August 15, 2016, Opinion, The Wall Street Journal

Opinion

Writing Off Student Loans Is Only a Matter of Time

Thanks in large part to Obama policies, only 37% of borrowers are paying down their student loans.

By Daniel Pianko

In her speech at the Democratic National Convention, Hillary Clinton exclaimed, “ Bernie Sanders and I will work together to make college tuition-free for the middle class and debt-free for all!” How she intends to do that remains something of a mystery, beyond higher taxes on “Wall Street, corporations, and the super-rich.” But it’s hard to imagine the student-loan industry and the burden of student debt getting any worse for taxpayers and borrowers than it is now.

A largely overlooked report released in February by the Government Accountability Office suggests that the Obama administration’s policies have exacerbated student debt, which equals nearly a quarter of annual federal borrowing. With only 37% of borrowers actually paying down their loans, the federal student-loan program more closely resembles the payday-lending industry than a benevolent source of funds for college.

PHOTO: GETTY IMAGES/IKON IMAGES

As this newspaper reported in April, “43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1,” and a staggering “1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt.” If student debt continues to skyrocket, the federal government may have to deal with as much as a $500 billion write-down when future defaults and loan-forgiveness programs are factored in.

In 2010, the Obama administration dispensed with the private intermediaries that had administered federal loans since the 1960s. It put in their place Direct Lending, a program administered by the Education Department. At the time, the Congressional Budget Office estimated that Direct Lending would save $62 billion from 2010 to 2020. That didn’t happen. The program’s advocates failed to anticipate how two other Obama-backed college affordability initiatives—Income-Driven Repayment and loan forgiveness—would create a cataclysmic hit to the federal student-loan program’s finances.

There are more than 20 Income-Driven Repayment programs, but they all work essentially the same way. Students struggling financially can defer their payments. When no or limited payments are made, their balances grow. Today, over 20 million borrowers are watching their loan balances increase thanks to these programs. The average balance ballooned to approximately $25,000 in 2014 from $15,000 in 2004,according to the Federal Reserve Bank of New York, and has grown still larger since then.

But the most significant explosion in student debt might still come. In 2007 Congress passed the Public Service Loan Forgiveness Program, which allows borrowers who work for nonprofit organizations or government agencies to have their loans forgiven after 10 years. Students will be able to take advantage of this program for the first time in 2017. Yet no mechanism to evaluate who qualifies exists. Virtually every teacher, firefighter, social worker, police officer, doctor, or nurse who meets “their employer’s definition of full time” could have their loans forgiven.

The law will cost about $5 billion each year, according to the Congressional Budget Office. But very few close to the student-loan industry believe that the CBO’s assumption will pan out. The total student-loan portfolio is now $1.3 trillion, and the program grows by approximately $100 billion annually. If only 20% more borrowers default than the CBO expects, the Education Department could face at least a $100 billion loss on its existing pool of loans.

What can Congress do? First, it should demand that the CBO appropriately score the Income-Driven Repayment options. The federal government should at least use the same nonperforming loan standards they require of banks. Specifically, the Education Department should be required to “reserve” funds in anticipation of foreseeable and significant write-offs. Assuming 20% of current loans end up being written off, the department will end up writing off more than $20 billion annually.

The Direct Lending program should also start leveraging its immense power to price loans differently based on the success of students. It may also be necessary to change the model by which colleges and universities receive loan proceeds. Today, schools receive Title IV funds at the start of the semester and only have to return them if students drop out before completing 60% of a course. Instead, schools should receive a portion of loan proceeds to start and only receive additional funds if students graduate and pay down their loans.

Student debt is a public good, because higher education is a pathway to a stable, economically productive life. But the tsunami of nonpayment has already begun. If the promise of college is to hold up for generations to come, then Washington has to start pricing the risk it assumes when it underwrites $100 billion in loans annually.

Mr. Pianko is managing director of University Ventures, an investment firm focused on global higher education.

