Today, Explained - Default in Our Loans

Episode Date: March 14, 2018

Education Secretary Betsy DeVos told states to back off regulating the nine private companies that lend money to students last week. That could mean more student debt and more student defaults when both are already at record highs. Vox’s Libby Nelson tells Sean Rameswaram about the national crisis we never solved. And we say goodbye to Stephen Hawking. Learn more about your ad choices. Visit podcastchoices.com/adchoices

All right, Luke Vander Ploeg, Today Explained producer. Here we are at the mattress firm in Brentwood, Washington, D.C. What the heck are we doing? We're going to try on some mattresses. Okay, it looks like we've got soft, medium, or firm. Which do you think you are? I don't know. I'm kind of a soft guy. What a softie. What a softie.

Okay, let's find out which it is. Mattressfirm.com slash podcast to find out how you can improve your sleep. Pop quiz. Three questions. Question one, how many Americans have student loans? 43 million of us hold some student debt. Question two. What percentage of graduating seniors borrow money to pay for college?

Over 70%. And final question. What is the average amount of loan debt that students are burdened with when they graduate? $10,000, $68,000, $26,000, $34,000. The answer is, in fact, $34,000. I know a lot of you are like, it's $68,000. I26,000, $34,000. The answer is, in fact, $34,000. I know a lot of you are like, it's $68,000.

I just know it. Extra credit, what happens when you default on a student loan? It's not pretty, it's super punitive, and things keep getting worse. Madam Secretary, I think we are facing a student loan crisis in America. And let me tell you why. This is Senator Dick Durbin at a hearing with Education Secretary Betsy DeVos last year. Student loan debt now is greater than credit card debt in America. In the year 2016, the number of defaults on student loan repayments increased by 14% over the previous year. Well, Senator, let me just say that I totally agree with you that student debt and student

loans are of grave concern. I talked about that during my confirmation hearing, and I feel no differently now. In fact, I probably feel more strongly about the critical nature of the increasing student debt. Every class that graduates from college is the most indebted class in American history until the next class graduates. Libby Nelson is the education explainer at Vox. And late last week, Betsy DeVos tried to tweak how education works in America. So on Friday, Betsy DeVos sent a letter to states essentially telling them that they can't regulate loan servicers on their own.

No big deal, right? The Secretary of Education is like, hey, states, let us handle loans. That's our thing. But if you take a few steps back, you start to see that this could be bad news for a lot of people. So if you took out a student loan, if you're a person with student debt and you took out a student loan any time before 2009, 2010 or so, you probably got it from a bank, or at least you think you got it from a bank. It was from something like Sallie Mae or from Nelnet, those banks were actually just lending the federal government's money and getting a cut of the funds in order to do that. In 2010, the education

department cut the banks out of this part of the process, and they started making all of the student loans themselves. So the vast majority of student loans issued in America now come directly from the federal government. But they don't do everything else. They don't enroll you in payment plans themselves. They don't deal with your paperwork. They aren't the ones who send you a note if you've paid off the loan. They contract with nine private companies called loan servicers who handle everything after you actually receive the loan. So this was an Obama administration initiative? Yes, this was a big deal for the Obama administration. Switching to the government making the loan saved a good amount of money.

But in order to keep some private companies in the mix, they ended up with these loan servicing contracts. And was the intention there to save money for students or to literally save the federal government money? It was literally to save the federal government money. Okay. Are these nine companies making more money under this new system of direct loans? They're definitely making less money under direct lending than they were under the old bank-based lending system. So the servicing contracts are kind of a bone to be thrown to these companies that have lost all of their major business in the past.

