Friday, December 9, 2016

Globe University will probably file for bankruptcy. Why can't students who took out loans to attend Globe get bankruptcy relief as well?

Globe University/ Minnesota School of Business is collapsing like a house of cards. Last September, a Minnesota judge ruled that Globe/MSB violated Minnesota consumer protection laws, and the Minnesota Office of Higher Education began the process of barring it from doing business in the state of Minnesota.

In October, the U.S. Department of Education ordered Globe to stop enrolling students, and this month, DOE cut off all federal student-aid funding to Globe.  Globe cannot survive without federal student aid money; and its seems likely it will file for bankruptcy in the near future.

Bankruptcy is a good thing for failing colleges.  In fact, several higher education institution filed for bankruptcy during the last two years, including: Corinthian Colleges, ITT Tech Services, Anthem College, and Dowling College.  Bankruptcy will allow Globe to shut down operations in an orderly manner and ensue that its creditors are treated fairly and equitably.

If Globe/MSB files for bankruptcy, it will be required to list its assets. Those assets will likely include loans it made to its own students. Kyle McCarthy, writing for the Huffington Post in 2014, reported that 42 percent of Globe's students had private loans; and some of these loans were originated by Globe University, Minnesota School of Business, or Terry Myhre, the owner of Globe University.

Ironically,  Globe University has easy access to the bankruptcy courts, where it will be able to shed some if not all of its debt; but Globe's students who file for bankruptcy will find it almost impossible to get relief from their debts to Globe. And this is true in spite of the fact that a judge found that Globe had committed fraud.

Why is this? Because private student loans issued by for-profit colleges, like federal student loans, cannot be discharged in bankruptcy unless the debtor can show that repaying the loans will cause "undue hardship," a very difficult standard to meet.

Obviously, this is a grave injustice. In my view, students who took out loans from for-profit colleges that committed fraud should have all their student loans automatically forgiven: federal loans, private loans, and loans issued by the college themselves.

Terry Myhre, owner of Globe University, receiving an award from the Daughters of the American Revolution


References

Christopher Magan. Fraud ruling threatens Globe U, Minnesota School  of Business with closure. Twin City Pioneer Press, September 8, 2016.

Judge Orders Globe University, Minnesota School of Business to Stop Fraudulent Marketing. KSTP Televsion News, September 10, 2016.

Kyle McCarthy. Globe University: Profiting Off the Backs of Students and Taxpayers. Huffington Post, January 23, 2014.

Shahlen Nasiripour. Corinthian Colleges Files for Bankruptcy. Huffington Post, May 5, 2015.

Andrew Skurria. Dowling College Files for Chapter 11 Bankruptcy. Wall Street Journal, November 29, 2016.

U.S. Department of Education. Globe University, Minnesota School of Business Denied Access to Federal Student Aid Dollars. U.S. Department of Education press release, December 6, 2016.

Tuesday, December 6, 2016

The Department of Education denies student-aid money to Globe University and Minnesota School of Business: Surely the end is near for Globe/MSB

The Department of Education announced this week that it is suspending Globe University and Minnesota School of Business from participating in the federal student aid program. Last September a Minnesota judge ruled that Globe and MSB had fraudulently marketed their criminal justice programs, and the Minnesota Office of Higher Education began the process of revoking the schools' authorization to operate.

Globe and MSB had over 9,000 students as recently as 2010, but enrollments plummeted after the Minnesota Attorney General's Office began investigating the institutions. According to a news story, students spent as much as $80,000 to obtain degrees in criminal justice, but these degrees did not lead to jobs as Minnesota police or probation officers. Apparently, the schools' programs were not accredited by the Minnesota Board of Peace Officer Standards and Training.

 It is hard to see how Globe and MSB can continue to operate without as steady infusions of federal student-aid money. Together the two schools received more than $50 million in federal aid money for the 2014-2015 academic year.  Earlier this year, DOE cut ITT Tech off from federal student-aid money, and that institution closed and filed for bankruptcy shortly thereafter. It seems likely that Globe University and MSB will be closing soon--perhaps within a few weeks.

It is good to see DOE and state attorneys general going after for-profit institutions that prey on unwary students. Without a doubt, vigorous enforcement actions will force a lot of shady institutions to close.

