers and state attorneys general who sought to protect their borrowers under state consumer protection laws, the Secretary of Education determined that the federal Higher Education Act pre-empted such litigation. Until this determination was subsequently overturned by multiple courts, many loan servicers were protected from the consequences of failing to give borrowers the benefits to which they were legally entitled.

The six AGs' assertions of irreparable harm are dwarfed in comparison to the historical and ongoing largesse showered on student loan entities. A stronger case could be made that squandered federal resources should be clawed back and more borrower debt should be cancelled to compensate for documented predations committed by lenders and servicers. The idea of a few state AGs keeping borrowers in debt as long as possible, to sustain revenue streams for ethically-challenged appendages of a superannuated industry, is repugnant. 

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* Fitch Ratings, contrary to the six AGs' claim of irreparable harm, suggests that loan cancellations will actually have a positive effect on SLABS:

"As Fitch has previously communicated, student loan forgiveness that includes FFELP loans would have a positive effect on some FFELP ABS trusts exposed to maturity risk, as student loan forgiveness of any amount would generate a one-time prepayment that could reduce maturity risk for the most vulnerable trusts. High levels of cash flow would, in most cases, pay down the senior-most bonds with the closest maturity dates. Maturity risk has been the main driver behind ratings downgrades in the sector, given the underlying loans have at least a 97% federal guarantee against default of principal and accrued interest."

** MOHELA, according to the Missouri state auditor, went on a lavish spending spree instead of returning the false claims.  See https://auditor.mo.gov/press/2007-56.htm.

CBO Cost Estimate Needs Work

September, 2022

Washington —  The Congressional Budget Office has offered an estimate of the cost of President Biden's need-tested student loan cancellation plan, announced last month.  Calculated on a "present value" basis looking out thirty years, the estimate is $400 billion.  The White House quickly compared the smaller number to the $2 trillion tax cut enacted in the previous administration, which was targeted at corporations and those in the upper tax brackets.  That may be a good perspective, but there's much more to the calculation that needs to be explored.  

CBO appropriately cautioned that its estimate is "highly uncertain."  Present value scoring is inherently problematic because it is only as good as its economic forecasting models. But present value scoring is required under the Credit Reform Act of 1990, so that's where CBO starts and ends its analysis, unfortunately.* 

Another way to look at the question would be through old-fashioned cash-basis fund accounting, looking at what we know — or should know — about the nation's student loan portfolio and applying the Biden policy to how it impacts federal Treasury revenues and expenditures, without a lot of out-year guesswork.  This approach also has the advantage of raising questions that are not addressed by CBO but are nevertheless important to get to matters of who is paying how much for what.

•  According to GAO, the federal Direct Loan program was a money-maker for the Treasury between 2010 and the onset of the pandemic, in the amount of over $114 billion.  This is mostly borrower-paid interest above the cost of the program and, if returned to borrowers through cancellations, is not a taxpayer cost but analogous to a rebate to borrowers for overcharges.  

•  Uncollectible student loan debts have already been written off in significant amounts that may or may not be a part of cost calculations.  Neither CBO nor the White House has offered a clear explanation as to how these amounts are accounted for, how much has already been covered by excess program revenues, and how calculations are being made to ensure the amounts are not counted twice.  

•  Amounts of borrower remediations for loan servicer fraud, abuse, and misinformation are likewise not a part of current estimates, as far as I can tell.  In April, the Biden administration offered waivers to many borrowers for the purpose of providing them borrower benefits to which they were entitled but improperly denied by servicers.  How these remediations interact with other cancellations is unclear, as they are authorized under more than one statutory authority and should not be duplicated in estimates.  Their totals could be large and not a cost to taxpayers, because the sums were added to borrowers' accounts improperly and their removal is a correction, not a cost.  (A way to get at estimating potential remediations is to determine how much of the total borrower debt is principal and how much has been added by capitalized interest and negative amortization.  If these numbers have been published, I'm not aware of them.  CBO should try to make this determination, because distinguishing between what students borrowed for college and what has subsequently been added is fundamental to understanding student loan issues.)  

•  Consideration should be given to the fact that the Biden cancellation policy could reduce the number of borrower accounts by nearly half, cutting costs of administration.  

