Secretary's Bombshell

July, 2023

Washington — After yesterday's bombshell announcement by the Secretary of Education that the government would cancel $39 billion of student loans for over 800,000 borrowers, it's time to get answers as to what's going on here.  

The Secretary said it is necessary to act to correct mistakes that were made in a broken lending and servicing system, which is one way of putting it.  A more accurate way would be to call it what it is:  finally, a quantification of years of massive waste, fraud, abuse, mismanagement, malfeasance, deception, and racketeering.

While I applaud the work of those dedicated employees at the U.S. Department of Education who have been working tirelessly to bring fairness to victimized borrowers (you know who you are), here are questions that must now be answered about the ongoing debacle that has been festering for many years:

• What did the government know and when did it know it?  
• Was there inside help for the perpetrators from within the Department of Education and Department of Justice?
• Will there be clawbacks from any loan servicers or will taxpayers have to pay the entire cost of the cancellations?  
• Will there be an investigation and prosecutions?  

If there is an investigation, I stand ready to assist to the extent I can shed light on these and related questions.  When the government knew can be pinpointed; who assisted inside the government can be identified.  Evidence is abundant.  Some is already public; some would have to be released by the government itself.  

This morning I received an email from a student loan borrower in Oregon who had been victimized badly over the years, into whose case I looked in much detail.  She was notified yesterday that most or all of her remaining loan balance would be cancelled.  I had taken up her case directly with the Department, which kindly allowed me to describe exactly how lenders and servicers worked their frauds and deceptions on her.  She wrote: "This is GREAT news and a huge relief."

This is being repeated in 800,000 households today.  Again, I applaud those in the Department of Education, and in the borrower-advocacy community, who have worked so hard for this moment.

As a taxpayer, however, I want investigations and accountability.*  And corrections to the "broken system" that gave rise to it all.  

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* How is the $39 billion being scored on the government's books?  In the case of the Oregon borrower, she had already paid back nearly all of her original principal and her balance was almost wholly attributable to lender and servicer "mistakes," as the Secretary put it.   It was never properly an account receivable and its correction requires no government outlay.   A further scoring question:  how much of the $39 billion would have duplicated the Biden administration's cancellations under the HEROES Act?  To the extent the HEROES cancellations would have zeroed out about half of the eligible borrowers' accounts, it would be duplicative.  Because the policy behind the $39 billion was announced months before the HEROES cancellations, it should have been considered current policy and scored to reduce the HEROES cost estimate that the Supreme Court used to convince itself that the HEROES cancellations constituted a "major question."  As more and more victimization of borrowers is revealed — wait for discoveries on Parent PLUS loans — it will become apparent that the HEROES cancellations were not so major after all.    

Mixed Supreme Court Messages

July, 2023

Washington — Talk about mixed messages.  Take these two, from Chief Justice John Roberts' majority opinions on, respectively, the recent affirmative action and student loan cancellation cases.  They seem to go against the thrust of the balance of the two opinions:

Nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise. 

We hold today that the act allows the Secretary to ‘waive or modify’ existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, not to rewrite that statute from the ground up.

I interpret these passages if not as invitations, at least as openings for the Biden administration to reshape the higher education landscape, which badly needs it.   

Many colleges and universities themselves had turned affirmative action, in practice, into a fig-leaf coverup for admissions and financial aid discrimination against the lower income, ironically putting financially needy black students disproportionately into debt.  Now is a chance to change that, by starting to look at all relevant factors in both admissions and financial aid.  

As for student debt cancellation, the way now seems clear for the Secretary to use his compromise and settlement powers under the Higher Education Act to remediate wrongs committed against borrowers who have been victimized by well-documented debt traps.  Now is a chance not only to provide relief to borrowers, but to gather public support for such cancellations as a matter of fairness.  Borrowers did not sign up for the kinds of predatory lending practices they too often encountered at every step of the way.  The Biden administration has not done a good job of explaining that, and it has cost them dearly.  Had they fashioned debt relief around fairness from the outset, we would all be in a better place today.* 

Among the first statutory or regulatory provisions to modify would be interest rates (and fees) that brought in more revenue, for a decade, than was necessary to cover the cost of the program, and then compounded at high rates when borrowers fell behind, reducing the possibility that they could ever pay off their debt.  

Another provision to modify relates to bankruptcy, to bring it closer to how other consumer debt is treated. 

The Biden administration should also move to shut off any suggestion that the Supreme Court's awkward stretch to make MOHELA an arm of the State of Missouri gives MOHELA and other loan servicers sovereign immunity.  Borrowers and consumer protection agencies, now more than ever, need to be able to hold them accountable for mistakes and deceptions. 

These actions should not be made in a vacuum, but with an eye toward higher education reforms that reduce reliance on student (and parent) debt.  The whole country is waiting for leadership.  I suggest getting back to cooperative federalism, also known as skin-in-the-game for states and institutions.  

As to timing, it would be a mistake to try to channel everything through negotiated rule-making.  Early and decisive action is necessary in the face of a looming loan re-payment crisis.  

Advice: while it may be tempting simply to fulminate against the Supreme Court, in order to stir up anger in the base, the better course is to use the openings the Court left open to actually solve problems. 

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*A crucial number to know, which the Biden administration has never provided, is how much of the $1.6 trillion in debt is principal and how much is interest, fees, capitalized interest, penalties, negative amortization, and the like.  This would be helpful in fashioning a compromise and settlement initiative that would be widely accepted by the public, if explained.