…Riskier ventures required even more capital. The most immediate impact of these rules has been to serve as a sort of brake on business activity, given the hassle and cost of raising more capital. And indeed, when banks today explain why they are moving into or abandoning certain businesses, they almost always cite capital requirements as their main motivation. The Federal Reserve official in charge of these regulations, Daniel Tarullo, was recently named “the most powerful man in banking” by The Wall Street Journal. Tarullo is now pushing to raise the capital requirements even higher for the very largest banks, like JPMorgan and Citigroup, and there are signs that this could do what Bernie Sanders could not: force the biggest banks to split themselves up. Among the many shrinking banks, one of the most noteworthy is Goldman Sachs, a villain of the crisis and the firm everyone assumed would outsmart the regulators. In large part because of the capital requirements and their quieting effect on all sorts of trading, Goldman has slashed staff from the risky, lucrative lines of business it used to dominate. Now the firm is focusing its efforts on less risky places, where capital requirements are lower….Even highly capitalized banks can still suffer unexpected losses. But in addition to discouraging risky activity, capital also serves as money that banks can afford to lose in a crisis……The nation’s eight most important banks now have 66 percent more capital than they did at the end of 2009, and the Fed recently said, after extensive testing, that the nation’s 33 largest banks could survive a two-year depression….and lose hundreds of billions of dollars….and still have more capital than the new rules require.”Nathaniel Popper, “Has Wall Street Been Tamed?”, The New York Times Magazine, August 7, 2016

“As I have discussed several times elsewhere on this blog, former Fed Chair Greenspan made clear in his paper “The Crisis” that governments, through their central banks, established the capital requirements for banks and not the private sector, and that central bankers deliberately set them at a level that did not take into account the once-or-twice-in-a-century economic or financial crisis, because the cost of doing so was felt to be too big a permanent drag on economic activity and jobs. As Greenspan said in this paper, “The sovereign must then recapitalize/guarantee its banks”. Why do governments take the paramount responsibility to establish the capital requirements and monitor bank safety and soundness and NOT the private banking sector and/or its private creditors? Because governments insure most of nearly every bank’s unsecured liabilities, via federal deposit insurance. This well-intended government distortion of free, fair, and rational markets for bank liabilities logically requires that the government then take the paramount role in establishing capital levels for the banking industry. How does this distort the marketplace? Just read this article and the excerpt above…these government capital rules have caused massive changes in banks’ business activities and operations, assets and asset size, risk taking, etc. And the government, post crisis, has now clearly admitted they were wrong about the appropriate level of pre-crisis capital for banks. How have they admitted fault? Just read the excerpt above….they have increased bank capital levels by massive amounts post-crisis and even eight years on, still think they need to be increased further. How, pre-crisis, then was it the fault of private bankers, following the government’s capital and other rules (and serving the marketplace, where in the case of mortgages trillions of dollars were lent, bought/sold/securitized), that they found themselves to be undercapitalized in a once-or-twice-in-a-century financial crisis?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Magazine

Has Wall Street Been Tamed?

On Money

By NATHANIEL POPPER

Credit Illustration by Andrew Rae

Before the financial crisis, bankers were often regarded as greedy and self-­interested. The mortgage melt down ­ratcheted that reputation into something much scarier: an existential threat to the global economy. Since 2008, the banks have seemed to many people like an active volcano does to the villagers below. Americans don’t really understand banks, or know what causes them to blow up, but they’ve seen enough to be afraid.

And to hear the public discussion about the issue these days, we still have good reason to be scared. The Republican presidential candidates generally agreed that Wall Street banks remain dangerously too big to fail. On the left, Bernie Sanders built that notion — and demands for a major policy response to it — into the foundation of his campaign. From Hollywood, we got “The Big Short” and its judgment, in the words of Ryan Gosling’s character, that “the banks took the money the American people gave them and used it to lobby the Congress to kill big reform.”

I began writing about the industry in early 2010, just after the worst of the crisis passed and right before Congress enacted its landmark effort to clean up Wall Street, what’s now known as Dodd-Frank. I was in Washington when the final version of the law was released. Along with all the discussion about its being the most significant reform of Wall Street since the Great Depression, I remember the confusion as we flipped through the thousands of pages, trying to pick out what would really matter, looking for where the lobbyists had won. Six years later, as I plan a move to the West Coast for a slightly different reporting beat, I keep returning to this question of how much has really changed. Is the system any safer than when I began?