• Consideration should be given to savings achieved by ending payments to FFEL loan holders when accounts are paid off.  This includes SLABS.**

•  Consideration should be given to how the Biden cancellations will positively affect the nation's economy.  When the cost of tax cuts is considered, advocates often claim — irresponsibly — that the cuts pay for themselves.  At best, the economic effects might cover a third of the revenue loss.  Doubtless, however, there is some effect, so for consistency in arguments over economic effects, a responsible estimate should be applied against the cost of the Biden cancellations.  

When the above factors are considered, my conclusion is that the CBO estimate is not only "highly uncertain" but likely overstates taxpayer costs significantly.  In any case, I'd like to see numbers attached to the above factors so everyone could be more confident in making estimates.  

In recent days, the Biden cancellations have been challenged in federal courts, which raises even more questions.  It's possible a case could go to the Supreme Court, which seems eager to apply its new "major questions" doctrine to overrule executive branch actions.  The Supreme Court could find that the Heroes Act justification for the cancellations is insufficient to support a major question, in part because of the amount of money involved in the cancellations, threatening Congress's constitutional power of the purse.  

This is why costs estimates need to be refined and sorted out over who is paying for what.  The Supreme Court does not need another decision based on factual mistakes, as was an infamous decision a few years ago.  

Does the Biden administration have a Plan B, or Plan C, in case Plan A is enjoined?   Would it use 20 U.S.C. §1082, rather than the Heroes Act, to support its action?  Would it change the amount of the cancellations to be based on a retroactive reduction of interest, for which there is empirical justification, or retroactive elimination of capitalized interest, which is the source of so much borrower grief and is at the heart of servicer misconduct?  Those actions could still be targeted, to make them need-based.  

Remediating improper servicing, cutting fees and rates to fulfill program purposes, targeting Pell-eligible borrowers with cancellations, and reducing the number of costly accounts and unnecessary subsidies are essential to good program management, an explicit obligation of the Secretary under the law, not actions for an activist judiciary to impair.***  To those of us who have looked at student loans over the decades, from many different angles, the only "major question" is how the corruption-tainted loan imbroglio has been tolerated so long without relief and reform.   

Critics of the Biden administration are on firmer ground when they note that nothing in the administration's student loan package addresses the need to restore borrowers' bankruptcy rights, which has bipartisan support, or to control college costs.  That's where attention needs to be focused.  It's not too late to add them to the package.

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* Nobel laureate Joseph Stiglitz writes: "Although the broad estimates of the total amount of canceled debt can be big—some reach hundreds of billions of dollars—these figures derive only from budgeting practices for how credit programs like student loans are recorded. The government and budget analysts calculate a number that is known as 'the present discounted value of foregone payments'...but it is a very poor guide for understanding what actually happens...."

** Student Loan Asset-Based Securities contain substantial numbers of loans with dubious ownership and balances, resulting from lender and servicer deception and misinformation.  See, for example, the earlier blog post about an actual case, at https://viewfromthreecapitals.blogspot.com/2022/07/new-taxpayer-burdens-from-student-loan.html  See CFPB corroboration of servicer issues as well.   

*** A lawsuit brought by six state attorneys general alleges that lenders, servicers, and investors in their states will be harmed by losing profits from student loans that may be consolidated or cancelled by the Biden actions.  The AGs are taking legal action to keep borrowers in debt so these parties can continue to profit indefinitely from well-documented program mismanagement and borrower misfortune.  This is a weak foundation on which to build a "major question" for the Supreme Court.   

 




Don't Overestimate Loan Cancellation Costs

August, 2022

Washington — Much of the recent criticism of President Biden's student loan cancellation plan is based on faulty assumptions about its high cost to taxpayers.  While there are reasons to wish he would have acted somewhat differently — to provide student loan relief through restoration of bankruptcy protections and to address cost of college — it is off-base to overestimate his action's taxpayer price tag.

First, the cost of the loan repayment pause due to the pandemic should be considered in the same category as similar actions, such as the Payroll Protection Plan, to keep the economy from collapsing. It should not be confused with long-term, underlying student loan issues, no more than PPP should be confused with corporate tax rate issues.  

Second (and here I am relying heavily on GAO's 2014 and 2022 reports on federal Direct Loan costs), borrowers for many years have been more than paying for the costs of the student loan program, such that the federal treasury was making money from borrowers in the hundreds of billions of dollars. Think of it this way: if those funds had been put into escrow, and later distributed back to borrowers as rebates for overcharges beyond the cost of the program, would we be saying that the rebates were being paid by taxpayers generally? Of course not. The appropriate question to ask is how much of the Biden cancellations must be paid by taxpayers, beyond rebating borrowers for overcharges, if there is in fact any taxpayer cost. GAO admits to being flummoxed by how to determine costs such that the question can be easily answered.

