A Student Debt Crisis is Imminent, But Loan Companies and the Trump Administration are Not Likely to Provide Solutions

By all accounts the country faces a looming student debt crisis.  Debts from student loans currently amount to $1.4 trillion, a number that has grown exponentially over the last decade as more and more students take on debt only to face a demanding labor market.  Default rates are also on the rise—recent data from the U.S. Department of Education indicates that 11.5 percent of student borrowers who began paying off their loans in 2014 have since defaulted.  A recent analysis from The Brookings Institute projects that these default rates will continue to escalate if no large-scale changes are made.

The situation of struggling debtors has been made worse by the dubious practices of the loan servicing companies that manage the Federal government’s Direct Loan program. Navient (formerly part of Sallie Mae) is one of the largest of these companies and currently faces lawsuits in Pennsylvania, Washington, and Illinois, as well as from the Consumer Financial Protection Bureau for its alleged mishandling of loan collection.  The CFPB suit alleges that Navient systematically deceived or misled borrowers over the phone and in writing, incorrectly processed or misallocated payments, and obscured information relating to income-driven repayment plans. Between 2010 and 2015 Navient added over $4 billion in interest rate charges. The CFPB asserts these charges could have been avoided had the company informed borrowers of their eligibility for less demanding payment plans. In its defense filing, Navient argued that “there is no expectation that the servicer will act in the interests of the consumer”—a somewhat extraordinary statement from a company contracted by the Federal government and ostensibly in the employ of U.S. taxpayers.  Such practices are not limited to Navient alone. The Pennsylvania Higher Education Assistance Agency (also known as FedLoan Servicing), which handles about a quarter of national student loans, is currently facing a suit brought by the Massachusetts Attorney General.  That suit alleges that the company overcharged borrowers and prevented public service workers and teachers from accessing benefits and loan forgiveness programs specifically targeted toward those entering public sector employment.

States that challenge these companies may soon have to directly contend with the Trump administration.  In California the Student Loan Servicing Act recently signed into law requires loan collectors to comply with a licensing program, giving the state oversight into questionable practices.  But  a confidential memo leaked in early March reveals that the U.S. Department of Education will direct states to stop interfering with collectors.  The memo first defends the Federal Direct Loan Program, pointing out that Congress created it  “with the goal of simplifying the delivery of student loans to borrowers, eliminating borrower confusion, avoiding unnecessary costs to taxpayers, and creating a more streamlined student loan program.” (Based on the Navient complaints gathered by the CFPB, theses goals of simplification and efficiency are clearly far from being reached.)  The memo goes on to say that “state regulation of the servicing of Direct Loans impedes uniquely Federal interests.”  The statement is revealing in two ways.  First, it seemingly reverses the tendency of the Trump administration to shift responsibility to states on issues, underscoring its fealty to the interests of business over that of jurisdictional principle.  Second, many argue that the most distasteful and unjust aspect of student loan administration is that it is actually profitable for the Federal government—to the tune of, by most recent estimates, $135 billion over ten years.  If this is the case, the Federal government has a vested interest in preserving the status quo.

Student debt accounts for the second largest category of consumer debt after housing.  And, as with the market for subprime housing mortgages, there is a crisis in the making.  This being said, we do not lack for remedies.  States and the CFPB, must continue to regulate and monitor loan collectors and repayment plans based on income should continue to be made accessible and comprehensible to borrowers.  But broader solutions such as debt cancellation and free college tuition are economically feasible and enjoy popular support.  Oregon, Tennessee, New York, and Rhode Island have all made community college tuition free, and there’s a push to make 4-year public colleges free as well.  As this push continues, the obstacle lies with the lobbying efforts of the loan industry and with a Federal government keen to protect their interests.

The Pay Gap Between CEOs and Workers

It is no secret that the executives of publicly traded companies are paid at rates that greatly exceed those of the rank-and-file.  In a recent survey of 356 companies by Equilar, the median ratio of CEO to worker pay was found to be 140:1, the average ratio jumps even higher, to 241:1.  A 2016 survey of S&P 500 index companies conducted by the AFL-CIO found that CEOs made, on average, $13.1 million a year compared to a rank-and-file worker’s $37,632 (a ratio of 348:1).

Over the past few decades, CEO pay packages, which typically include bonuses and stock options in addition to salary, has ballooned while the average salary of workers has remained relatively stagnant. An analysis from the Economic Policy Institute shows that CEO pay (adjusted for inflation) increased from 1.5 million in 1978 to 16.3 million in 2014, a surge of 997 percent.  During the same period the paycheck for an average worker increased by only 10.9 percent, from $48,000 to $53,200. And, although executive compensation is high around the world, American CEOs are still paid much more than most of their global competitors.

While many companies bemoan the difficulty of precisely calculating yearly CEO pay due to the fact that it is determined by bonuses and stock options which do not strictly follow the fiscal calendar, the writing on the wall offered by the pay-gap statistics is clear.  For years, workers have been sold the myth of trickle-down economics, both by politicians and Wall Street.  When publicly traded companies perform well, the rewards have invariably flowed upwards, not to the rank-and-file.  As the movement for minimum wage increases gains momentum and the erosion of America’s once thriving middle class becomes more evident, opposition to the trickle-down narrative has swelled among Americans.

Soon, however, there will be a more detailed set of pay gap data to interpret.  In 2015, the Securities and Exchange Commission ruled that public companies must disclose the compensation of their CEOs.  The ruling took effect for the 2017 fiscal year and the disclosures will be made available in spring of 2018, thanks to a provision in the 2010 Dodd-Frank Act.  With better data and more transparency, workers, companies, politicians and policy makers will be in a stronger position to assess and confront this problem.