Dodd-Frank was designed, in essence, to check the pre-­crisis excesses that ultimately required the government to bail out the largest banks. But upon its unveiling, it did seem as though some of the most consequential efforts to transform the banks had been edited out at the industry’s behest. The law didn’t seem to address many of the risky practices that transmuted a downturn in the subprime-­mortgage market into a global conflagration. Perhaps most consequential, as Sanders has not tired of reminding us, the biggest banks were not broken up. Just a day after the law was passed, a bank analyst made a prediction for me: “After the dust settles and they’ve crossed all the T’s, there’s probably not going to be much difference in how the banking industry looks. That’s the long and short of it.”

Among the many shrinking banks, one of the most noteworthy is Goldman Sachs, a villain of the crisis and the firm everyone assumed would outsmart the regulators.

JPMorgan Chase, the nation’s largest bank, has shrunk since 2014, but it entered 2016 with 50 percent more assets than it had in 2007, in great part because of its acquisition (on the cheap) of Bear Stearns and Washington Mutual in 2008. Early this spring, the top banking regulators announced that because of their size and complexity, five of the eight largest banks, including JPMorgan, still didn’t have workable plans to avoid going out of business without taking the economy down with them — suggesting that they would probably need to be bailed out if they began to collapse again.

So are they headed toward failure? To judge the likelihood of that, the first thing to consider is what types of risk they’re taking on. And on that front, at least, the changes have been far more notable than most Americans realize. For starters, Dodd-Frank’s “Volcker Rule” forced the banks to get rid of the trading desks where they made enormous speculative bets for their own profit. There was some talk that the banks would find a way around the rule, but almost every bank has disbanded these trading teams or sold them to hedge funds. And this is just one of the risky businesses that the big banks have jettisoned in recent years. The most risky — and profitable — units at all the banks before the crisis were the so-­called fixed-­income divisions, where the banks created and traded bonds and derivatives. In 2006, these departments were the single largest sources of revenue at banks like Goldman Sachs and Morgan Stanley. Today, by contrast, the amount of money the big banks make from their fixed-­income divisions is less than half of what it was at the peak in 2009, and it continues to fall.

There are multiple reasons for this evolution, including global economic shocks like the Greek debt crisis and the new trading rules in Dodd-Frank. But the greatest engine of change has been some rather arcane accounting rules, known as capital requirements, set by the central banks of governments around the world. Put most simply, capital requirements force banks to raise a specific amount of money (usually from investors) for every dollar they lend or trade. In 2010, central banks agreed that the large commercial banks needed to double or even triple their capital buffers. Riskier ventures require even more capital.

The most immediate impact of these rules has been to serve as a sort of brake on business activity, given the hassle and cost of raising more capital. And indeed, when banks today explain why they are moving into or abandoning certain businesses, they almost always cite capital requirements as their main motivation. The Federal Reserve official in charge of these regulations, Daniel Tarullo, was recently called “the most powerful man in banking” by The Wall Street Journal. Tarullo is now pushing to raise the capital requirements even higher for the very largest banks, like JPMorgan and Citigroup, and there are signs that this could do what Bernie Sanders could not: force the biggest banks to split themselves up.

Credit Illustration by Andrew Rae

Among the many shrinking banks, one of the most noteworthy is Goldman Sachs, a villain of the crisis and the firm everyone assumed would outsmart the regulators. In large part because of capital requirements and their quieting effect on all sorts of trading, Goldman has slashed staff from the risky, lucrative lines of businesses it used to dominate. Now the firm is focusing its efforts in less risky places, where capital requirements are lower. Its newest products are savings accounts and consumer loans, plebeian products that Goldman would never have deigned to offer before the crisis. The company as a whole has shrunk by nearly a quarter since its peak.