Third, complicating the question even more, is how much borrower debt was never borrowed to attend college, but has been added by lenders and servicers under questionable circumstances. From my years on the inside of student loan administration, and from looking in depth at individual cases, I know how corruption manifests itself in higher borrower debt. Such debt should be cancelled because it was improperly added to borrower accounts in the first place. Whatever sums are involved, and they may be huge, there are no taxpayer costs for such cancellation.  

Fourth, what are the benefits of potentially eliminating up to half of all loan accounts, in terms of reducing servicing costs and improving servicer performance?  This must be put into the equation as a significant boon both to taxpayers and to borrowers.  (The government should especially stop hounding borrowers who have already paid back principal and more.)

It's wrong in so many ways to cast the cancellations as new, inflationary, poorly targeted taxpayer burdens, when a more careful analysis may well show the opposite, or at least raise so many questions that editorialists (and celebrity pundits) should hold their tongues.

There are plenty of reasons to say the Biden actions don't solve all that ails U.S. higher education.  So let's get to work on real problems, not make up issues that distort and distract.     





President Biden's Student Loan Cancellations

August, 2022

Washington —  Before commending the Biden Administration for its action on student loan cancellations, let me be clear that I think the Administration overlooked an opportunity to couple its action with two other badly needed initiatives:  restoration of bankruptcy protections for borrowers and much stronger measures to control college costs.  These two initiatives would be both good policy and good politics.  Much could be done on bankruptcy and college costs by executive action without waiting for Congress, as I have outlined previously in this space (and would be happy to expand upon at joberg@aol.com).  

But now for the commendation.  Upon taking office, the Biden Administration brought in new managers from outside the revolving door that historically provided under-qualified and ethically-challenged higher education and loan industry functionaries in top positions.  The new people soon began applying consumer protections to assist students, families, and taxpayers in a series of actions involving esoteric-sounding but hugely consequential provisions of the Higher Education Act:  borrower defense to repayment; gainful employment; state consumer protections; disability discharges; forbearance abuse; private collection agencies; income-driven repayment; public service loan cancellation; and many others.  These actions may turn out to be as important as the broader cancellation of up to $10,000 ($20,000 for Pell recipients) as announced by the President on August 24th.  

As to the Biden cancellations themselves, rather than repeating the critiques of others, I'll raise questions that need deeper reflection rather than knee-jerk reactions.  

•  It's not clear who, if anyone (including federal taxpayers), is paying for the cancellations, for several reasons.  Many loans were already in default and written off.  Borrowers themselves have been paying for the cost of the program, including defaults, resulting in the federal government actually making money from the program for many years, until the repayment pause during the pandemic.  When repayment resumes, new revenues will offset taxpayer costs to a degree determined by arcane budget scoring rules.  This is not an easy call; too much should not be assumed without looking at all sides of the question.

•  It's not clear how much debt borrowers willingly incurred themselves, as opposed to debt that was added to their accounts by various lender and servicer deceptions and misrepresentations.  Debt that was added by negative amortization and capitalized interest under suspicious circumstances (such as forbearance abuse, consolidation deception, and denial of borrower benefits) is not a known figure.  If such debt is cancelled, it is not a cost to taxpayers but a recognition that it should not have existed in the first place, had the program been properly administered. 

•  As to the possible inflationary effects of the new cancellations and other policies, the fact that they will be implemented at the same time many more borrowers will be going back into repayment must be taken into account.  It is an additionally tricky business to do net present value scoring over many years on the true cost of loan programs while gauging both the inflationary and deflationary effects of changing policies at any particular time.  I've not yet seen a convincing analysis.  

•  Regarding the possibility that a court will block the Biden cancellations, it is hard to predict but it puts the Department of Justice in the position of having to defend them.  This is justice with a small j, because DOJ has for many years allowed student loan programs to sink further and further into corruption, without taking action against wrongdoing among lenders, schools, servicers, guaranty agencies, and other middlemen, even ED personnel at the highest levels.  It is a mistake to overlook the role of corruption as an important cause of the need for cancellations, and to overlook the failures of the federal law enforcement agency that should have been more active in rooting out the corruption.  Both agencies are trying to avoid the issue by citing section 20 U.S.C. §1098, related to the pandemic emergency, as the authority for the cancellations, rather than 20 U.S.C. §1082, which many borrower advocates recommended.  Admittedly, use of §1082 gets messy because it links loan cancellation to issues of program management, but the Administration, and millions of borrowers, may regret not using it if a court determines §1098 doesn't do the job.   

