Tuesday, September 30, 2014

Almost by itself, the Student Loan Program is Destroying the American Middle Class: The sad story of Steve and Darnelle Mason

Several newspapers carried a story about Steve and Darnelle Mason, a married couple who co-signed student loans for their daughter Lisa to attend college.  Lisa borrowed a lot of money--$100,000, but it was probably a good investment because she graduated with a nursing degree that led to a job as a critical-care nurse.
Lisa Mason
Photo credit: Steve Mason &
USA Today

Unfortunately, Lisa died at age 27 of liver failure, leaving three young children.  Had Lisa borrowed the money from the federal student loan program, the debt would have been forgiven with her death.

But Lisa borrowed the money from private banks, and loan-service companies that took over her loans didn't forgive the debt. As co-signers on Lisa's loans, Lisa's parents are liable for the full amount.  And with penalties and accrued interest, that debt has  ballooned to $200,000.

This sad story, which has gained national attention, demonstrates the risk parents take when they co-sign student loans for their children's college education, particularly when they co-sign a loan from a private bank. They are on the hook for the full amount. And unlike the federal student loan program, most banks do not have income-based repayment options. Nor do they grant economic hardship deferments.

Jeffrey Dorfman (2014) recently wrote a story for Forbes arguing that there is no student loan crisis. Dorfman would probably say people like Steve and Darnelle Mason are a rare exception, As Dorfman, pointed out, most people borrow fare less money to attend college than Lisa Mason did, often less than a typical car loan.

It is true of course that the Mason's story is exceptional. Most 27 year-old people don't die. But a lot of them are unable to manage their student loans, and parents who co-sign those loans are on the hook to pay them back.  Parents can lose their retirement savings, the equity in their homes, literally everything they've worked for over a lifetime if they co-sign their child's student loan and the student can't pay it back.

What a lot of parents don't realize is that student loans are very hard to discharge in bankruptcy. In 2005, the banks were able to get Congress to amend the Bankruptcy Code to make private student loans nondischargeable unless the debtor could show "undue hardship."  And  the courts have interpreted "undue hardship" very harshly.  Just a few months ago, a 63-year old man's petition to discharge almost a quarter million dollars in student loans for his children was denied, even though the man was unemployed and about to lose his home in foreclosure (Murphy v. Educational Credit Management Corporation, 2014).

Millions of people are suffering from unmanageable student loans.  Although most people don't borrow as much as Lisa Mason did, even a small loan is impossible to pay if the debtor is unemployed.  And the poor souls who fall behind on their payments and default often see their loan balances double because the creditors add accrued interest and penalties to the unpaid debt.

President Obama and Secretary of Education Arne Duncan know how bad the student-loan crisis is,but their efforts to bring this crisis under control have been feeble.  The Department of Education doesn't report the actual default rate and its solution to the overall problem is to encourage student-loan debtors to sign up for long-term income-based repayment plans.

In essence, the Obama administration's response to the student-loan catastrophe has been to obscure the enormity of the problem, hoping it won't blow up before President Obama leaves office.  What needs to be done?

First and foremost, the Bankruptcy Code must be amended to make unmanageable student -loan debts dischargeable in bankruptcy. This one reform would shut down the private student loan business because the banks would not lend money for education if they knew student-loan debtors could wipe out their student loan debt in a bankruptcy court.

Steve and Darnelle Mason, for example, would be able to discharge their debts in bankruptcy if they had maxed out their credit cards to go on expensive vacations or had foolishly invested in some get-rich-quick scheme. But they can't discharge the student-loan debt that Lisa accumulated in good faith to get a college education, even though it is crushing them financially.

 Day by day, the student-loan program is destroying the middle class by making it impossible for young people to buy homes, start families, and save for their retirement.  And many parents who co-signed student loans for their children are now faced with the loss of their entire life savings.

This state of affairs is not right, and we won't truly begin to deal with the student-loan crisis until we give people who are overwhelmed by student debt a fresh start in bankruptcy.


Grant, Tim. Private student loan debt can outlive student. Pittsburgh Post-Gazette, September 12, 2014. Accessible at http://www.post-gazette.com/business/2014/09/12/Private-student-loan-can-outlive-student/stories/201409120016.