But hundreds of thousands of students have taken out billions of dollars in federal student loans to attend for-profit institutions, and their student loans are not automatically forgiven if the institution they attended is found liable for fraud. Although DOE has a closed-school loan forgiveness program and a process whereby students can seek loan forgiveness if they were defrauded by the college they attended, both processes are cumbersome and slow.

In my view, all students who attended a for-profit college should have their student loans automatically forgiven if the college they attended is found liable by a competent court of defrauding students  or violating consumer protection laws. Of course, discharging all these student loans would be a huge hit for taxpayers, but it is not fair for students who were lured into taking out loans to receive substandard training or education from sketchy for-profit colleges to be burdened by debt they simply will never be able to pay.




References

Christopher Magan. Fraud ruling threatens Globe U, Minnesota School  of Business with closure. Twin City Pioneer Press, September 8, 2016.

Judge Orders Globe University, Minnesota School of Business to Stop Fraudulent Marketing. KSTP Televsion News, September 10, 2016.

U.S. Department of Education. Globe University, Minnesota School of  Business Denied Access to Federal Student Aid Dollars. US. Department of Education Press Release, December 6, 2016.

 

Saturday, December 3, 2016

California bar exam pass rate hits 32-year low, but law-school graduates who fail the bar exam must still pay off their student loans

Last July, 7,737 people sat for the California bar exam, and only 3,332 test takers passed--a 43 percent pass rate. A total of 4,405 people--57 percent of test takers--failed the exam, the lowest pass rate since 1984.

In all 50 states, J.D. graduates cannot practice law until they pass a bar exam pass.  Thus, the 4,405 law graduates who failed the California bar exam last July suffered a major setback in their professional careers.

They also suffered a financial catastrophe. The average J.D. graduate leaves law school with more than $100,000 in student-loan debt; and that debt must be paid regardless of whether the graduate passes a bar exam or ever gets a job as a lawyer. Without a doubt, a majority of the people who failed the California bar exam last July have student-loan debt.

Obviously, the risk of failing the bar is not equally distributed among test takers. People who graduate from ABA accredited law schools have higher pass rates on the California bar exam than people who attended a law school that is only accredited by the state of California. Sixty percent of test takers who graduated from out-of-state ABA accredited schools passed the July bar exam, while only 21 percent of people who attended state-accredited schools passed.

And people who fail the bar exam the first time they take it have a lower pass rate than overall test takers if they retake the exam. Among exam repeaters, only 17 percent passed the California bar exam last July. Pretty bad odds.

The California bar exam results are just another indication that the future for many law-school graduates is bleak. The legal job market has less than six  lawyer's job for every ten new law graduates, and it offers no law jobs for graduates who cannot pass the bar. People who graduate high in their class from a prestigious law school such as Harvard or Stanford are eminently employable, but people who graduate in the bottom half of their class or who attend bottom-tier law schools may never obtain a job that will justify the student-loan debt they piled up to get a law degree.
So if you are thinking about going to law school, here's my advice.  Read Paul Campos' book titled Don't Go to Law School (Unless). And heed Campos' warning; unless you have family connections or are admitted to a top-tier law school, you probably should not take out student loans to pursue a legal career.

And if you went to law school, can't find a law job, and are unable to pay off your student loans, you should consider bankruptcy. But if you go that route and try to get your law-school loans discharged, you must educate the bankruptcy judge about the terrible job market for lawyers.

Now if we can just find a job.


References

Paul Campos. Don't Go to Law School (Unless). 

Kyle McEntee. Law Grads Still Face Tough a Job Market. Bloomberg  Law, May 4, 2016.

Noam Scheiber. An Expensive Law Degree and No Place to Use It. New York Times, June 17, 2016.

Ann Yarbrough. Bar exam pass rate dips to 32-year low. California Bar Journal, December 2016.


Friday, December 2, 2016

Sandy Baum's new book on student debt contains some good ideas

In the past,  I have been critical of Sandy Baum's work on the federal student-loan program. In my view, she sometimes drastically understated the enormity of the student-loan crisis. But her new book, titled Student Debt: Rhetoric and Realities of Higher Education Financing, contains some good ideas, which I endorse.  Here are some of her most important recommendations:

"Don't Garnish Social Security Payments." I have long argued that the federal government should stop garnishing the Social Security checks of elderly student-loan defaulters. Baum agrees. As she put it, it is one thing for the government to garnish wages of student-loan defaulters or scoop up defaulters' tax refunds, but "[f]urther diminishing the living standards of senior citizens . . . with no potential for labor market earnings who are struggling to make ends meet on their Social Security payments is quite another thing." Bravo.

