The federal government is making billions of dollars on student loans every year. So why double the interest rate on the loans next year? To boost those profits.


The federal government pays tons of money to run its student loan programs, right? The interest rate on those loans is doubling next year from 3.4% to 6.8% in order for the taxpayers not to need to subsidize student loans as much, right?

Not according to law professor Alan White, who says that “Congress’ dirty secret is that the government makes a huge annual profit on student loans.” In his latest blog on the highly respected blogsite, Credit Slips, he cites as his main source “the scrupulously nonpartisan Congressional Budget Office.” According to its data, “$37 billion will flow IN to [the U.S.] Treasury from student loans made this fiscal year at the 3.4% rate.” And that’s after accounting for about $1.5 billion to administer those loans. So the interest rate doubling dispute “is about whether to increase this annual profit next year.” The two parties “are arguing about how much of the federal deficit to plug with student loan interest money.” If the interest “rate will jump up to 6.8% for 2013 loans, [that would yield] another $30 to $40 billion return to Treasury.”

But wait a minute. How about all the money that is lost because of all the borrowers who can’t or don’t pay on their student loans? Prof. White acknowledges that many loans do go into default, but because student loan creditors have “supercreditor powers, especially wage garnishment and tax refund intercepts. . . [, t]here is no statute of limitations… , and even bankruptcy discharge is difficult. The $37 billion Treasury profit for [fiscal year] 2012 is after allowing for estimated credit losses in the $5 billion range.”

So how can there be such a huge amount of profit? “In two words, yield spread. ….  Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%.   Administrative costs are well below 1%.”

The bottom line: $37 billion profit for taxpayers in 2012, and about twice as much as that in 2013 if the interest rate doubles.

I don’t know if this law professor is right. My head started spinning when trying to figure out the pages and pages of accounting tables in the Congressional Budget Office’s report. But even if he is right, is it such a bad thing for the federal government to be making a profit with its investment of taxpayer money on student loans? After all, we have a huge deficit hole to plug.

But it seems important when making tough choices to frame the issues honestly. It’s one thing to talk about doubling the student loan interest rate so that borrowers are then paying more of, or even all of, the taxpayers’ cost of those loans. It’s an entirely different story if we’re doubling the interest rate from a level where it’s already raking in billions of dollars in profits, making way beyond paying the taxpayers’ cost.

A study by the Brookings Institute concluded that the “United States spends 2.4 times as much on the elderly as on children, measured on a per capita basis, with the ratio rising to 7 to 1 if looking just at the federal budget.” Is it fair to add this additional deficit-paying burden on the younger generation?

And beyond the question of fairness, we are a nation in which the income gap between the well-off and the poor is widening, opportunities for improving one’s economic status are reducing, and the middle class is being squeezed from all directions.  So doesn’t adding yet another burden on people’s efforts at economic advancement hurt the nation as a whole?

Student loans are not just burdening recent graduates. They’re now directly hurting people you wouldn’t expect. And dragging down the whole economy.


Recent college graduates are clearly hurting in this economy as they come out of school and enter the job market. The national unemployment rate has come down from the Great Recession high of 10.0% in October 2009 to 8.2% in May 2012. But it’s the persistence of extraordinarily high unemployment that is hurting young graduates. Only one other time since the Great Depression of the 1930s had the unemployment rate hit 10%, during the recession of 1981-82. But then, like in most other modern recessions, a strong recovery reduced the unemployment rate quite quickly, in that case down to 7.2% in less than two years. In contrast the current recent graduates are trying to claw their way into their first career jobs in the midst of a “jobless recovery.”

And they are forced to do so saddled under the most student loan debt ever.  You’ve probably heard the news of the past few months that total student loan debt now exceeds $1 trillion and is more than the nation’s total credit card debt. Realize that most of these graduates started college before the Great Recession hit, many heading into careers that looked relatively sensible back then but are now disaster areas. Public school teachers, anyone?

And many others made the tough decision to stay in school to ride out the recession, maybe shifting into more reliable fields, only to be confronted with one of the most anemic recoveries in modern history.

But it’s not just these twenty-something year olds who are hurting. Two other populations are being hugely impacted.

First, middle-aged students have gone back to school in a scramble to shift with the rapidly changing economy to more marketable careers. Their gamble has included taking on a huge amount of student loan debt. As the title of this Reuters article says, “Middle-aged borrowers [are] piling on student debt.” It states that in the last three years, average student loan debt has gone up 47% for the 35-to-49 year old age group, more than for any other group.

