Tuesday, December 1, 2015

A Real Job For The CFPB: Just Say No

 A high school English teacher has amassed $410,000 in student loan debt.

That was not a typo.  

According to a recent New York Times article, Liz Kelley of Ballwin, Mo has managed to accumulate almost half a million dollars in student loan debt.  Ms Kelley, who is now 48, first started taking out loans in 1990 to finance her undergraduate English degree.  Then she borrowed more money to go to law school, then more to go back to grad school, then more to partially finance one of her four children's college education, and then more to begin (but not finish) a Ph.D. program.  

She finally stopped borrowing money in 2008.  Through deferment and forbearance programs, she was able to hold off ever paying a nickel back until until this year - 25 years after she first started borrowing what became $410,000.  Now the entity that lent Ms. Kelley all that money to finance her dreams wants it back.  And it's playing hardball by threatening to garnish her wages and even her social security, when she eventually starts collecting it.  So, Ms. Kelly has worked out a plan where she pays $2750 a month -  for the next 30 years on a teacher's salary.

She has no retirement savings, and she can't really afford that monthly payment plan.  
Cue the Consumer FInancial Protection Board right?  Has some greedy bank completely taken advantage of poor Liz?  No.

Ms.  Kelley owes the money to the U.S. government.  Therefore, the CFPB, as a federal government entity itself,  will not be entering a dog into this fight.

But it should.  Well, actually it (the government) should have entered the fight 25 years ago in Ms. Kelly's case, before she signed the first loan document.

What if someone from the government bank had explained to the 18 year old Ms. Kelley that no private bank in the world would ever loan her money without a government guarantee? I would imagine much of what that someone would have said would have sounded like the following excerpt taken from the aforementioned article:


"People have always had a difficult relationship with debt. Access to capital is the fuel of a modern economy. Borrowing for college is often a good idea, because it represents an investment in human potential in a time when brainpower is the most valuable asset most people own. But there’s a reason debt is often grouped with sins and frailties in ancient moral codes. Borrowing is risky, financial decisions are not always rational, and people often do a poor job of properly weighing the interests of their present and future selves.

The private enterprise system is built to limit over borrowing by sharing risk between lenders and borrowers. Lenders examine credit and income histories and ask for collateral that can be repossessed in case of default. They charge more interest when they take on more risk. Because most loans can be discharged in bankruptcy, lenders share the cost of default. It’s likely that Ms. Kelley’s mortgage lender lost money on her 2008 foreclosure, for example.

But the federal student loan program doesn’t work that way. Those ads that run on bus stop signs and on late-night television — “No Cash? No Credit? No Problem!” — are essentially the Department of Education’s official policy on student loans.

On the front end, the department is the world’s nicest, most accommodating lender. Interest rates are set by Congress and are lower than banks charge in the private market. Borrowing for college is essentially an entitlement — as long as you’re enrolled in an accredited college and aren’t in arrears on a previous student loan, it doesn’t matter how much debt you have or how little money you make. Undergraduate loans are capped to contain borrowing and college costs, but graduate loans are bound only by the vague limits of “living expenses.”

Private lenders also don’t let people defer making payments for years or decades at a time....

The local university and the Department of Education, by contrast, are assumed to have students’ best interests in mind. Pro-student organizations support low interest rates, no credit checks and lengthy deferment options, as do colleges that can’t stay solvent without debt-financed tuition. Individually, these policies have merit, just as not repaying a student loan is often a perfectly rational choice in the short term, right up until the point when the short term becomes long. For some people, it hardly seems like debt at all. When the loan bill finally comes due, the federal government transforms into a heartless loan collector. You don’t need burly men with brass knuckles to enforce debts when you have the Internal Revenue Service. It is both difficult and illegal to hide money from the federal government, which can and will follow you as long as you live."


Ms.  Kelley might not be in the fix she's in today had someone tried to educate her about the real cost of her student loans. 

By the way, hers is an extreme example.  Most people don't end up owing that much money.  Still, as the article points out, there are over a million people who owe $150,000 or more in student loan debt. Try telling any of them it's not a big problem.

The CFPB claims to be in the protection business.  In this context, protecting should mean educating, not legislating.  It should also mean denying lots loan applications to protect unwitting young people from the perils of debt.  

There would probably be a fair amount anger and frustration directed at CFPB for choosing to act in accordance with prospective students' best interests rather than their wishes.  To that I'd say, I'd bet there are plenty of body guards who have told their bosses, "no", in order to keep them "safe". For a real protector, that's a big part of the job.

A CFPB that took on the kind of mission that would put it in the role of actually "protecting" some of the country's most vulnerable, consumers would be one worthy of praise and respect.  But I'm not holding my breath because that kind of CFPB would first have to have a Pogo-like revelation in which it came to grips with who the real enemy was.


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