•  Regarding the administrative difficulties that will be faced by targeting cancellations by income, a question arises about the role of the Treasury Department, which heretofore has often been uncooperative about assisting in efforts that would require the agencies to work together.  Historically, the Treasury Department hardly acknowledges the Education Department, so far apart are they in the Washington pecking order.  But now it is the President who will be directing both agencies to try to make targeted cancellations work.

•  As to whether the Biden cancellation policy is regressive or progressive, certainly there is an attempt to take regressivity out of it.  But it must be remembered that traditional higher education support through subsidies to institutions is regressive to start with, especially tax subsidies to public institutions that keep tuition low for the middle- and upper-income masses.  The blue collar family that does not send its children to college has a greater basis for grievance over that regressivity, as compared to cancelling the loan of a Pell grant recipient who needs a reprieve from a bad loan experience, quite possibly not of his own making.  And, clearly, regressivity questions sometimes must take a back seat to citizen support for widely accepted public goods, like higher education.  Put in the context of other federal actions, like tax cuts aimed at the highest tax brackets, the issue hardly registers.  

•  The use of Pell grants to target the cancellations is sound for more uses than targeting.  It also recognizes that the value of Pell grants has diminished greatly over the decades and thus helps to make up for it.  Importantly, it also avoids institutional packaging and displacement of grants, which has deprived the Pell-eligible of billions of dollars annually.  (This is another area overdue for Secretarial attention and action.)  Putting Pell into the equation also reduces troubling gender and racial gaps in debt distribution.  

•  Not to be overlooked is the planned overhaul of income-driven repayment, to stop capitalized interest and negative amortization from putting borrowers even further behind when they are already faithfully paying as much as they can on their debt.  This is an important reform that goes beyond cancellation.     

•  The Biden cancellations should reduce significantly the number of borrowers in the loan system, which is no small consideration when two major loan servicers have chosen not to continue their federal contracts.  Each was notorious for poor servicing and saw ever-increasing litigation from borrowers, states, and federal regulatory agencies.  Better to cancel loans if possible rather than transfer borrowers from one bad servicer to another.  Combined with "Fresh Start," another initiative to take borrowers out of default, fewer borrowers will wind up with bad servicing.  These considerations should not be underestimated as to how they shaped the President's decision.  For example, what seems like a high income limit may have been driven by the need to reduce the number of borrower accounts.  

•  One negative review of the Biden cancellations, which warrants special mention, is the Washington Post's editorial of August 24.  It was remiss not to note that for several years, the Post was kept afloat by profits from a for-profit chain of colleges that was heavily dependent on federal student loans.  Exploitation of students by such colleges is partly responsible for the student loan crisis that has precipitated the President's actions.  Readers deserve better.  

Although I would have recommended a different approach to how the President went about his decision and its promulgation, I'm nevertheless pleased that the Pell-eligible population is part of the equation, that the number of accounts to be serviced will go down significantly, that the capitalized interest debt trap will be eliminated, and that federal agencies will have to work better together, all suggestions that have appeared often in these pages. Mostly I'm pleased that many, many lives will get back on track as a result of these actions. 

But there is much, much more to do.   

 




Secretary Speaks Truth, Court Should Take Note

August, 2022

Washington — U.S. Secretary of Education Miguel Cardona spoke the truth this month about priorities in higher education, even going so far as to call them a "joke":
 
[M]any institutions spend enormous time and money chasing rankings they feel carry prestige.... There's a whole science behind climbing the rankings.  [Emphasis added]

Separately, the trade press this month noted an alarming decline in Black enrollment in the U.S.:

Black enrollment grew from 282,000 in 1966 to more than 2.5 million in 2010.... But from 2010 to 2020, as overall college enrollments fell, the number of Black students on campuses fell even more sharply, to 1.9 million.

Would the "science" behind climbing the rankings have anything to do with Black enrollment declines?  Yes.  The science of so-called Enrollment Management, as widely practiced in higher education, does not target race per se as a factor in chasing prestige, but it might as well.  A look at who gets loaded down with student debt and who doesn't reveals the unavoidable connection.  This has been clear for more than a decade.  The Black population is increasingly wary of the debt load it is being expected to assume, and it shows across a wide spectrum of debt and enrollment indicators.  