You don't get a choice about which servicer you get. You just are randomly assigned one. Occasionally, your loan will move to a different servicer. And this is a process that can get really complicated if you're trying to figure out what's gone wrong with your student loan, if you have lost your job and are trying to figure out how to avoid defaulting on your loan while still not making the same payments you used to. I've talked to student loan policy experts who struggle with this. A few years ago, I talked to a woman with a master's in social work and a PhD in education policy who had been tossed around on the phone when she was trying to get through to

her servicers. So this is literally her area of expertise and she couldn't navigate it? Exactly. There are people where this is literally what they do and they have sometimes struggled to navigate this system. It's especially difficult for people who are trying to change payment plans or trying to lower their payments, consolidate their loans. Obviously, some people have fine experiences with servicers, but the Consumer Financial Protection Bureau, which collects complaints, have heard that servicers don't tell borrow Financial Protection Bureau, which collects complaints, have heard that servicers don't tell borrowers about the plans that are best for them. They push them into plans with higher interest rather than plans that could lower their payments. And the thing that's really important here, I think, is for the most part, people who are on

the phone with the servicers and going to that length are people who want to pay back their loans and who are making a good faith effort. there are you know thousands of dollars at stake here for most people and you don't get a choice you know if you don't like your servicer you can't leave and just transfer your loan to someone else so you're sort of stuck with these people okay so i think we're caught up now people are trying to navigate this super confusing system set up by the federal government they're not finding it easy and the states set up by the federal government. They're not finding it easy. And the states are now upsetting the federal government because they're trying to help. So some states have started writing borrowers bills of rights,

including D.C. and Illinois and several other states, which would require servicers to do a few things. They would make them inform borrowers about loan forgiveness, about different repayment options, ensuring that they have people on hand who can explain ways to lower your payments. In addition to the borrowers' bills of rights, which have been in state legislatures, there have been state attorneys general who have sued servicers over some of these issues and are trying to bring a little bit of enforcement to the table as well. And now the education secretary, Betsy DeVos, is trying to tell the states to butt out. Or has she already successfully done that? She's certainly tried.

So she's sent a letter saying basically regulating servicers is a federal responsibility. It's not something that the state should be doing. It doesn't appear to have discouraged the states involved at all. So it's not totally clear where this is going to go, but this is certainly something that they're trying to do and saying, hey, we make the rules here. You can't come in and make a different set of rules that the servicer has to play by in your state,

but not in other states. And is that just the education secretary trying to keep everything consistent through and through, or is there some other motivation there? That's certainly what they'd say. This is obviously something that the loan servicers wanted because, you know, from a generous point of view, it is difficult to do business if you're regulated in different ways. From a less generous point of view, perhaps they don't want to have

this additional scrutiny and this additional pressure on their business. And we've seen that Betsy DeVos's education department has generally been more friendly to the private sector than previous departments have been. Okay. I'm curious a little bit more about these nine companies. Are they making insane amounts of money? Have they been for a long time? What are they? Who are they?

The big servicers that people would know are Navient, which is the company formerly known as Sallie Mae. Oh, yeah. And Nelnet is another. And then there are several others that are smaller. They have a pretty large federal contract. The education department spends about a billion dollars a year among all nine of these companies. Oh, wow. So it's in the millions for each company, but for the federal government, it's a billion

dollar expenditure. So would a single national system of regulations make more sense than the current patchwork of state regulations? Almost certainly in the sense that it almost always makes more sense and is more straightforward for companies. The problem is you've got to get Congress to pass that. And in addition to there being these philosophical questions about how much you should regulate business, some of these companies also are sort of hometown companies for senators.

Nelnet is really big in Nebraska, for example. And so it does mean that there also were some interested parties kind of scattered throughout America on this. Huh. I don't hear President Trump talk a lot about student loans. I did hear President Obama talk a lot about student loans. I know about this firsthand. Michelle and I, we know about this firsthand.

This is not something I read in a briefing book. This is not some abstract idea for us. We've been in your shoes. When we graduated from college and law school, we had a mountain of debt, both of us. Is anyone in the party that controls, you know, the Congress, the Senate, the White House taking this seriously right now? Yeah, it's pretty, it's honestly pretty astonishing. A few years ago, you know, student debt was a huge deal that every politician was

talking about. Even other Republicans, Marco Rubio, for example, used to talk about student debt a lot. It's just, it's clearly just not something that is on Trump's radar, in part because higher education isn't really part of his economic vision. Congress is taking some stabs at rewriting the Higher Education Act, which is the law that governs student loans and all of this stuff. Yeah. on priorities that are arguably more urgent or more important to Republicans controlling Congress. I personally am not particularly optimistic that anything on that law is going to get done this year. And even if that were to happen, it certainly wouldn't necessarily include any kind of servicing overhaul. Student loans aren't getting easier to navigate, and at the same time, they're getting harder to pay off. So where does that leave students? Is college or grad school even a good idea anymore?