Even highly capitalized banks can still suffer unexpected losses. But in addition to discouraging risky activity, capital also serves as money that banks can afford to lose in a crisis. Unlike the debt that banks loaded up on before the crisis, capital does not have to be repaid in the event of a loss. Having this sort of cushion can in turn stop losses from spiraling out into and threatening the rest of the economy. The nation’s eight most important banks now have 66 percent more capital than they did at the end of 2009, and the Fed recently said, after extensive testing, that the nation’s 33 largest banks could survive a two-year depression — and lose hundreds of billions of dollars — and still have more capital than the new rules require.

Michael Lewis, the author of “The Big Short,” has been one of many industry critics to complain that the biggest continuing problem in the financial industry is that the incentives haven’t changed: Bankers are encouraged to take short-term risks, without bearing the losses if those risks cause long-term damage. In fact, pay packages have changed more than Lewis lets on. Some traders now receive their bonuses over several years, in case past deals go sour, and regulators are currently codifying those practices.

But to focus on pay packages misses how capital requirements have changed incentives for the entire system. I hear constantly from traders who say that the daily work of buying and selling bonds or stocks, and thus the amount of money they can take home, is constrained by the capital limits. This helps explain why at Goldman, for example, the average pay per employee has fallen 24 percent since 2010 and 39 percent since 2007. This also illuminates why Wall Street is in decline as the career path of choice at elite colleges and business schools.

People still have other concerns about Wall Street, including cases of fraud and market manipulation, so the banks are unlikely to disappear as political fodder in a presidential campaign between two New Yorkers for whom Wall Street is a recurring issue. Each side is likely to signal its intent to get tough on the industry that nearly wiped out the economy. But if Wall Street remains a volcano, it’s one I now feel far more safe living underneath.

Nathaniel Popper is a reporter for The Times and the author of “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.” Adam Davidson will return next month.

A version of this article appears in print on August 7, 2016, on page MM14 of the Sunday Magazine with the headline: Has Wall Street Been Tamed?.

…Ever since the Dodd-Frank financial “reform,” the SEC has been pushing more cases toward in-house administrative-law judges. These judges are hired by the SEC and sit on the commission’s payroll. They have ultimate discretion over the cases they handle, and the rules severely limit discovery and depositions. In short, President Obama’s SEC gets to sit as prosecutor, judge and jury—and no surprise that the agency loves this setup. An analysis of SEC data by The Wall Street Journal last year shows why. Between October 2010 and March 2015, the SEC “won against 90% of defendants before its own judges in contested cases,” the report found. “That was markedly higher than the 69% success the agency obtained against defendants in federal court over the same period.”….Despite the obvious complexity of Ms. Tilton’s case, the SEC chose to bring its suit as an administrative proceeding—sheltering itself from the rules of evidence in federal court. Ms. Tilton had the temerity to call foul. Last April she filed suit against the SEC in federal district court, challenging the constitutionality of the agency’s administrative-law judges. The Tilton ordeal shows another Obama agency that—like the EPA or the IRS—seems to think it gets to operate outside the usual rules of democracy. This is an administration that is determined to have its way, whether by threats, or by unconstitutional appointments to agencies, or by ignoring the law. IfDonald Trump wants a line that will resonate across large parts of the electorate, he could do worse than simply this: “I promise as president to follow the Constitution.” Thanks to Barack Obama, that is unfortunately a new, low bar for the presidency.”, Kimberley A. Strassel, “The SEC Plays Judge and Jury”, August 5, 2016

Opinion

The SEC Plays Judge and Jury

How the agency has gone after Lynn Tilton is typical of Obama’s approach to politics.

New York financier Lynn Tilton speaks with her attorneys after her hearing at the U.S. district court in New York, May 11, 2015. PHOTO: REUTERS

By Kimberley A. Strassel

Few words define this administration better than “abuse”—in particular the oppressive tactics of Barack Obama’s turbocharged bureaucratic state. We interrupt your regular election broadcasting to present another example, this one courtesy of the Securities and Exchange Commission.

The victim is an outspoken financier by the name of Lynn Tilton, the founder and CEO of Patriarch Partners LLC. By way of context, it’s worth noting that Ms. Tilton was an early critic of the Obama administration’s response to the financial crisis. In 2009 she traveled to Washington, D.C., to pitch her own legislation, a plan to offer rescue loans to small- and medium-size businesses. Not long after that trip, the SEC opened up an investigation. Early last year, the commissioners voted 3-2 to bring charges against her for allegedly defrauding investors.