Meanwhile, the higher education establishment is once again weighing in with the U.S. Supreme Court to protect race-based affirmative action, arguing that without this tool it cannot achieve desired racial diversity.  The Court will hear oral arguments in two affirmative action cases in coming months.

Which raises a question:  Why not use Enrollment Management science, which is not race-based but causally linked to enrollment distributions, to increase rather than suppress Black enrollment?  Instead of using resources to chase rankings, use them to reduce Black debt load.  A commitment to do so would make the higher education community appear less hypocritical.*  

The Secretary could aid this himself, by sending his program review teams to institutions that use the science of Enrollment Management in ways that counter the purposes of federal student aid programs.  He could make participation in HEA Title IV programs dependent on use of the science to complement, rather than countervail, federal programs. 

I am not optimistic about how the Court will approach these questions, based on previous decisions. The Court has not looked seriously at Enrollment Management science and its effects.   In oral argument for a 2015 decision, Justice Scalia was more interested in asking whether Black students might be better off attending institutions that are not academically competitive.   Such is the level of the debate at the Court.  

A sensible decision in the current cases, in my opinion, would be one that reaffirms strict scrutiny for any use of race, not just nominally but in effect as well.  Especially in effect.  That would lower the hypocrisy and would be more likely to achieve racial diversity goals. 

_______________________________________

*  See also Matthew Johnson, Undermining Racial Justice: How One University Embraced Inclusion and Inequality.


New Taxpayer Burdens from Student Loan Deceptions

July, 2022

Washington — Deceptions of borrowers by lenders, accompanied by loan servicer misrepresentations, have long plagued federal student loan programs.  The extent of the abuse is becoming more apparent as the nation attempts to find solutions to its $1.7 trillion (and growing) student loan crisis.  

At what point should deceptions and misrepresentations be investigated as fraud against both borrowers and taxpayers, who wind up paying for it?  That is a question raised by looking at an actual case, brought to my attention earlier this year by an Oregon borrower who has shared her extensive loan paperwork with me.  

The borrower first took out bank-based federal guaranteed loans (FFEL) in 1989.  She obtained a four-year degree from a reputable college and did additional graduate study, borrowing a total loan principal of $78,096.  Over the following years, like many borrowers, she experienced occasions when she could not afford her monthly payments and was placed by her loan servicers into deferments, then into forbearances, which capitalized interest.  She was conscientious and never went into delinquency or default.

To be able to handle payments of principal, interest, and rapidly growing capitalized interest, she asked her servicers for an affordable repayment plan based on her income, but was turned down on grounds that she was not eligible.  Her servicers offered more forbearances instead, which drove her more deeply into debt.

She then undertook a close examination of her loan history to determine why servicers would not place her into an affordable repayment plan, for which she rightly thought she was eligible.  She was perplexed at what she found.

She had consolidated her loans in 2002 with Vermont Student Assistance Corporation (VSAC), which was also her loan servicer, then re-consolidated in 2004 with the federal Education Department's Direct Loan (DL) program, with servicing contracted to Affiliated Computer Services (ACS).  But that consolidation was never finalized.  Although DL paid off VSAC for the consolidated loan, she never received a DL repayment schedule.  Instead of a DL schedule, on which she was to begin paying, she was contacted by Goal Financial, a private direct-marketing consolidator, which sent its own consolidation paperwork to her.  Because Goal Financial clearly knew about her DL consolidation — just how is a key question — and advised her how to complete its own paperwork referencing it, she was deceived into thinking that what she got from them was still part of the DL process.  But what she signed actually terminated her DL consolidation and put her back into the FFEL program with Goal Financial as her lender.  

Goal Financial, which paid off DL, then began receiving her payments along with lucrative federal taxpayer special allowance payments that supplemented them.  

Goal Financial contracted with ACS and Great Lakes as servicers but after a few years the servicing of her loan was moved to AES/PHEAA.  That servicer, notorious for mismanaging federal contracts, misrepresented her eligibility for an affordable repayment plan, telling her incorrectly that FFEL borrowers could not participate.  In 2020, the Oregon borrower re-consolidated into DL to take advantage of a repayment pause due to the Covid pandemic.  DL paid off Goal Financial fully for the loan, including all the interest capitalization the borrower incurred because she had been denied benefits to which she was entitled.  The payoff amount to Goal Financial was $89,711, despite her payments of $68,239 over thirty years.  In other words, compared to the principal she borrowed, she was $11,615 worse off despite paying $68,239 toward the original debt.  