Second, just as dramatic, parents of students are taking on more and more student loan debt on behalf of their children. According to this Bloomberg article, “Loans to parents have jumped 75 percent since the 2005-2006 academic year… .  An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992- 1993.”

Hopefully the retrained, re-schooled middle-aged workers will find work that justifies taking out the loans. After all, the labor force has to adjust to the changing realities of the labor market, and if it does so efficiently the whole economy benefits.

And hopefully the parents’ investment in their children’s education will also be worthwhile. Their kids’ increased earning power over their lifetimes may well make it so. And you’d think that if a college student knows that his or her parents are mortgaging their home or their retirement, that student would be motivated to make good use of the education!

But the bigger question is whether this cycle of increased student loan debt is sustainable. What would the consequence be for all of us if student loan defaults increased significantly, like subprime mortgage defaults did at the beginning of this Great Recession?  A title of a recent report by the National Association of Consumer Bankruptcy Attorneys asks the question squarely: “The Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis? 

I’m a bankruptcy attorney who looks across my desk just about every day into the faces of clients whose investment in higher education did not pan out. I know that in my line of work I don’t tend to hear the success stories, but from where I’m sitting it feels like we’re heading in a dangerous direction.

Many more Americans now believe that strong conflicts exist between the rich and the poor. After years of very high unemployment, millions of home foreclosures, and months of the Occupy Movement dominating the news, maybe this is not so surprising. But there ARE some unexpected aspects of this change in attitude.

In mid-January, the Pew Research Center released a report titled “Rising Share of Americans See Conflict Between Rich and Poor.”

You’ve likely heard about the Pew Research Center, but you may not know that it is a highly respected public policy research organization that is not only nonpartisan, it does not even take positions on issues. Instead it sees its role as “provid[ing] information on the issues, attitudes and trends shaping American and the world.” This report is an example of data it puts out for others to debate about their policy implications.

The survey analyzed in this report was conducted in mid-December, and compared the results to those of the same survey in 2009. The main conclusion is that the percentage of people who believe that there are either “very strong” or “strong” conflicts between the rich and the poor has increased in just two years from less than half—47%– to about two-thirds—66%–of us. Even more dramatic, the percentage stating the conflict is “very strong” doubled in these two years, from 15% to 30%.

If these attitudes are not just temporary, and especially if this trend continues, the social and political consequences for our nation would be huge.

But beyond this headline-grabbing main finding, the report also contained the following surprises:

  • This perception of conflict is perceived to be greater among rich and poor than within other longstanding social conflicts in society—more than between immigrants and native born, between blacks and whites, and between young and old.
  • This perception is NOT one held only by those with lower income.  To the contrary people of all incomes share a similar increase in perception of conflict.
  • Younger people perceive more class conflict than do older people, women more than men, Democrats more than Republicans, and African Americans more than whites and Hispanics.
  • In spite of increases in perceptions of class conflict among virtually all groups, the report does “not necessarily signal an increase in grievances toward the wealthy” nor “growing support for governmental measures to reduce income inequality.” Specifically, “there has been no change in views about whether the rich became wealthy through personal effort or because they were fortunate enough to be from wealthy families or have the right connections.”

In most parts of the country, foreclosure rates have been highest for low-income borrowers, and lowest for higher-income borrowers. But the exact opposite is true in “boom-market metropolitan areas located in California, Nevada and Arizona.

This is one of the most surprising finding of a report released a couple of weeks ago by the Center for Responsible Lending (CRL) called Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. In my last blog I wrote about this report, focusing on its main headline story that 5 years into the foreclosure disaster, we’re not even halfway through it. But this conclusion that higher income homeowners are more prone to foreclosure in certain parts of the country is a real eye-opener.

This very thorough study of mortgages divided the borrowers into four categories:

Low-income: at 50% or lower than the area median income

Moderate income: at 50-80% of the area median income

Middle-income: at 80-120% of the area median income

Higher-income: at more than 120% of the area median income

Regional housing markets were also divided into four categories, based on appreciation in home prices between 2000 and 2005:

Weak-Market States:  Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Nebraska, North Carolina, Ohio, Oklahoma, Tennessee, Texas

Stable-Market States: Alabama, Arkansas, Colorado, Georgia, Illinois, Louisiana, Missouri, North Dakota, South Carolina, South Dakota, Utah, West Virginia, Wisconsin

Moderate-Market States: Alaska, Connecticut, Idaho, Maine, Minnesota, Montana, New Mexico, New York, Oregon, Pennsylvania, Vermont, Washington, Wyoming

Boom-Market States: Arizona, California, Delaware, Distr. of Columbia, Florida, Hawaii, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, Rhode Island, Virginia

For the weak-, stable-, and moderate-market states, the rates of foreclosure were highest among low-income borrowers, lower among moderate-income borrowers, lower still among middle-income borrowers, and the lowest among higher-income borrowers. But in the boom-market states, the foreclosure rates are completely opposite: highest among higher-income borrowers, lower among middle-income borrowers, lower still among moderate-income borrowers, and the lowest among low-income borrowers.