The specifics of that case are long, complex and best weighed by a court of law. But they aren’t being settled by any outside court—and therein rests the abuse. Ever since the Dodd-Frank financial “reform,” the SEC has been pushing more cases toward in-house administrative-law judges. These judges are hired by the SEC and sit on the commission’s payroll. They have ultimate discretion over the cases they handle, and the rules severely limit discovery and depositions.

In short, President Obama’s SEC gets to sit as prosecutor, judge and jury—and no surprise that the agency loves this setup. An analysis of SEC data by The Wall Street Journal last year shows why. Between October 2010 and March 2015, the SEC “won against 90% of defendants before its own judges in contested cases,” the report found. “That was markedly higher than the 69% success the agency obtained against defendants in federal court over the same period.”

Despite the obvious complexity of Ms. Tilton’s case, the SEC chose to bring its suit as an administrative proceeding—sheltering itself from the rules of evidence in federal court. Ms. Tilton had the temerity to call foul. Last April she filed suit against the SEC in federal district court, challenging the constitutionality of the agency’s administrative-law judges.

This June, a divided panel of the Second Circuit Court of Appeals ruled, 2-1, that it lacked the jurisdiction to look at her case because the SEC hasn’t finished its administrative proceedings. Ms. Tilton has appealed to the full Second Circuit.

Meanwhile, she’s getting the treatment one might expect after challenging the agency’s authority. Take, for starters, the cash that the commission is attempting to part from her. In 2015, the SEC’s administrative-law judges ordered a total of $32 million in disgorgement and penalties, according to the agency. Ms. Tilton’s case alone demands disgorgement of nearly seven times that—$208 million.

There’s also the treatment that Ms. Tilton is getting at the hands of Carol Foelak, the administrative-law judge. When the Second Circuit’s panel ruled in June, it lifted a temporary stay on the SEC proceedings. Ms. Tilton at that time brought in a new team of high-powered lawyers from Gibson Dunn. They respectfully asked Judge Foelak to set a trial date in December—to give them time to prepare a defense against an SEC case more than five years in the making.

Even the SEC’s enforcement division argued for a December trial. The judge instead put it on the calendar for September. When Gibson Dunn again petitioned for a later date, the judge moved the case back by a few weeks to October, even as she warned the law firm against filing any further “frivolous” motions.

There’s a perception that the SEC is going out of its way to deny Ms. Tilton a fair shot. The Wall Street Journal’s 2015 analysis of the administrative-law judges prompted an internal SEC investigation. The commission adopted new rules this July that “reform” the system. The new rules don’t in any way fix the problem, but they at the very least allow defendants more latitude to collect witness depositions and other evidence to help in their trials. Yet the SEC is insisting that Ms. Tilton’s case must be tried under the old rules, those that were in effect when the proceedings began?

The Tilton ordeal shows another Obama agency that—like the EPA or the IRS—seems to think it gets to operate outside the usual rules of democracy. This is an administration that is determined to have its way, whether by threats, or by unconstitutional appointments to agencies, or by ignoring the law.

If Donald Trump wants a line that will resonate across large parts of the electorate, he could do worse than simply this: “I promise as president to follow the Constitution.” Thanks to Barack Obama, that is unfortunately a new, low bar for the presidency.

…The U.S. government desperately wants Mr. Osborne and his wife to start repaying their combined $46,500 in federal student debt. But they are among the more than seven million Americans in default on their loans, many of them effectively in a standoff with the government. These borrowers have gone at least a year without making a payment—ignoring hundreds of phone calls, emails, text messages and letters from federally hired debt collectors. Borrowers in long-term default represent about 16% of the roughly 43 million Americans with student debt, now totaling $1.3 trillion across the U.S., and their numbers have continued to climb despite the expanding labor market. Their failure to repay—in many cases due to low wages or unemployment, in other cases due to outright protest at what borrowers see as an unfair system—threatens to leave taxpayers on the hook for $125 billion, the total amount they owe.”, Josh Mitchell, “Student-Loan Defaulters in a Standoff With Federal Government”, The Wall Street Journal, August 2, 2016