Thanks to a recent (and wise) decision by the Education Department, borrowers illegally denied their benefits have been offered "income driven repayment waivers" so that they can be placed back into the programs they could have participated in, but for deception and misrepresentation.  In the Oregon borrower's case, the balance of her loans will be cancelled to the extent she has been in repayment for more than the number of years required under the plans she was eligible for, but denied.  

But why, federal taxpayers might ask, shouldn't the payoff to Goal Financial be reduced to take out the illicit profit it made from its original deception and its servicer's misrepresentation?  Why shouldn't Goal Financial be investigated for the deception through which it received federal special allowance subsidies during the period from 2005-2020, and for how much the servicer illegally added to the borrower's principal that was paid to Goal Financial in 2020? 

The borrower has taken up these questions of deception and misrepresentation with the Oregon attorney general, who has established a consumer protection unit dedicated to student loan abuses.  When the Oregon AG looks into this case (and likely many, many more cases like it), here is what that office will find.

  • The story of Goal Financial goes back to the 1990s, when Marcus Katz defrauded federal student aid programs in Georgia and was debarred for it.  After the debarment was lifted, he and his sons Ryan and Cary Katz, along with former Congressional aide Mark Brenner and others, formed private loan consolidation companies in San Diego.  They used direct marketing techniques, including cold-calling telephone banks, to entice borrowers into consolidating their loans into Goal Financial and College Loan Corporation. They also used mail with letterheads strongly resembling the seal of the U.S. Department of Education. They were enormously successful, financially.  But their success was due in part to privacy breaches, through which they obtained the names of borrowers from credit rating agencies, loan servicers, and perhaps even the Education Department itself, which in 2005 shut off lender access of its student loan data files temporarily out of concern the access was being misused.  Goal Financial was cited for unspecified privacy breaches by the FTC in subsequent years.  
  • The direct-marketing lenders developed a process known as the "two-step consolidation" through which borrowers who thought they were getting one consolidation quickly wound up with another.  The "two-step" expression is still used guardedly among servicers and loan administrators as the suspected reason that documents are missing from paper trails.  The Oregon borrower who was deceived into a Goal Financial consolidation never received a DL payment schedule, most likely because it was never created, allowing time for the San Diego phone banks to call her first.  The servicer ACS may have been complicit, as it had access to DL records and a relationship with Goal Financial.  Or Education Department employees themselves may have been involved, actively or passively.  No one is eager to talk, other than to say that many records involving "two-step" have since been purged.  
  • The attempt by the Oregon borrower to follow paper trails in this case, often without success, raises questions in itself.  The Goal Financial loan was apparently owned at different times by one or more eligible lender trusts, but it is hard to determine, because trust names and numbers do not match.  The loan may have lost eligibility for its federal guaranty at one point, due to "marketing errors" as cited in SEC reports, but no information is available to the borrower as to what those marketing errors were, who committed them, who took away the federal guaranty, or who restored it.  

At both state and federal levels, student loan borrowers have consumer protections.  Oregon consumer protections are statutory, specifically citing student loan borrowers.  At the federal level, a presidential executive order gives borrowers a right to "actionable" information about their loans.  In this borrower's case, she has succeeded in achieving eventual cancellation of her remaining loan balances under the IDR waiver process, but too many questions remain unanswered to stop there.  

The Oregon AG in particular needs to investigate further what is already known about this case, because there may be thousands or even hundreds of thousands of cases just like it.  Time is of the essence, because there is a history of repeated attempts at the federal level to pre-empt state investigations of federal student loan programs, and more may be in the offing.

This is also a matter that should be taken up by the Inspector General at the U.S. Department of Education, not only from the consumer protection standpoint, but to determine if lender deceptions and servicer misrepresentations constitute fraud against taxpayers, who are paying lenders and servicers questionable sums likely in the billions of dollars when paying off loans through consolidations, federal guaranties, or under various loan cancellation efforts.  These are amounts that were never incurred by borrowers to pay for education, but were added to their loan balances by deception and misrepresentation, and absolutely should not be a liability of taxpayers.