Looking Back on HAMP and Forward on Student Loan Relief
Congress should soon take a look at fastest growing category of consumer debt—student loans. During the 2016 Presidential election, Donald Trump added his voice to the Democratic law makers, led by Senator Elizabeth Warren, calling for student loan relief. President Trump was elected on the promise of quick action for hard working Americans. Here’s why student loan relief is a good place for the Republican Congress to start. And why it’s important that Republican student loan relief avoid the mistakes the Obama Administration made with HAMP.
Student Loan Debt is a Job Killer
Student loan relief is one way President Trump and the Republican Congress can deliver on their promise of faster economic growth. Forty three million Americans have student loans. One third of those, fourteen million Americans, have student loans greater than $25,000.00.
Fourteen million Americans have more than $25,000 in student loans. That holds down economic growth for all of us.
One cause of the slow recovery from the recession—which was a major factor in Hillary Clinton’s defeat—is student loan debt. This article from Business Insider explains. Student loans are “having a crippling effect on economic activity, says Barbara O’Neill, a specialist in financial resource management for Rutgers University.”
Here’s one example of how that works. A debt free college graduate can expect to save enough money to be a home owner five years after graduation. With $28,950.00 it takes ten years. And 13 years for people with $50,000.00 in student loans. That’s fewer jobs in construction and in manufacturing household appliances and furniture. It puts off the age when young people get married and start a family. And it makes it harder for young families to start college savings for the next generation.
So What Does Student Loan Relief Have to Do With HAMP?
January 1 2017 marks the end of President Obama’s Home Affordable Modification Program (HAMP). The Obama Administration hoped that HAMP would help three to four million people save their homes. It reached far less than half of that. My own clients, like the people in this news article, reported constant frustration in applying for the program and lost paperwork the banks. However, the banks “will continue to receive billions in incentive payments for helping borrowers who signed up for HAMP for seven years.”
No wonder commentators have said that HAMP was designed to help the bankers, not the home owners.
HAMP was a Political Disaster
HAMP failed the Obama Administration as badly as it failed the home owners. As early as January 2010, the New York Times warned President Obama that the lack of “serious relief for homeowners” was damaging the Democratic party politically. Voters watched while “the federal government rescued banks, financial firms and auto companies, but they themselves feel adrift, still awaiting the kind of decisive leadership on jobs and housing — in terms of both style and substance — that Mr. Obama promised in 2008.”
The Administration failed to heed the warnings of its media supporters. The political damage caused by HAMP continued the present.
The decision to protect banks over homeowners was debilitating. A tide of cynicism swept out Democrats in the last…elections, with voters more skeptical than ever that government can solve problems, or take the people’s side over the financiers. Two-thirds of voters in exit polls found the economy to be rigged for the wealthy.“The consequence of these decisions was the disillusionment of his base in believing that political action is going to work,” says Damon Silvers. “They weakened the Obama presidency in ways he could never recover from.”
That prediction that the Obama presidency would never recover from the damage caused by the HAMP Program was written February 2015. It was born out by the collapse of the Obama coalition and the defeat of Hillary Clinton in 2016.
No Bureaucratic Program Please!
Republicans could have predicted that HAMP would fail. In fact, they did, as early as 2011.
“To many struggling Americans seeking permanent mortgage relief, HAMP offered little more than false hope. More homeowners have been kicked out of the program than have received permanent relief,” Rep. Darrell Issa, the California Republican who chairs the House Oversight Committee, said in a statement.
HAMP was a complex government program. As Republicans are quick to point out, complex government programs often don’t work as promised. You can look at this 255 page instruction manual, written by Fannie Mae, and see why: bureaucracy “in action.”
Rather than a new program, there’s a simple change in the law that will work wonders. Less than twenty years ago (before 1998), hard pressed consumers could discharge their student loans in bankruptcy, as long as the student loan had been in payment status for seven years.
Before 1976, student loans were dischargable in bankruptcy the same as any other debt. The special status of student loans is a recent change in the law. It can easily be corrected.
What’s Wrong With Just Expanding the Obama Public Service Loan Forgiveness
Congress authorized, and the Obama Administration implemented, a program for forgiveness of Federal student loans for people working in “public service” who make 120 monthly payments (10 years worth). Rep. Karen Barr (D-CA-37) introduced a bill, HR 5487, that would remove the “public service”requirement—making student loan relief possible for people working in the private sector.
(The “pubic service” requirement essentially discriminates in favor of government employees, who are probably not underpaid. But expanding a failing program is not the best way to do that.)
Like the HAMP program, the PSFL is set up by Federal regulations which the private loan servicer is required to follow in dealing with the consumer. Little wonder that only a tiny fraction of those eligible have signed up. (Only 295,000 people, according to one estimate, out of 43 million student loan debtors, one quarter of whom may be eligible for PSLF. A participation rate of 2%.)
Like its bigger cousin HAMP, PSFL has become the subject of litigation in court, for unfair rulings on what is and isn’t “public service.”
None of the websites describing this program give credit to George Bush, who signed it into law. Nor are any of the handful of people who might be finishing the ten year commitment likely to remember him.
The promise of student loan relief ten years down the road does nothing to provide economic growth now. As long as that student loan debt sits on a consumer’s credit report, it weighs down the consumer’s debt to income ratio, making it harder for that consumer to buy a home, start a family and save for the future.
For those who need it, Bankruptcy Provides Student Loan Relief Now
In 2005, Congress enacted more stringent tests to discourage unnecessary bankruptcy filings. Bankruptcy filings are at a historic low, with only 30 people per 1000 filing bankruptcy annually. Restoring the pre-1998 legal status of student loans in bankruptcy, Congress can provide immediate student loan relief to borrowers who need it—with safeguards already in place to prevent abuse. Economic activity will increase, as more young families are able to buy homes.
This approach implements the commitment of the Trump Administration to change with immediate impact and no bureaucracy.
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