That's in just a minute. All right, I'm ready to try the soft mattress. Okay, before you do, I want to remind you that Mattress Firm offers 120 night sleep trial to ensure perfection and 120 night low price guarantee. So you know you paid the perfect price and mattress firm comm slash podcast Let's do it. All right, you got your protective sheet that you're putting down over the pillow What are you gonna do you jump you gonna die? All right, here I go. I'm gonna jump do it Well, look at that give oh, yeah, how's it feel? Yeah, how you feeling just sinking right in instant reaction, please Yeah, it's just it's sort of like it's sort of cradling me. It's it feel? How are you feeling? I'm just sinking right in. Instant reaction, please. Yeah, it's just sort of like, it's sort of cradling me.

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This is Today Explained. I'm Sean Ramos-Firm. Not too long ago, growing student debt reached like national crisis levels for both parties. Here's Marco Rubio in 2015. Well, it's a personal issue for me. I owed over a hundred-something thousand dollars in student loans. Easy to pay back. No, I had to write a book. But when I got in the Senate, I was paying, I think it was $800 a month.

And Elizabeth Warren in 2016. Student loan debt is weighing down our economy. This is truly an economic emergency. So what happened? We certainly didn't fix it. We don't hear as much about student debt as we did a couple of years ago, I think because people are getting jobs and the economy is better overall. But there's still very much a problem that's bubbling there under the surface. And the problem most certainly has to do with rising tuition costs.

Yes. Part of that is that tuition costs rose really sharply, particularly at public colleges during the recession. I think a quintessential example here is in California. So if you were born in the 50s or 60s and you went to Berkeley or one of the other wonderful University of California campuses, you paid very little in the hundreds of dollars for your education because it was really thoroughly subsidized by the taxpayers of the state. You bought some books, you maybe had some nominal fees here and there, but it was something you could pay for with a summer job or an on-campus job. At those same schools today, you're looking at upwards of $30,000

when you're taking all of your costs, housing, transportation, books into account, which is a really dramatic difference and not something that the average 18 to 22-year-old or even the average older student who's trying to attend college full-time can afford to pay with a part-time job. Yeah, I went to one of those schools. I can relate. Could you tell me, Libby, what happens when you default? What does it mean and what happens to you? Yeah, defaulting on a student loan is a very bad thing to do. It is worse than defaulting on almost any other kind of debt.

It's virtually impossible to discharge a student loan in bankruptcy. So you are stuck with this loan, whether you were paying or not. The federal government can garnish your wages. They can take your tax refund. They can go to much greater lengths than, say, Citibank could with your mortgage just to get this money back. And so you basically can't get away from this debt. It's something that's going to follow you. And there are a lot of people who are finding themselves in this position. Why is student loan default so punitive? I mean, these are students. These are people who are struggling to contribute to society. Why can't we take it a little easy on these kids, Libby? Well, I think the argument that people make against it is generally, if you default on your mortgage, they can take your house. If you default

on your car loan, they can repossess your car. If you default on your student loan, you still have your education. And so the fear is that if they make it too easy, people will say, you know, honestly, it's worth taking this hit on my credit of declaring bankruptcy in exchange for not having to pay off 20, 40, you know, in cases of graduate loans, 80, 100, $150,000 in debt. That said, it can really get to extremes in some cases. There are people who are clearly really struggling. And you have seen, at least until Trump took office, there was an effort at the education department in some specific cases to make it easier for people to have their debts forgiven, either because they'd made payments for a long time, because their school, they could argue that their school had defrauded them.