“Read this article. Clearly, another common financial crisis-era term proves to be false. Which term and how so? “Predatory Lender.” Here, you have our federal government and its well-intended federal student loan program being called a “predatory lender” by borrowers who almost always knew exactly what they were obligating themselves to (just like most mortgage borrowers) and just because their education, career and economic circumstances didn’t turn out how they had hoped and they are struggling to repay their loans (obligations), they take to name-calling….even calling the federal government a “predatory lender”…..but the NY Times and the liberal media don’t point out this fact, a fact that this is EXACTLY the same issue that caused banks and private mortgage lenders to be called “predatory lenders” by the press, media, failed borrowers, the government, and others (like short sellers) during the crisis. In fact, it’s worse. How so? Mortgage debt can be discharged through foreclosure/bankruptcy, federal government student loan debt can’t, the federal government is lending to “kids”, and the federal government is not subject to consumer debt collection practices and can even garnish wages, tax refunds, etc. p.s. By the way, I wonder if the Obama Administration used colleges and federal student loans as a way to keep young Americans, some who clearly didn’t belong there given their grades/prospects, in school during the downturn, so that the youth unemployment figures weren’t even worse? And now these kids, some of whom dropped out or got poor educations, are stuck with student loans that they can’t repay? If so, that really might be “predatory”, right? Maybe that’s why they now want to have taxpayers take a big hit on these loans?”, Mike Perry, former Chairman and CEO, IndyMac Bank

U.S.

Student-Loan Defaulters in a Standoff With Federal Government

Some seven million Americans are in default, many of them ignoring phone calls, emails, text messages and letters from debt collectors

By Josh Mitchell

The letters keep coming, as do the emails. They head, unopened, straight into Jason Osborne’s trash and deleted folder.

The U.S. government desperately wants Mr. Osborne and his wife to start repaying their combined $46,500 in federal student debt. But they are among the more than seven million Americans in default on their loans, many of them effectively in a standoff with the government. These borrowers have gone at least a year without making a payment—ignoring hundreds of phone calls, emails, text messages and letters from federally hired debt collectors.

Borrowers in long-term default represent about 16% of the roughly 43 million Americans with student debt, now totaling $1.3 trillion across the U.S., and their numbers have continued to climb despite the expanding labor market.

Their failure to repay—in many cases due to low wages or unemployment, in other cases due to outright protest at what borrowers see as an unfair system—threatens to leave taxpayers on the hook for $125 billion, the total amount they owe.

The Osbornes say they are the victims of a for-profit school that made false promises and a predatory lender—the government.

“Do you think I’m going to give them one penny I’m making to pay back the loan for a job I’m never going to hold?” said Mr. Osborne, 45 years old, who studied to be a health-care worker but can’t find a job as one.

The rising number of borrowers in default weakens the economy as underwater homeowners did after the housing crash: by damaged credit, an inability to spend and save for the future, and a lack of resources to move to better jobs.

In the case of homeowners, though, foreclosures offered a chance to start fresh and slowly rebuild their lives. There is generally no such option for student debtors—federal law prohibits them from expunging their debts in bankruptcy, except in extremely rare circumstances.

The Obama administration says it can help borrowers like the Osbornes get back on track with programs that slash their monthly payments and forgive a portion of their balances, if only they would respond. The administration is also working to expand a program that forgives debt for borrowers who can prove their schools defrauded them with deceptive advertising claims.

And in a controversial move, the government has stepped up garnishments of borrowers’ wages. It garnished $515 million in the nine months through March, federal figures show.

After years of uneven progress in reducing defaults, the Education Department is turning to a team of behavioral scientists who are trying to figure out how to get borrowers to respond, testing things such as what language to use in emails and what time of day to send text messages.

Deputy Treasury Secretary Sarah Bloom Raskin has also met with borrowers to gauge what policies would help them avoid default. Ms. Raskin has the same concerns about defaulted borrowers as the administration did with homeowners who faced foreclosure.

