Student Loan Balances and Repayment Behavior Worse for Private Colleges

ABI Bankruptcy Brief

August 8, 2019

ABI Bankruptcy Brief

Student Loan Balances and Repayment Behavior Worse for Private Colleges

A study recently released by the New York Fed found that during the 2000-10 period, student loan balances at college exit increased and repayment behavior deteriorated for those pursuing undergraduate certificates and associate's and post-bachelor’s degrees at private institutions, relative to those pursuing such degrees at public institutions. Declines in repayment behavior at private institutions were sharpest for associate’s degrees and undergraduate certificates, according to the study by Meta Brown, an associate professor of economics at Stony Brook University, Basit Zafar, an associate professor of economics at Arizona State University, Rajashri Chakrabarti, a senior economist at the Federal Reserve Bank of New York and Wilbert van der Klaauw a senior vice president at the Federal Reserve Bank of New York. "Those [students] holding loans that are delinquent or in default may experience immediate financial hardship; down the line, they may see a reduction in their credit scores that makes it difficult for them to obtain home or car loans or even to find a job (since many jobs now make hiring conditional on a credit report check)," the researchers write. "Lack of credit access could further adversely affect consumption, which in turn could act as a drag on GDP growth."

The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Listen to this podcast to find out more and click here to download your copy of the Final Report.

Analysis: Farmers Struggle as Trade War Intensifies

Hundreds of other farmers around the country, grappling with rising debt, dismal commodity prices and the fallout of the Trump administration’s trade wars, are facing the same fate, the Washington Post reported. Net farm income has dropped by nearly half in the past five years, from $123 billion to $63 billion. Dairy producers were already struggling with low prices due to oversupply and America's new thirst for alternatives such as soy milk when the Trump administration’s trade wars with Mexico, Canada and China hit, sending exports plunging and exacerbating gluts of various commodities. Dairy farmers have lost at least $2.3 billion in revenue since the trade wars began, according to the National Milk Producers Federation.

The U.S. Senate on Aug. 1 passed a bill that will make it easier for more farmers with larger amounts of debt to file for bankruptcy protection, Reuters reported. The bipartisan bill — H.R. 2336, the "Family Farmer Relief Act of 2019" — raises the ceiling on how much debt producers who file for chapter 12 bankruptcy can have, to $10 million from the previous $4 million. The bill awaits the President's signature into law.

Inflated Bond Ratings, a Catalyst of the Financial Crisis, Are Back

Inflated bond ratings were one cause of the financial crisis. A decade later, there is evidence they persist. In the hottest parts of the booming bond market, S&P and its competitors are giving increasingly optimistic ratings as they fight for market share, the Wall Street Journal reported. All six main ratings firms have since 2012 changed some criteria for judging the riskiness of bonds in ways that were followed by jumps in market share, at least temporarily, a Wall Street Journal examination found. The problem is particularly acute in the fast-growing market for “structured” debt — securities using pools of loans such as commercial and residential mortgages, student loans and other borrowings. The deals are carved into different slices, or “tranches,” each with varying risks and returns, which means rating firms are crucial to their creation. The Journal analyzed about 30,000 ratings within a $3 trillion database of structured securities issued between 2008 and 2019. The data, compiled by deal-tracker, allowed a direct comparison of grades issued by six firms: majors S&P, Moody’s Corp. and Fitch Ratings, and three smaller firms that have challenged them since the financial crisis, DBRS Inc., Kroll Bond Rating Agency Inc. and Morningstar Inc. The Journal’s analysis suggests a key regulatory remedy to improve rating quality — promoting competition — has backfired. The challengers tended to rate bonds higher than the major firms. Across most structured-finance segments, DBRS, Kroll and Morningstar were more likely to give higher grades than Moody’s, S&P and Fitch on the same bonds. Sometimes one firm called a security junk and another gave a triple-A rating deeming it supersafe.

