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Want to Know How FUBAR Federal Student Loans Are? Read This.

Betsy DeVos, the Wicked Witch of the Midwest, was perhaps the most despised member of President Trump’s cabinet. As Trump’s Education Secretary, she coddled the for-profit college industry and (in my opinion) bungled the Public Service Loan Forgiveness (PSLF) program.

Nevertheless, in a speech delivered in November 2018, DeVos revealed to the nation just how totally screwed up the federal student loan program really is. She deserves some credit for that.

Here’s what DeVos said:

  • The federal government holds $1.5 trillion in outstanding student loans, one-third of all national assets.
  • Only one in four federal student-loan borrowers were paying down the principal and interest on their debt.
  • Twenty percent of all federal student loans were delinquent or in default, which was seven times the delinquency rate on credit card debt.
  • The debt level of individual borrowers had ballooned between 2010 and 2018 because students were borrowing substantially more money.
  • The federal government’s portfolio of outstanding student loans constituted 10 percent of our nation’s total national debt.

Soon after giving this speech, DeVos engaged a private firm to determine just how bad the student loan crisis was. Jeff Courtney, a former JP Morgan executive, headed up this investigation, and here is what he found:

Although DOE calculated that it would eventually receive 96 cents of every student-loan dollar in default, in fact, it would only recover between 51 and 63 percent.

Courtney also found that DOE allows student-loan defaulters to sign up for new loans, which are used to pay off the defaulted loans. When that happens, the defaulted loans are categorized as paid in full when, in fact, they aren’t paid off at all.

DeVos acknowledged that private businesses could not legally operate in this way. In fact, she said, if a private actor engaged in DOE’s accounting practices, that person would “probably be behind bars.”

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Of course, we know that Courtney’s findings aren’t the only evidence of DOE’s financial skulduggery. DOE has been putting distressed debtors into income-based repayment plans (IBRP) and counting the loans in these plans as performing loans.

But that is not correct. Approximately 9 million student borrowers are in IBRPs, and their monthly payments are not large enough to pay accruing interest. Thus, IBRP participants see their loan balances grow with each passing month, even when they make regular monthly loan payments.

In fact, all 9 million IBRP participants are in default–if default means never paying off the debt.

In recent months, Congressional members have been asking DOE to disclose the actual cost of the federal student loan portfolio, but Education Secretary Miguel Cardona hasn’t been forthcoming.

Here is the essence of the matter. DOE knows the federal student loan portfolio is a trainwreck, but it hopes to keep the catastrophe a secret for as long as possible.

It’s like that old joke about the CIA and classified information: We can tell you the truth about the student-loan program, but then we’d have to kill you.

Richard Fossey is a professor at the University of Louisiana in Lafayette, Louisiana. He received his law degree from the University of Texas and his doctorate from Harvard Graduate School of Education. He is editor of Catholic Southwest, A Journal of History and Culture.

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