Stop giving private lenders special protection in the bankruptcy courts. In 2005, Congress amended the Bankruptcy Code to make private student loans nondischargeable in bankruptcy unless the borrower could show "undue hardship," the same standard that applies to federal student loans. This is wrong.

As Baum observed, "[t]here is no good reason for the government to sanction these unsecured loans as student loans or to grant them any special provisions, particularly . . ., protection from bankruptcy proceedings." This is an eminently sensible observation, and other respected policy commentators agree with Baum on this.

Treat student loans like any other unsecured debt in bankruptcy. I have argued for years that student loans should be treated like any other unsecured debt in bankruptcy and that the "undue hardship" provision in the Bankruptcy Code should be repealed or at least interpreted far more humanely. 

I was heartened to read that Baum, a leading expert on the federal student loan program, agrees with me on this point. Indeed, reforming bankruptcy laws to allow distressed student-loan debtors relief from oppressive student loan debt is the key to reforming the entire student loan program.

Other reforms Baum proposes. Baum made some other good points in her book. For example, some limits should be placed on the amount of money people can borrow to fund their college studies; and some limit needs to be placed on the amount of interest that can accrue on student-loan debt. She also said limits should be placed on the amount elderly people can borrow to fund their studies since they won't work long enough to pay off enormous amounts of student-loan debt.

Baum makes other good points in her book. But the reforms I've listed here are critical.  If the policy makers aren't going to listen to me (and so far they have not), then perhaps they will listen to Sandy Baum.

References

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016. 

Department of Education miscalculates cost of income-driven student-loan repayment plans: More accounting fraud

The Obama administration touts long-term, income-driven repayment plans (IDRs) as a good solution for overburdened college borrowers who are struggling to pay back their student loans.  About 5.3 million borrowers are in IDRs now, and the Department of Education (DOE) hopes to enroll 2 million more borrowers in these plans over the next year.

IDRs allow borrowers to make student-loan payments based on their income, not the amount they borrowed, and to stretch the loan repayment period out from 10 years to 20 or even 25 years.

IDRs lower borrowers' monthly payments, which is a good thing. And, if IDR borrowers faithfully make their monthly loan payments for the entire repayment term (20 or 25 years), any remaining unpaid debt is forgiven.

And therein lies the big problem with IDRs. Many IDR borrowers are making payments so low that their payments do not cover accruing interest. Thus a substantial percentage of people in IDRs are seeing their loan balances grow over time--not shrink, even when they are making all their monthly payments on time. Many people in IDRs will never pay off the principal of their debt, which means that their student-loan debt will ultimately be forgiven with the forgiven amount being absorbed by taxpayers.

DOE regularly calculates the cost of IDRs to taxpayers,  but according to a report issued last month by the U.S. Government Accountability Office, DOE has seriously miscalculated those costs. GAO estimates that  $352 billion in federal student loans is being paid through IDRs for the 1995 through 2017 cohorts.  Of that amount, $137 billion--39 percent--will not be repaid (GAO report, p. 51). This is nearly double DOE's estimate of 21 percent.

GAO concluded that DOE has miscalculated the costs of IDR for several reasons:
  • DOE did not differentiate among different IDR programs when calculating costs, in spite of the fact that some IDRs are more generous toward borrowers than others.
  • DOE originally assumed that no one in GRAD PLUS programs would participate in IDRs, even though GRAD PLUS borrowers are eligible to participate. In fact, a lot of unemployed or underemployed people with graduate degrees are opting for long-term, income based repayment plans as the only way to manage their enormous debt.
  • DOE assumed that all IDR participants would recertify their income annually, which is a requirement for continued IDR participation.  In reality, more than half of IDR participants are not recertifying their income on an annual basis, causing those individuals to be ejected from their income-drive repayment plans.
  • DOE's cost analyses assumed that people in standard repayment plans would not switch to IDRs (GAO report, p. 37), but the Obama administration is actively encouraging borrowers to switch to IDRs. Currently, 40 percent of all federal student-loan dollars are now being  repaid through some sort of IDR (GAO report, p. 8).
The GAO also observed that DOE has made repayment projections based on the assumption that monthly payments would increase as borrowers' incomes go up over the years. But, as GAO pointed out, it is "challenging" to predict how much IDR borrowers' income will change over time and how much of their original loan balances will ultimately be forgiven and charged to taxpayers.

