Archive for the ‘Capitalization’ Category
Earlier this week, Professor Diane Ravitch penned an eye opening essay on Arne Duncan’s “legacy” as Secretary of Education. Among the subjects discussed by Dr. Ravitch are No Child Left Behind (P.L. 107-110), with its focus on standardized testing, and other policies that encouraged “privatization and undermining the teaching profession with a $50 million grant to Teach for America to place more novice teachers in high-needs schools” (para.2).
One matter that isn’t outlined in Ravitch’s article is the power the Secretary of Education has in student loan reform and borrower “justice.” According to the U.S. Code, the Secretary of Education “may promulgate regulations limiting the amount of interest that may be capitalized on such loan, and the timing of any such capitalization” (20 U.S. Code § 1087e(5) – “Terms and conditions of loans”). While I am not a member of a legal profession, I interpret this passage from the U.S.C. as granting the Secretary of Education decision making authority over student loan capitalization policies and procedures. It is capitalization that increases the overall amount of the loan, especially on unsubsidized loans; it capitalization that is an obstacle to repaying the loan principal. The basic issue of capitalization has never been addressed by the Secretary; nor have exact details of the Department of Education’s capitalization formulas and policies
Germany abolished tuition for in-country and international students.
It appears lawmakers in Germany came to the conclusion that loan servitude was not only an intergenerational problem striking at parents and students alike, and loan debt is a social (economic) justice issue.
Senator Elizabeth Warren introduced the Bank on Students Loan Fairness Act (S. 897 and H. R. 1979) during the 113th Congress, first session. While the bill is important in terms of interest rate increases set for July 1 (on federal subsidized Stafford loans) from 3.4 to 6.8 percent – and this IS important – those of us who have graduated face huge capitalization (compounded interest) on their existing student loans. As I’ve stated on this blog in multiple posts, the Secretary of Education has the power to determine policies regarding capitalization. A remedy must be found to help borrowers from this crippling debt.
In a Factsheet from Sen. Warren’s office, the following claim is made; couldn’t the same be made that long term capitalization of loans has contributed to this $1 trillion debt? And it hampers postgrads from actively participating in “buying homes, saving for retirement,” and so on?
Outstanding student loans now total more than $1 trillion, surpassing total credit card debt. Last month, the Federal Reserve identified this mounting debt as a risk to household spending. The burden of loans keeps borrowers from buying homes, saving for retirement, and engaging in consumption that will keep our economy on the road to recovery. (Factsheet)
I just ran across an October 7, 2012 article by Miriam Wang at Alternet on the “joint examination” by ProPublica and The Chronicle of Higher Education on the Plus Loan program. There’s some great reporting on the Plus program, but no mention in Wang’s article and the joint report on borrower’s right to know of capitalized interest, replete with formulas used to determine interest and infographics that educate borrowers as to how the loan will balloon over time due to capitalization.
These loan stories, so very reminiscent of a Charles Dickens novel, suggest to me that the real issue is just too taboo to discuss: the right to education and heaven forbid, a right to a free education. A right to education in the form of achieving universal primary education (Goal 2) has already been laid on in the Millennium Development Goals.
The recent protest of Cooper-Union students begs the discussion society-wide on the subject of free education as a societal good and long term form of “alternative” wealth (emphasis and links added):
NIKI LOGIS: My name is Niki Logis. I teach sculpture at the Cooper Union. I have been at the Cooper Union for 43 years. I am devoted to the Cooper Union because it is the only tuition-free undergraduate college in the United States that is prepared to take provincial American teenagers, and a sprinkling of others, and turn them into mature artists who are capable of critical thinking and original art making. You cannot have a contingent of students attending any aspect of an institute that had the name Cooper Union on it be the same if those people are paying tuition. The nature of your abstract and theoretical speculations would be different. The nature of where you recruited your students from would be different.
I only just discovered that a few of my concerns regarding student loan repayment and public service options for contingent, part time faculty were addressed back in January and March 2012.
Among the changes are a three year break on loan capitalization for borrowers who qualify for the Public Service Loan Forgiveness program (PSLF) and working multiple jobs (under PSLF, borrowers must work 30 hours but can do so in multiple, qualifying public service organizations defined in the Q & A about Public Service Loan Forgiveness as “a broad range of employers, including any federal, state, or local government organization or agency and most not-for-profit organizations”). Also under the PSLF, remaining loan balances are not subject to IRS taxation.
