Analysis: Canceling Student Debt Has a Life-Changing Effect on Borrowers — and Raises Their Income by an Average of $4,000

Analysis: Canceling Student Debt Has a Life-Changing Effect on Borrowers — and Raises Their Income by an Average of $4,000

ABI Bankruptcy Brief

May 9, 2019

ABI Bankruptcy Brief

Analysis: Canceling Student Debt Has a Life-Changing Effect on Borrowers — and Raises Their Income by an Average of $4,000

Cancelling student loans frees up borrowers to make decisions that can improve their financial lives, according to a working paper distributed this week by the National Bureau of Economic Research, reported yesterday. When roughly 10,000 borrowers had their private student loans cancelled, they were more likely than similar borrowers to move, change jobs or return to school, the paper found. They also saw their incomes increase by $4,000 over a three-year period on average, which equates to roughly two months’ salary on average. In addition, these borrowers were less likely to rely on other forms of credit — reducing their indebtedness by 26 percent — and 12 percent less likely to default on those accounts, the researchers found. “There are quite significant benefits of intervening in the student loan market by forgiving student debt,” said Marco Di Maggio, a professor at Harvard Business School and one of the authors of the paper.

The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Click here to download your copy.

Sanders, Ocasio-Cortez Want to Cap Credit Card Interest Rates at 15 Percent

Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) will introduce legislation today to cap credit card interest rates at 15 percent, the Washington Post reported. Sanders, the Vermont senator running for the Democratic nomination for president, said that a decade after taxpayers bailed out big banks, the industry is taking advantage of the public by charging exorbitant rates. “Wall Street today makes tens of billions from people at outrageous interest rates,” he said. Ocasio-Cortez (D-N.Y.) will introduce the House version of the bill. “There is no reason a person should pay more than 15 percent interest in the United States,” she said on Twitter. “It’s a debt trap for working people + it has to end.” In addition to a 15 percent federal cap on interest rates, states could establish their own lower limits under the legislation.

Commentary: Leveraged-Loan Pushback Is Too Little, Too Late

For fund managers, it’s easy to be picky when money is tight, but not so simple when they’re rolling in cash, according to a Bloomberg commentary on Tuesday. Leveraged-loan investors are suddenly willing to push back on the pervasive weakening of covenants, the safeguards in offering documents that are meant to protect creditors. In January, Moody’s Investors Service determined that covenant quality in leveraged loans was the worst on record in the third quarter of 2018. It hasn’t gotten much better since. On Monday, the Federal Reserve echoed that sentiment, further amplifying its warnings about risky corporate debt in a twice-a-year financial stability report. “Credit standards for new leveraged loans appear to have deteriorated further over the past six months,” the Fed said, with its board voting unanimously to approve the document. “The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors.” It might be too little, too late for investors to get tough on leveraged-loan issuers, according to the commentary. Already, UBS Group AG estimates that loan owners may end up recouping about 40 cents on the dollar in a downturn, potentially less than half what they’d historically expect to get. Moody’s has estimated recovery rates of 61 percent on first-lien loans and 14 percent on second-lien obligations in a recession, down from long-term historical averages of 77 percent and 43 percent, respectively.

Pensions Have Tripled Their Investment in High-Risk Assets, but Research Questions Whether It Is Paying Off

Public pensions are more invested than ever before in high-risk and expensive assets like real estate and hedge funds, yet research continues to show that this tactic is unlikely to improve their earnings, Governing magazine reported yesterday. According to Fitch Ratings, in the span of a decade, pensions tripled their average investment in these so-called alternative investments. In 2007, they averaged 9 percent of state and local public pension investment portfolios. By 2017, that number had risen to 27 percent. During that period, median average returns on overall investments were 6.2 percent, according to Fitch. But during the longer period between 2001 and 2017, reflecting a time of less reliance on alternative investments, they were actually slightly better: 6.4 percent. “If you look at trends and allocation to riskier assets and the returns we see alongside them, you clearly see that you can’t necessarily say you’re getting the bang for the buck over the last 17 years,” says Fitch analyst Olu Sonola, who authored the report. The report adds to the growing body of evidence that alternative investments are not worth the extra cost and risk. In fact, they may be lowering pensions' earnings and costing state and local governments more money. Pensions' average investment returns — overall, not just on alternatives — failed to meet expectations between 2001 and 2017, even though those expectations lowered from 8 percent to 7.5 percent. Plans that don’t meet expectations require state or local governments to put more money in pension systems. Even high-performing pension systems like Colorado, Oklahoma, Utah and Wisconsin have had to increase their payments or give up being fully funded for this reason.

Trump Taking Aim at ‘Surprise Medical Bills’

President Donald Trump will begin a push today to fight health care sticker shock by limiting “surprise medical bills,” the unexpected charges faced by insured patients when a member of a health care team that treated them is not in their insurer’s network, the Associated Press reported. Senior administration officials said that Trump will outline principles he can support as part of legislation to limit such billing practices. Patients being treated for medical emergencies often are in no position to check into whether their insurers have contracted with their surgeons or anesthesiologists to provide medical care. Trump wants to make it clear that patients who receive emergency care should not be hit with charges that exceed the amount paid to in-network providers. “Surprise” bills amounting to tens of thousands of dollars can hit patients and their families when they are most vulnerable — after a medical emergency or following a complex surgical procedure. Often patients are able to negotiate lower charges by working with their insurers and the medical providers. But the process usually takes months, adding stress and anxiety. The officials said that the legislation also should protect patients seeking elective care by ensuring that they are fully informed before scheduling their care about which providers will be considered out of network and what extra costs that will generate.

Small Mortgages Are Getting Harder to Come By

Some low- and middle-income home buyers are having a hard time getting mortgages for an unexpected reason: The loans they’re applying for are too small, the Wall Street Journal reported today. Lenders extended about 106,000 mortgages with balances between $10,000 and $70,000 in the U.S. last year, worth $5.1 billion. That is down 38 percent from almost 171,000 in 2009, according to figures compiled by Attom Data Solutions, a real estate data firm. The drop-off at the bottom end of the market has been far swifter than at the top. Origination was down a more modest 26 percent for mortgages between $70,000 and $150,000, and it rose 65 percent for mortgages above that range. Only about a quarter of homes that sold for less than $70,000 were financed with a mortgage, while almost 80% of sales between $70,000 and $150,000 had one, according to an Urban Institute analysis last year. Low-end borrowers had their applications denied at a higher rate than those taking out bigger mortgages even when comparing borrowers with similar credit quality, according to the think tank.

Latest ABI Podcast Examines the Intersection of Tribal Sovereignty and Bankruptcy

ABI Editor-at-Large Bill Rochelle talks with former ABI Resident Scholar Prof. Jack Williams of Georgia State School of Law (Atlanta) about the intersection of tribal sovereignty and bankruptcy law. Williams, who is of Native American descent and coordinates outreach to Native American tribes on ABI's Veterans Affairs Task Force, analyzes emerging issues regarding tribal sovereign immunity, the collision between state and tribal jurisdiction, and a brewing dispute over the ownership of former tribal lands and mineral rights. Click here to listen.

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New on ABI’s Bankruptcy Blog Exchange: Dear CFPB: Let the QM ‘Patch’ Expire

A GSE exemption in the Consumer Financial Protection Bureau’s “qualified mortgage” rule is set to sunset in 2021, and regulators should not try to extend it as some experts have suggested, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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