And so there has been a recognition that maybe in some cases it should be a little easier to get rid of this debt than it's been in the past. I'm wondering how student loan defaults and even student loan debt sort of breaks down by race, too. Does it affect some more than others? It's very much inflected by class and by race. So African-American students who generally come from families with less wealth tend to have the most debt. Students from low-income backgrounds who don't have parents with savings or with home equity who can help pay for their schooling take on the most debt. And then when you take into account the wage gap that comes into effect later in life, especially for students of color, it's a really, really difficult situation to find themselves in. They take on more debt. They typically earn less after they graduate.

They're less likely to graduate. It's particularly a crisis for students of color. And it feels like something that we just can't even like really talk about as a culture. Like you don't want to come out of college and declare yourself crippled by your student loans. You want to come out of college and say, like, I'm ready to join the workforce. I think that's changed a lot over the last five years, starting in the depth of the recession with the Occupy movement. There were people who would like write about their student debt on signs and hold it up. It sounds kind of cheesy to say it now, but it really did. It put it on the political agenda in a way that it had not been in the past. Because in the past, yeah, people didn't say, hey, you know, I'm $55,000 in debt and I'm

stressed out about it or I'm $25,000 in debt and I don't know how I'll pay back my loans or I'm, you know, $150,000 in debt. Yeah. That really did start to change. People talked to the media about it. People were profiled about their debts and how they were struggling with them. And student debt became sort of an identity in a way that it had not been in the past, over the past five or so years.

But there are things, you know, we don't talk about the race gap in this. We don't talk about class as much. It's very much framed as this middle class issue, often with like a white kid from a liberal arts college who took on $65,000 in debt, which is not really what the crisis looks like in America. Is it getting to the point where like paying money for college is not a sound economic decision? No. And I think this is a somewhat scary consequence of this bigger conversation about debt. It is still a very good idea to go to college. It is a very good idea to borrow money to go to college if you cannot afford to go to college otherwise. You earn so much more over the course of your life. There are many other differences in things like health and things like life expectancy,

life satisfaction between college graduates and non-graduates. Going to college is the best economic decision you can make. That said, it matters where you go to college. It matters how much you're paying. It matters what you study. And the thing that absolutely matters the most is whether you graduate. Yeah. When we talk about student debt in America, we're usually talking about people, and even in this conversation, it's been sort of predicated on, you've graduated from college, you've got your degree. The place where student loans are really a huge problem is the people who don't graduate, who borrowed, you know, $20,000 for two or three

years and graduate and maybe don't have that like big ticket, scary number on their debt, but they also don't have a degree that can help them get a job to pay it off. It's not the people with the scary $100,000 loans who are defaulting. It's the people who owe $8,000 but quit college after a year and so just can't scrape the money together to pay that back. Libby Nelson is an editor at Vox. Before we go, today is a numbers day. It's March 14th, 314, Pi Day.

It's also the day Albert Einstein was born. And sadly, this March 14th is the day we lost Stephen Hawking. He spent his life explaining the universe to us. And one of the great ironies of his life is that a voice that wasn't really even his became his unmistakable voice. One of the great revelations of the space age has been the perspective it has given humanity on ourselves. When we see the Earth from space, we see ourselves as a whole. We see the unity and not the divisions. It is such a simple image, with a compelling message, one planet, one human race.

We are here together, and we need to live together, with tolerance and respect. We must become global citizens. I have been enormously privileged, through my work, to be able to contribute to our understanding of the universe. But it would be an empty universe indeed, if it were not for the people I love, and who love me. We are all time travelers, journeying together into the future. But let us work together to make that future a place we want to visit. Be brave, be determined, overcome the odds. It can be done. Okay, Luke, we've done it. We went to mattressfirm.com slash podcast, but then we came into the actual store.

You tried 10 soft mattresses. What do you think? What's the verdict? Look, these are great mattresses, but I've got to try the full range of firmness before I can make a final decision. Okay, what's next, medium or firm? You know, it's called Mattress Firm for a reason. Going straight to the namesake.

No one ever said it would be easy. That's tomorrow.