Jason Deslisle, a fellow at the American Enterprise Institute, said this about the GAO report: "Really what the GAO is saying is that the Obama administration's expansion of this [IDR] program has been done without good information about the effects."  And Alexander Holt, a policy analyst at New America, said the report shows "insane incompetence" on the part of DOE. 

But in essence, DOE is engaged in accounting fraud. We really don't know what it costs taxpayers to herd millions of student borrowers into IDRs, and DOE doesn't want us to know.

And you know what? DOE doesn't care what it costs. All it is doing is maintaining the charade that the federal student loan program is under control when in fact millions of Americans have student-loan debt they will never pay back.

References

Andrew Kreigbaum. GAO Report finds costs of loan programs outpace estimates and department methodology flawed. Inside Higher Ed, December 1, 2016.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.





Wednesday, November 30, 2016

Betsy DeVos, Trump's choice for Secretary of Education, has the power to ease the suffering of student-loan debtors

Betsy DeVos, Donald Trump's choice for Secretary of Education, has no experience in higher education, and that may be a good thing for student-loan debtors.

Most commentators on the student-loan crisis are insiders who want to maintain the status quo regarding the federal student loan program. The universities depend on regular infusions of student-loan money, which enables them to raise their tuition prices year after year at twice the rate of inflation.

But DeVos has no ties to higher education at all, and thus she has the capacity to look at the student-loan catastrophe from a fresh perspective. In fact, DeVos has the power to do one simple thing that could potentially bring relief to millions of distressed student-loan debtors.

Under current bankruptcy law, debtors cannot discharge their student loans in bankruptcy unless they can show that repaying the loans will cause them "undue hardship."  In nearly every case, the Department of Education and the student-loan guaranty companies argue that student-loan debtors should be denied bankruptcy relief under the undue hardship standard.

Instead, they routinely demand that distressed college borrowers enroll in long-term income-based repayment plans that can last for 20 or even 25 years.  And DOE and its debt collectors make this demand even when debtors' income is so low that they pay nothing or next to nothing under the terms of these plans.

Here are some examples:
  • In the Edwards case, decided last spring, Educational Credit Management (ECMC) argued that Rita Gail Edwards, a woman in her mid-50s, should pay $56 a month for 25 years to service a debt of almost a quarter of a million dollars! 
  • In the Roth case, ECMC opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on Social Security income of less than $800 a month. Instead, ECMC wanted Roth to enter a long-term repayment plan even though ECMC conceded that Roth's income was so low that she would pay nothing under the plan. 
  • In the Abney case, DOE wanted Abney, a 40-year-old father of two, to enter a 25-year income-based repayment plan. Abney was living on $1200 a month and was so poor he couldn't afford a car and rode a bicycle to get to his job.
In essence, DOE and the debt collectors maintain that almost no one is entitled to discharge their student loans in bankruptcy and that everyone should be placed in long-term, income based repayment plans.

What if Secretary DeVos simply decreed that DOE and the loan guaranty agencies will stop pushing long-term repayment plans in the bankruptcy courts and would consent to bankruptcy discharges for people like Roth, Edwards, and Abney? (Incidentally, in all three cases, the bankruptcy courts rejected the creditors' arguments and discharged the student loans in their entirety.)

By consenting to bankruptcy discharges for people like Abney, Edwards and Roth, the Department of Education would signal to the bankruptcy courts that it supports a less harsh interpretation of the "undue hardship" standard. That would open the door for thousands of people of distressed debtors to file bankruptcy to discharge their student loans.

Some people might argue that my proposal would unleash a flood of bankruptcy filings that would undermine the financial integrity of the federal student loan program. But let's face facts. People like Roth, Edwards and Abney would never have paid back their student loans, and placing them in 25-year repayment plans that would have obligated them to make token payments that would have done nothing more than maintain the cynical fiction that their loans weren't in default.

Wouldn't it be better for DOE to be candid about the student-loan crisis and admit that millions of people will never pay back their loans? Wouldn't it be better public policy to allow honest but unfortunate debtors to get the fresh start that the bankruptcy courts are intended to provide?

Betsy DeVos is fresh on the scene of the student-loan catastrophe. Let's hope she brings some fresh thinking to the U.S. Department of Education.