Mall Landlords Weigh Becoming Lenders to Blunt Retail Apocalypse

Mall landlords accustomed to offering rent reductions to ailing retailers are mulling a new strategy to forestall the industry’s collapse: positioning themselves as lenders to tenants struggling to stay afloat, Bloomberg News reported. Boutique bank PJ Solomon has organized discussions with several mall owners about pursuing such a strategy with troubled retailer Forever 21 Inc. in what could serve as a model for future transactions within the sector. The talks have centered on converting rent and other liabilities into secured debt that could give distressed companies some breathing room to stay out of court, according to sources. If a retailer later goes bust, the arrangement could give landlords a stronger say in the restructuring process because lenders get higher priority in a bankruptcy. The landlords potentially could use their preferred status to bid for assets, swapping their unpaid claims for ownership. For mall operators dealing with wave after wave of closings, the situation is critical. More than 7,500 U.S. retail storefronts have shuttered this year alone, according to Coresight Research, dwarfing openings as chains such as Payless Inc. and Gymboree Corp. ceased operations.

Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

Zombie Debt: How Collectors Trick Consumers into Reviving Dead Debts

Debt collectors lose the right in many states to sue consumers after three or more years. But there’s a loophole: If the consumer makes a payment, even against his or her own will, that can be used to try to revive the life of the debt, the Washington Post reported. The practice could prove increasingly profitable as the country’s consumer debt reaches record levels — more than $4 trillion this year — and the industry is able to bring in “tens of billions of dollars” from debt past the statute of limitations every year, according to a report by the Receivables Management Association International. The efforts to collect on old debts often focus on getting consumers to reset the statute of limitations through a variety of means, including sending them credit cards that let them pay off their old debts or by allowing them to make a small payment to halt debt collection calls. The efforts have contributed to the flood of debt-collection lawsuits clogging courts across the country, consumer advocates say. In New York City, the number of debt-collection lawsuits surpassed 100,000 last year, compared with 47,000 in 2016, according to data from the New Economy Project, an advocacy group. Texas and Washington state passed legislation this year making it more difficult to revive debt past its statute of limitations, but the industry successfully fought efforts in other states, including New York. And consumer advocates worry that new rules proposed by the Consumer Financial Protection Bureau — the first major update to the Fair Debt Collection Practices Act in more than 40 years — could further bolster the industry.

America’s Pension Funds Fell Short in 2019

Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers, the Wall Street Journal reported. Public plans with more than $1 billion in assets earned a median return of 6.79 percent for the year ended June 30, the lowest since 2016, according to Wilshire Trust Universe Comparison Service data released Tuesday. Public pension plans project a median long-term return of 7.25 percent, according to data collected by Wilshire Associates in 2018. Overall, a decade-long bull market in stocks has been good for pensions. Large public plans had five years of double-digit returns and a 10-year annualized return of 9.7 percent for the year ended June 30, according to Wilshire. But those returns still haven’t brought pension funding levels close to what is needed to pay for future benefits. State and local pension plans have about $4.4 trillion in assets according to the Federal Reserve, $4.2 trillion less than they need to pay for promised future benefits.

A Growing Problem in Real Estate: Too Many Too Big Houses

Large, high-end homes across the Sunbelt are sitting on the market, enduring deep price cuts to sell, the Wall Street Journal reported. That is a far different picture than 15 years ago, when retirees were rushing to build elaborate, five or six-bedroom houses in warm climates, fueled in part by the easy credit of the real estate boom. Many baby boomers poured millions into these spacious homes, planning to live out their golden years in houses with all the bells and whistles. Now, many boomers are discovering that these large, high-maintenance houses no longer fit their needs as they grow older, but younger people aren’t buying them. Tastes — and access to credit — have shifted dramatically since the early 2000s. These days, buyers of all ages eschew the large, ornate houses built in those years in favor of smaller, more-modern looking alternatives, and prefer walkable areas to living miles from retail.

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New on ABI’s Bankruptcy Blog Exchange: State Regulators Scrutinize Payroll Advance Firms

New York and 10 other states are looking into whether companies in the fast-growing sector are violating payday lending laws, 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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