While it seems intuitive that the lower income borrowers would be less able to weather the storms of a harsh recession, why are the results topsy-turvy in the boom-market states?

Start by remembering that by the report’s definition most “higher-income borrowers” were not that wealthy:

While these borrowers may have had higher incomes (with a median of $61,000 for middle-income borrowers and $108,000 for higher-income borrowers), the extremely high cost of housing in these boom markets, even for modest homes suggests that the majority of these borrowers were not the very wealthy buying mansions, but rather working families aspiring to homeownership and the middle class.

But then the report made a fascinating discovery in looking at the incidence of high-risk features within mortgages, such as hybrid or option ARMs, prepayment penalties, or higher interest rates:

While in weak market areas, low-income and moderate-income families have the highest incidence of mortgages with at least one high-risk feature, the pattern is reversed in boom markets.

I suspect that because housing was so expensive in these boom-markets, even home purchases made by those in the higher-income categories used higher risk mortgages because a) they needed to stretch their housing dollar to afford what they were buying, b) property values were climbing so fast that everybody figured they could refinance later into a better loan, and c) sales were happening so quickly that the entire process got sloppy.

The end result is that mortgages with “high-risk factors” are resulting in more foreclosures, even if they belong to higher-income borrowers. There could be many explanations for this–for example, homes in those regions’ may be deeper “underwater,” or the unemployment rate may be higher there, either of which could push up the foreclosure rate. But overall the results seems to imply that a borrower’s good payment history is better predicted from the existence or absence of “high-risk factors” in the mortgage than from the borrower’s amount of income.

Going on five years into our foreclosure disaster, a major report is now authoritatively giving us that sobering news.

The Center for Responsible Lending (CRL) is a respected non-partisan research and policy organization with the mission of “protecting homeownership and family wealth by working to eliminate abusive financial practices.” In mid-November it released the results of its comprehensive analysis of foreclosures called Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. This study reviewed and tabulated 27 million mortgages originated from 2004 and 2008, and looked at the borrowers’ performance on those loans through last February. As its title signals, the study addresses at how different socio-economic groups, different parts of the country, and different racial groups have been affected by the flood of foreclosures. Its findings contain a number of meaningful surprises, which I’ll tell you about some other time. But its first finding—that we’re not even halfway through these foreclosures—is what most caught my attention.

The analysis shows that of all mortgages entered into from 2004 through 2008, at least 2.7 million of them have been gone all the way through to completed foreclosure. This is about 6.4 percent of all mortgages entered into during that period of time. And this 2.7 million does not include foreclosures that have occurred in these last few years on earlier mortgages, those entered into before 2004.

Of this same set of 2004-2008 mortgages, another 3.6 million households are “at immediate, serious risk of losing their homes.” The study defined this category as those mortgages already in the midst of the foreclosure process, or more than 60 days delinquent. Not all of these will result in completed foreclosures, but a large percentage likely will.

So, about 2.7 million foreclosed, 3.6 million to go.

It’s important to realize that this 3.6 million in seriously troubled mortgages does NOT include other troubled mortgages which originated outside the 2004-2008 period, nor those which are performing decently now but will nevertheless go to foreclosure in the near future because of new unemployment, etc. So it is very likely that there will be more than that 3.6 million number.


I realize that for many people, this constant talk about foreclosures gets tiring, frustrating, even maddening.  Unless you are dealing with a foreclosure yourself, or are close to someone who is, it’s one of those things that’s in the news so much, year after year, that the stories start sounding the same so you start tuning it out.

But I can’t tune it out. I don’t want to tune it out. Much of my job is to listen attentively to those stories, told to me virtually every day by hard-working men and women who are fighting to save their family home, their place of shelter and stability and dignity. Behind every single foreclosure, and every threatened foreclosure, there is a very human story. Some of the stories are rather straightforward, but most are messy. Human beings being who we are, our lives don’t tend to travel down a neat and tidy path. My job is to take your financial story, lay out your options, and help you chose among them to get to the best place you can get to. Including with your home.

The country is nowhere close to working through its foreclosure epidemic. But let me help you get through your own personal part of it.

U.S. corporations are making record profits quarter after quarter, yet unemployment seems to be stuck at a devastatingly high rate. Why aren’t these financially flush big businesses hiring?