Mark http://www.nytimes.com/2016/11/23/us/politics/donald-trump-president-elect.html?action=click&contentCollection=Opinion&module=RelatedCoverage&region=EndOfArticle&pgtype=article

Saturday, November 26, 2016

American Bar Association begins cracking down on mediocre law schools: Too little, too late

After waking from a long slumber, the American Bar Association is finally cracking down on mediocre law schools. A few days ago, the ABA censured Valparaiso University School of Law and placed Charlotte School of Law on probation. According to the ABA, both schools had violated ABA standards requiring law schools to only admit students who are likely to pass the bar exam.

This is not the first time that ABA has censured a mediocre law school. Last summer, the ABA's accrediting unit recommended against  accrediting the newly organized University of North Texas School of Law and cited Ava Maria Law School for failing to comply with ABA quality standards. Like Charlotte and Valparaiso, UNT and Ava Maria received ABA raspberries for low admission standards.

But the ABA's sanctions against four mediocre law schools is too little and too late. The job market for lawyers has imploded; and law chool admission applications have plunged. Many second- and third-tier law schools have had to lower their admissions standards just to fill empty seats; consequently, a lot of law schools are graduating a high number of students who will have difficulty passing their bar exams.

Law School Transparency (LST), a watchdog organization that monitors law school admission standards and bar pass rates, identified a great many law schools that have very low admission standards. LST constructed a model for determining when law school admission standards are so low that students run the risk of failing the bar, and it found a high number of law schools with dicey admission standards.

These are some of LST's most startling findings from its 2015 report on law schools' admission standards for their 2014 entering classes:
  • Seven law schools had admitted students with qualifications so low that 50 percent of their freshman classes ran an extreme risk of failing the bar exam. Those schools included Southern University Law Center, a historically black institution; and Arizona Summit and Florida Coastal, two for-profit law schools.
  • Twenty-six law schools had admission standards so low that 25 percent of their entering classes were at extreme risk of failing the bar.  Texas Southern, another historically black law school, is on that list, along with several regional public institutions, including North Carolina Central University, Ohio Northern University, and Southern Illinois University.
  • Twenty-nine law schools had admission standards so low that 25 percent of their entering classes ran a very high risk of failing the bar exam. Among this number were John Marshall Law School, a for-profit institution; Widener University, a private school; and University of Arkansas at Little Rock, a public institution.
It is the ABA's responsibility to monitor law schools' quality standards, and it fell down on the job. In fact, an advisory panel for the Department of Education recently recommended that the ABA's authority to accredit more law schools be suspended for a year--an astonishing rebuke to a very powerful professional organization.

But even if the ABA gets serious about enforcing quality standards at the nation's law schools, thousands of law-school graduates have already been seriously injured. On average, an individual graduates from law school with $140,000 in student-loan debt; and there are now two newly minted attorneys for every available law job.

Some law graduates have sued their law schools for misrepresentation, arguing they were lured into enrolling based on misleading job placement rates that the law schools disseminated. So far, these suits have been unsuccessful. Thomas M. Cooley Law School and Thomas Jefferson Law School, for example, successfully defended lawsuits filed by their graduates.

A number of law school graduates have filed bankruptcy in an attempt to discharge their student loans. Some have been successful or at least partly successful--the Barrett case and the Hedlund case. Others have lost their adversary lawsuits: Mark Lilly and Mark Tetzlaff.

In my view, people who graduated from second- and third-tier law schools with mountains of debt and no law job should seriously consider filing bankruptcy. But if they pursue this course, they must educate the bankruptcy judge about the terrible job market for lawyers and the high debt load that most law graduates now carry.

As the crisis in legal employment becomes more evident, I think bankruptcy judges will become more and more sympathetic toward law school graduates who are burdened by heavy debt loads and don't have law jobs. I think judges might be particularly sympathetic to debtors who graduated from second- and third-tier law schools given the terrible job prospects for these people.

As I said, educating the bankruptcy judge is critical. The data collected by Law School Transparency is a good place to look for data that will help bankruptcy judges understand the absolutely desperate plight of many recent law scool graduates.

References

Barrett v. U.S. Department of Education, 545 B.R. 645 (Bankr. N.D. Cal. 2016).

Paul Fain. Federal panel votes to terminate ACICS and tightens screws on other accreditors. Inside Higher Ed, June 24, 2016.

Andrew Kreighbaum. ABA Censures Law School. Inside Higher Ed, November 22, 2016.

Andrew Kreighbaum. ABA Tighens Up. Inside Higher Ed, August 31, 2016.