Did the Obama administration commit ‘the biggest accounting fraud in history’ with student loans? Experts weigh in

https://finance.yahoo.com/news/obama-administration-student-loans-experts-113140861.html

Did the Obama administration commit ‘the biggest accounting fraud in history’ with student loans? Experts weigh in

September 5, 2019

The Wall Street Journal’s editorial board (WSJ) recently accused the Obama administration of pulling off “the biggest accounting fraud in history” with student loans when eliminating the role of private lenders in the federal student lending market.

Experts who spoke with Yahoo Finance acknowledged the issue with the general policy in hindsight, though they disagreed on who exactly is to blame.

In 2010, Democrats “nationalized the market to help pay for Obama Care,” WSJ asserted. “The Congressional Budget Office at the time forecast that eliminating private lenders would save taxpayers $58 billion over 10 years. This estimate was pure fantasy, and now we’re seeing how much.”

The WSJ op-ed also highlighted the rising number of severely delinquent student loans since then and blamed the Obama administration for expanding plans in 2012 for new borrowers “to reduce defaults, buy off millennial voters and disguise the cost of its student-loan takeover.”

The editorial board then added: “This may be the biggest accounting fraud in history.”

‘There’s no way around that’

WSJ argued that eliminating private lenders from the student loan market severely hurt Americans and that by using fair-market accounting, it becomes clear that student loans will actually cost taxpayers nearly $307 billion over the next 10 years.

Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO) during the George W. Bush administration and currently president of the center-right American Action Forum, agreed that the accounting discrepancy manifested because of the “technique” used by the CBO to evaluate the cost of these loan programs.

“A widely known deficiency of the Federal Credit and Reform Act is that it does not allow the CBO to incorporate [market risk] into assessments,” Holtz-Eakin told Yahoo Finance. “So the loans, when they’re evaluated are evaluated as safer than they truly are, and thus, the losses are smaller than they may truly be. And there’s no way around that — the techniques force you to do that.”

He added that “that’s why when you when they switched from the private loans to the government loans, it appeared to save money… that is misleading. I don’t disagree, but it’s not the CBO’s fault — those are the rules.”

Sheila Bair, the chair of the U.S. Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, agreed that the WSJ was “right to call out the government” on the accounting issue and stressed that it is “a huge problem with federal budgeting and transparency generally.”

Income-based repayment plans were ‘poorly designed’

The WSJ argued that the key catalyst for the student debt crisis today — $1.48 trillion student loans outstanding, with 35% of the consumer loans in the “severely derogatory” category — was a result of the Obama administration’s policies regarding income-driven repayment (IDR) plans.

IDR plans allow borrowers to cap monthly student loan payments based on how much money they are making at a given time. As of September 2018, “almost half of the $898 billion in outstanding federal Direct Loans [were] being repaid by borrowers using IDR plans,” according to the Government Accountability Office.

Holtz-Eakin agreed with WSJ, arguing that the CBO “cannot anticipate a future action of either the Congress or the administration.”

If the government chooses “to move to a whole bunch of loan forgiveness and income-based repayment models, they can’t anticipate that and both of those things bring in less money,” he explained. “The money goes out and it doesn’t come back and they’re bigger losses.”

Holtz-Eakin added that the Obama administration “did that on a regular basis — there was nothing CBO could have done about it.”

Former FDIC Chair Bair, who headed the agency during part of both the Bush and Obama administrations, argued that the issue arose from the poor design of the repayment plan system.

“This has been a couple decades in the making, frankly,” said Bair. “I think that the concept of a payment based on income is a good one — it’s not a bad one. But the way these things have been designed, it’s like the worst of all possible worlds.”

With borrowers often in thousands of dollars in student debt, IDR plans are seen as an alternative for borrowers with high debt and low income. But the current income-based repayment plans is “very poorly designed… [and] confusing,” Bair said.

The WSJ pointed out that borrowers end up owing more than they borrowed even though they’re repaying their loans — called negative amortization — which Bair acknowledged.

“With a true income share, you have higher earners paying more and lower earners paying less, but you let the higher earners pay more to help with the cross-subsidization of the lower earners, and also just to mitigate the budget impact,” said Bair. “But what the government does do now is they cap you out.”

In other words, if a borrower decides that they want to increase their monthly repayment amounts, instead of being able to pay back loans quickly, they’re capped out because the repayment structure is based on their income. Hence, the borrower — despite being able to increase payments — is stuck with a loan that’s accruing interest for possibly 20 or 25 years.