“As we intervened to help homeowners, I think we also have a responsibility to help students who might feel the aftershocks of economic developments they had no part in creating,” Ms. Raskin said.

Most borrowers in default owe relatively small balances—a median of $8,900, according to the Education Department. But student advocates say that can be a lot of money for someone unemployed or in a low-paying job, and with other expenses to juggle.

And many feel they shouldn’t have to pay anything.

The Osbornes’ example underscores the challenge. Each enrolled at Abdill Career College Inc., a small for-profit school in Medford, Ore., shortly after the recession. They earned certificates as medical assistants and in 2011 graduated from a second program to become phlebotomists, or health-care workers that draw blood.

But they couldn’t find steady jobs in the field, Mr. Osborne said. Now, Mr. Osborne makes $13 an hour in sales for a solar-power company, and she works as a maid, he said.

Mr. Osborne said Abdill provided a low-quality education and exaggerated the likelihood that they would find career success. And he said the government should have never extended them so much debt for jobs that are in low demand. The typical phlebotomist makes just under $32,000 a year, according to the Labor Department.

About 1 in 5 student borrowers who left Abdill in 2012 defaulted on their loans within three years, the latest federal figures show. Its default rate of nearly 21% is far higher than the national average of 12% among all colleges.

Abdill’s owner, a woman named Ki who said she doesn’t have a legal last name, confirmed the couple attended the school. But she said privacy law prevents her from discussing details of the couple’s time there. She said the school has recently lowered its tuition, and that it prioritizes helping students find jobs.

Mr. Osborne said the government should have never extended him and his wife so much debt for jobs that are in low demand. He now makes $13 an hour in sales for a solar-power company, while his wife works as a maid. PHOTO: LEAH NASH FOR THE WALL STREET JOURNAL

It isn’t clear how many borrowers in default are simply unable to repay, or are able to pay but refuse to do so in protest.

Illinois resident Jim Lopko, 36, said he would repay his debt if his balance hadn’t skyrocketed because of interest. He owes $122,000 in student debt—a combination of federal and private loans—after graduating with an associate degree from one for-profit school and dropping out of a bachelor’s program at a second in 2009. He said he dropped out because he had borrowed the maximum amount in federal loans and he couldn’t gain access to any more private ones.

He is in default on his private loans and in forbearance on his federal loans. Debt collectors call him almost daily but he ignores their calls.

Mr. Lopko, who lives in a Chicago suburb, now earns $32,000 a year as a customer-service agent for an Illinois manufacturer.

“The only way out of this situation honestly is to win the lotto or to find a job that pays me $300,000 a year,” Mr. Lopko said.

He says he tries to be frugal but admits he occasionally splurges. He recently upgraded to a one-bedroom apartment from a studio and took out a loan for a new Subaru WRX that carries a $445 monthly payment.

“Are you supposed to stay in inside all the time, never go out, and pay these loans?” he said.

…The whole morass has created a culture favoring debt to finance college costs. This proliferating student debt has in turn contributed to a tuition “bubble,” making college more expensive but leading to no demonstrable change in the percentage of high-school graduates who go on to college. This is the same dynamic seen during the subprime-mortgage crisis, when ballooning home debt increased the price of housing but ultimately did little to improve homeownership rates. Too little attention has been given this election season to the skewed economic incentives built into the current federal-loan programs.”, Sheila Bair, President of Washington College and former Chairwoman of the FDIC, The Wall Street Journal, August 3, 2016

“The truth is again revealed. Former crisis FDIC Chair Bair points out that it is well-intended government policies (in particular government guaranteed lending programs) that have distorted both the higher education and housing marketplaces, with little-to-no measurable upside over the long run, and a lot of risk/potential downside for Americans students and homeowners, student loan and mortgage borrowers, banks (and the health and stability of our financial system), the U.S. taxpayers, and our economy as a whole.”,Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

Paying for College Has to Be Easier Than This

Government policies discourage parents from saving for their children’s education.