Here are links to the docs as well as the Department of Education’s “Employment Certification for Public Service Loan Forgiveness Form” at the Student Aid on the Web Web site:
U.S. Department of Education | PSLF Fact Sheet
U.S. Department of Education | Q&A about Income-Based Repayment (IBR)
U.S. Department of Education | Q&A about Public Service Loan Forgiveness (PSLF)
Additional info is available at the Project on Student Debt.
I wish the Obama administration and Department of Education would have more fully, widely, advertised the positive changes to PSLF. Millions of borrowers will benefit. And so will society long term.
Here’s another story on student loans, this time from The Atlantic. From the article:
Meet Kelli Space. She went to Northeastern University to get a degree in sociology. And she graduated in $200,000 of student loan debt. In the economy’s newest trillion-dollar crisis, she is the 1 percent.
Kelli is not the face of America’s student debt problem. Among the 37 million people in this country with student loans to pay off, the median balance is $12,800. A whole 72 percent of borrowers have less than $25,000 left in debt, according to data from the Federal Reserve Bank of New York.
No, students like Kelli are the rarities, the white rhinos. Only about 5 percent of borrowers owe more than $75,000. The question is: How do they get there?
The article goes on to quote a study of “experiences of high-debt borrowers by analyzing survey data from about 6,500 undergraduate and graduate student loan borrowers, fully 25 percent of which have outstanding loan balances at or exceeding $100,000” by a group called NERA Economic Consulting. Neither The Atlantic article or the NERA report mention capitalization of interest (although NERA does use the phrase “interest that accrues over time”, p. 12). Recall that capitalization is accrued interest on one’s loans in addition to interest rate of the loan. To attend graduate school, for example, grad students usually carry (this is changing) subsidized (fed gov pays interest) and unsubsidized loans, where interest is not subsidized while in school and is subject to capitalization.
Of late, what most, if not all, articles and reports on student loans ignore: 1. That Kelli, like most borrowers, receive a set amount (scroll down to the chart “Annual and Aggregate Loan Limits”) of loans that only go so far, and in some cases, don’t cover the total costs of education, 2. What loans equal after one graduates does not represent the true costs of one’s education, but charges such as interest and capitalization of interest, and and 3. Kelli, again like most borrowers, probably couldn’t afford to pay her unsubsidized loans while in school, so capitalization – accrued interest – silently, grossly inflated the loan during the deferment/forbearance period. In other words, if Kelli was in deferment/forbearance during her academic studies, the loans evolved to $200,000 through the interest rate and capitalization of interest during the time she was in school.
I ran a few parameters for Kelli given in The Atlantic in the FinAid calculator to illustrate my concern with interest and capitalization (emphasis added):
|Initial Loan Balance:||$200,000.00|
|Loan Interest Rate:||6.80%|
|Loan Term:||10 years|
After the deferment period of 12 months, the new loan balance is $213,950.75, including $13,950.75 in accrued interest.
Without the interest capitalization there would have been 120 payments of $2,301.61 , for a total payment of $276,193.20 (including a total of $76,193.20 in interest) plus an additional $13,600.00 in interest paid during the deferment period.
With the interest capitalization there are 120 payments of $2,462.15 , for a total payment of $295,458.00 (including a total of $81,507.25 in interest plus $13,950.75 in interest accrued during the deferment period).
The numbers speak for themselves.
There isn’t a “new politics of student debt.” It is an old politics, a politics that concerns debt servitude. Borrowers have been aware of “politics” (as in power relations) the minute they signed on the dotted line for their education.
Inside Higher Education‘s recent article ignores the importance of capitalization in increasing debt, monthly payments, and more importantly, the beneficiary of “free” capitalized interest. The article also ignores the role of the Department of Education in setting loan policy in terms of writing regulations on student loan capitalization and repayment.
In 2005, I contacted my legislators on the capitalization issue, as well as to share ideas on potential volunteer activities. Nada, nothing, zip, zero. There still doesn’t seem to be any cognizance of the role of capitalization in inflating debt, or critical thinking about the ways existing programs such as Public Service Loan Forgiveness could expand options for borrowers to repay their loans., especially adjunct faculty and those working part time. If any borrowers skim this blog, please contact your congresspeople to request hearings…it’s the only way to bring the hidden problem of capitalization to light.