‘Recreated the worst aspects of the subprime… crisis’

The other issue was underwriting.

Previously, the government guaranteed student loans that borrowers took out from private lenders. Today, it controls more than 90% directly.

When the Obama administration “got rid of the guarantee program with the private sector out of the process and made it a direct federal loan, they got rid of all underwriting,” Holtz-Eakin noted.

“And so they recreated the worst aspects of the subprime mortgage lending crisis,” he stated. “They gave anyone who walked up a loan, without any notion of their capacity to repay.”

September 5, 2019. Tags: , , , , , . Barack Obama. Leave a comment.

How Obamacare blew up the student loan crisis

https://www.washingtonexaminer.com/opinion/how-obamacare-blew-up-the-student-loan-crisis

How Obamacare blew up the student loan crisis

July 2, 2019

Sen. Elizabeth Warren wants to cancel student loan debt for 95% of debtors. Fellow 2020 hopeful Sen. Bernie Sanders wants to cancel all of it. What they and every other statist and socialist eager to default on trillions owed to taxpayers forget that President Barack Obama nationalizing student loans brought us to this catastrophe in the first place.

Lost in the kerfuffle and fuming of the Affordable Care Act’s passage in 2010 was the Health Care and Education Reconciliation Act, signed into law just seven days after Obamacare. Half of the act consisted of small and otherwise innocuous amendments to the ill-fated Affordable Care Act, but the other half, Title II, radically overhauled the country’s student loan industry, replacing federally backed bank loans with direct government lending.

The private student loan industry was already dysfunctional and never truly private. The largest private student loan lender, Sallie Mae, originated as a government-sponsored lender, and the government-subsidized market only emerged out of a small but much older federal student loan market. But Title II replaced a mess with a nightmare.

Universities took advantage of the new, easier loan requirements to raise tuition rates still further. From 1995 to 2012, the average tuition at a 4-year private college had risen by 30%. In the following four years alone, it spiked by another than 12%. Researchers at the New York Federal Reserve Bank famously found in 2015 that the pass-through effect of subsidized federal student loans on tuition raised rates by 60 cents for every dollar of loans spent. Although lefty politicians love to hate on fraudulent for-profit schools and blame them for the problem, only 9% of all college students in the country attend for-profit institutions. More to the point, nonprofits still act like for-profits anyway.

For decades, student loan debt had remained in the low hundreds of billions, but during Obama’s presidency, it exploded from $150 billion to more than $1 trillion, the overwhelming majority of which is owed to the government. As student loan debt continues to spiral upward, the federal government’s revenue streams for the programs are becoming more tenuous than ever. For instance, the Department of Education has found that income-driven repayment plans, which allow lower-income borrowers to dodge payments and receive complete debt forgiveness 25 years after the loan initiation, increased by 625% alone.

Now Sanders and Warren want to erase the whole thing with a magic wand and nationalize the colleges’ tuition-hiking scam.

On a moral level, canceling student debt more or less translates to defrauding taxpayers. On a practical level, it defeats whatever incentive structure we’ve attempted to build into the loan process. Whereas home loans are secured by houses as collateral, debtors can’t exactly take your brain away when you default. To send a message both to students and colleges that loans constitute free cash will then only exacerbate the tuition crisis we face.

The federal government set the stage for this problem, exacerbated it by subsidizing and regulating private student loans, and finally sent it into a trillion dollar tailspin by nationalizing the whole mess. If the past serves as any lesson, the government’s best bet is to get out of this imploding industry entirely and refocus on forcing colleges to get some skin in the game.

August 15, 2019. Tags: , , , , . Barack Obama. 2 comments.

Attention banks! Do not give a mortgage to Simon Galperin!

A guy named Simon Galperin just wrote this article, which is titled, “I’m a 29-Year-Old With $235k in Student Debt. I’ll Never Pay It Back.”

Galperin’s statement that he will never pay back his student debt is not because of a medical issue that has rendered him unable to work.

Instead, his statement is proof that he is irresponsible, lazy, spoiled, and entitled.

He also says he believes that innocent taxpayers should be forced to pay off his student debt, so that he can then get a mortgage to buy a house.

If Galperin ever does apply for a mortgage to buy a house, I hope that any bank that considers giving him a mortgage will come across this article that he wrote, and realize that he is an absolutely horrible credit risk.

June 17, 2019. Tags: , , , , , , , , , . Economics. 2 comments.