I’ve been writing a string of blogs about how tax debts are dealt with in bankruptcy, and I’ll get back to that after today. This is the time of year when the nation’s major corporations report their 3rd quarterly profits, and so I found myself scratching my head about the disconnect between their huge profits and their lack of hiring. So I read a number of news stories and editorials and this is what I got out of them:

1.  Big businesses have gotten to be more “productive,” in the sense of producing more goods and services with less labor. That has happened partly through investments in labor-saving technology and partly by requiring employees to work harder and faster for the same pay. With the cut-throat labor market, companies don’t need to increase salaries to retain or replace their employees.

2.  Profits have increased because a larger percentage of sales for large U.S. corporations have been overseas. Around 40 per cent of their profits are from foreign sales. For many companies, sales are growing modestly in the U.S. while growing much faster elsewhere, especially in the “emerging markets” of China, India, and South America.  

3.  Relatively strong overseas sales come with job growth overseas instead of here. According to the U.S. Commerce Department, in the past decade, U.S.-based multi-national corporations added 2.4 million jobs outside the country while cutting 2.4 million jobs here. Jobs naturally grow where sales are growing–someone has to take customer orders at the 3,000+ KFCs in China! But of course there’s also increased foreign outsourcing of work that used to be done here, from manufacturing to computer programming.

4. Normally when businesses are more productive, resulting in more profits, they tend to expand, thus creating more employment opportunities. But this has not been happening for three reasons.

a. With the double-whammy of very high unemployment and loss of home values, U.S. consumers either don’t have the means or the attitude to spend money, so companies are leery about expanding to increase production.

b. The international business environment—particularly the European sovereign debt crises in Greece, Italy and elsewhere—is making big business cautious.

c. Political gridlock in Washington, D.C. makes business planning very difficult. With the Congressional deficit-reduction “super committee” scheduled to issue its report very shortly, big businesses have been sitting tight to see if this “super committee” will come up with its momentous compromise, and what it’ll consist of.

The bottom line: big businesses don’t need to hire to produce the goods and services they are producing, at least within the U.S., and they don’t want to expand and hire here because of lackluster consumer demand and high uncertainty in the world economy and in domestic politics.

Luxury Sales—Some Very Tangible Evidence of the Widening Income Gap

Rich Americans are buying again. The rest of us—not so much. The difference between the sales figures at luxury stores versus middle- and low-end ones is stark evidence showing who has been coming out of the Great Recession doing pretty well and those who have not.

An article in the business section of the New York Times a couple of weeks ago made the point that “the retail economy is locked on two tracks: one for businesses that cater to the well-to-do, and the other for everyone else.”

On the low-to-medium end, retailers such as Target and JC Penney posted modest single-digit gains for sales in July compared to a year ago, while others such as Kohl’s actually had lower sales this July than last. On the higher end, it seems like the more luxury-oriented to store, the better the improvement in sales. Nordstrom sales were up 6.6% this July, Neiman Marcus up 7.7%, and Saks Fifth Avenue up a whopping 15.6%.

The article I referred to above points out some ways that retailers see what’s going on inside the wallets of their customers, particularly the low- to average-income shopper. They see a pronounced dip in sales in the weeks or days before shoppers’ paydays. People have less discretionary income, and tend to be living paycheck to paycheck.  And instead of buying clothing and other seasonal items as much for upcoming seasons, more people tend more to buy only what they need when they need it. This also enables them to take advantage of seasonal sales. In turn these retailers have to cut their prices to bring in shoppers, which lowers their gross receipts.

In contrast, luxury stores are now able to sell much more of their merchandise without discount, and have even been able to increase their prices. According to Saks Fifth Avenue’s chief executive Stephen Sadove, “There’s a dramatic decline in the amount of promotions in the luxury sector — we’re seeing higher levels of full-priced selling than we saw prerecession.” Example: their Christian Louboutin “Bianca” platform pumps just about sold out, at full price, for $775 a pair. And while three years ago his store’s most expensive Louboutin suede boots cost $1,575, the top of the line  version now sells for $2,495.

But before we get out our pitchforks to storm the gated mansions of the wealthy, here’s a bit of reality to chew on: “the top 5 percent of income earners accounts for about one-third of spending, and the top 20 percent accounts for close to 60 percent of spending,” said Mark Zandi, chief economist of Moody’s Analytics. “That was key to why we suffered such a bad recession — their spending fell very sharply.”

Sounds like we need the wealthy to continue their spending.

It sure doesn’t feel like it, especially during this maddeningly slow “recovery,” but it’s true: we’re all in this together.