PHOTO: GETTY IMAGES/ISTOCKPHOTO

By Sheila Bair

In 2004, I published a children’s book, “Rock, Brock, and the Savings Shock,” about the importance of saving at an early age. During one of my book events, a mother astonished me when she revealed that she had advised her son not to save because it would hurt his eligibility for student-loan programs.

Twelve years later, as the president of a small liberal-arts college, I more fully appreciate the upside-down government policies that precipitated that woman’s remarks. With federal student debt exceeding $1.2 trillion, I am dismayed at how government programs discourage families from saving for their children’s educations. The disincentives involve a complex web of federal-aid-eligibility requirements, consolidated into a mind-bending application process known as Fafsa, or Free Application for Federal Student Aid. The higher the family’s income or savings, the lower the amount of aid for which the student can qualify.

This might seem intuitive: Why should taxpayers support the college education of students if they have their own financial resources? The problem is that these rules penalize work and thrift—even a student’s paid internships reduce student-loan eligibility. And their complexity can discourage low-income families from even applying.

Schools like ours hire full-time financial counselors who help students and their families with the Fafsas, but we have seen more than a few students give up, even with our help. The Obama administration has tried to simplify the process, but Fafsa still contains more than 100 questions. Even if the form can be simplified (a Senate bill introduced in 2015 would replace the current Fafsa application with two questions), the complexity in income-eligibility requirements remains through multiple loan programs—subsidized, unsubsidized, PLUS—all with differing qualifications and caps.

The whole morass has created a culture favoring debt to finance college costs. This proliferating student debt has in turn contributed to a tuition “bubble,” making college more expensive but leading to no demonstrable change in the percentage of high-school graduates who go on to college. This is the same dynamic seen during the subprime-mortgage crisis, when ballooning home debt increased the price of housing but ultimately did little to improve homeownership rates.

Too little attention has been given this election season to the skewed economic incentives built into the current federal-loan programs. Some want to layer more expensive and complex aid options onto the system and make public colleges free for a large swath of the population.

But young people would still end up paying for these programs, as future taxpayers, if not as student borrowers. And they would undermine a core strength of our higher-education system—choice—by giving a heavy advantage to public schools over independent, private institutions. New government programs would also require more government regulation, making college even more expensive than it is today.

The U.S. should instead radically simplify the system. We need a federal-loan program in which all students can participate, with a common sense cap on total federally backed borrowing. Schools should be given incentives to make sure college financing is affordable to their students by requiring that they absorb some portion of taxpayer losses if their students have high default rates.

Unlike grant programs, our federal college-loan programs should be viewed not as instruments of income redistribution, but as investments in an educated workforce and the country’s economic future. Numerous studies show that a college education significantly increases the future earnings potential of young people.

All students should have access to a reasonable amount of federally backed lending, and all should be expected to give taxpayers a fair return. Eliminating disincentives to save, and broadening the loan pool—while capping overall borrowing and holding schools accountable for losses—should improve loan performance, prevent children from getting in over their heads in debt, and dramatically reduce the rate of default.

No institution illustrates the law of unintended consequences better than the federal government. A desire to concentrate taxpayer resources in the hands of those most in need has created perverse incentives among families not to save for their children’ educations.

At Washington College, we recognize not all families have the resources to save and are making more scholarships available to low-income families. In addition, we will soon announce a new Savers Scholarship to give families a dollar in scholarship aid for each dollar they contribute from a collage-savings plan, up to $2,500.

We want to reward prudence and responsibility, not penalize it. The federal government should do the same.

Ms. Bair is the president of Washington College in Chestertown, Md. She was chairwoman of the Federal Deposit Insurance Corp. from 2006 to 2011.

…They must be transparent to all and their assumptions and output constantly audited for logic and common sense. Think about the biggest one these days…climate change models (algorithms)…have they really been audited and certified to be accurate? I don’t think so and yet many of us want us to change our entire economies and way of life based on these untested, filled with assumptions, models that profess to predict weather and sea levels decades into the future. How is that possible, when few algorithms/computer models can predict even one year out?”, Mike Perry, former Chairman and CEO, IndyMac Bank

http://www.nytimes.com/2016/08/01/opinion/make-algorithms-accountable.html