Dorfman, Jeffrey. Time To Stop the Sob Stories About Student Loan Debt. Forbes, September 18, 2014. Accessible at http://www.forbes.com/sites/jeffreydorfman/2014/09/18/time-to-stop-the-sob-stories-about-student-loan-debt/

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Serico, Chris. After daughter's death, parents plead for forgiveness of her $200K student-loan debt. USA Today, July 14, 2014. Accessible at http://www.today.com/parents/after-daughters-death-parents-plead-forgiveness-her-200k-student-loan-1D79996678

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

Wednesday, September 24, 2014

The Department of Education Dishes Out More Baloney About Student Loan Default Rates

During World War I, it was said the British Army kept three different casualty lists: one list to deceive the public, a second list to deceive the  War Office, and a third list to deceive itself.

Something like that is going on with the Department of Education's latest report on student-loan default rates. According to DOE's latest report, which was released today,the three-year default rate actually dropped a full percentage point from 14.7 percent to 13.7 percent.

However, as Inside Higher Ed reported, DOE tweaked this year's report, adjusting rates for some institutions that were on the verge of losing their student aid due to high default rates. Students at these institutions were not counted as defaulters if they defaulted on one loan but had not defaulted on another. According to Inside Higher Ed, the adjustment will be applied retroactively to college's three-year default rates for the past two years.

Thus, as a Chronicle of Higher Education article noted it's "unclear whether [the adjustments for certain schools] or other factors affected the reported percentages."

The bottom line is this: As of today, we don't know whether student-loan default rates really went down or whether DOE's "adjustments" account for the decline.

Arne is full of it!
But it really doesn't matter.  As everyone in the higher education community knows, many colleges with high default rates have hired  "default management" firms to contact former students who are in danger of default and urge them to apply for economic hardship deferments.  Borrowers who get these deferments--and they are ridiculously easy to get--don't pay on their student loans but they aren't counted as defaulters.

Moreover, Arne Duncan's Department of Education has been pushing students to sign up for income-based repayment plans (IBRPs) that will lower students' monthly payments but will extend their repayment period from 10 years to 20 or even 25 years.  As I've said before, many people who obtained IBRPs are making monthly payments so small that the payments do not cover accruing interest. Thus, these people are actually seeing their loan balances get larger even though they are making payments and aren't counted as defaulters.

In short, we don't know what the true student-loan default rate is if it is defined as people who are not paying down their loan balances. But it is a lot higher than the 13.7 percent rate that DOE reported today.

Why is DOE tinkering with the numbers? One reason may be the high student-loan default rates among the HBCUs.  Last year, 14 HBCUs had three-year default rates of 30 percent--high enough to jeopardize their participation in the federal student loan program. This year, Arne Duncan announced that no HBCUs had default rates that would put them at risk of losing federal aid money.

Abrakadabra!  Arne Duncan tinkers a little with definitions and the student-loan default crisis is solved.

As Robert Cloud and I have argued in a forthcoming law review article, one of the three most important things that needs to be done to solve the student-loan crisis is to accurately report the true default rate.  And these are the other two things we must do: 1) provide easier access to bankruptcy for overburdened student-loan debtors, and 2) implement stronger regulations for the for-profit college industry.

But these things are not being done, and the student-loan crisis grows worse with each passing day. Like the British Army during the First World War, DOE doesn't want to know what the true student-loan default rate is and it doesn't want anyone else to know either.


Stratford, Michael. Education Dept. tweaks default rate to help colleges avoid penalties. Inside Higher Education, September 24, 2014.

Thomason, Andy. Student-Loan Defaults Decline in Latest Data, Education Dept. Says. Chronicle of Higher Education, September 24, 2014.

Tuesday, September 23, 2014

A Comment on Susan Dynarski's Op Ed Essay in the NY Times on President Obama's Proposed Federal College Rating System

Susan Dynarski contributed an op ed essay in a recent issue of the New York Times on President Obama's proposed college rating system.  As Ms. Dynarski explained, the President's intent is to rein in college costs.

Ms. Dynarski said up front that she does not think the President's proposal will help bring spiralling tuition costs under control--at least for the public colleges. She urged President Obama to slow down the initiative to put a college rating system in place in order to get it right.

I will go further and say that the President's college rating plan will do nothing to control college costs. Instead, it will simply add another layer of bureaucracy to the nation's higher education sector, which is already burdened with red tape created by efforts to comply with FERPA, the Clery Act, Title IX, the federal student aid program, and a blizzard of "Dear Colleague" letters issued by the Department of Education.

Without a doubt, the nation's elite schools will do just fine under any rating system that President Obama and Secretary of Education Arne Duncan are likely to devise; they have large endowment funds, lobbyists, and lawyers that will make sure they come out on top.  Don't worry about Harvard, Stanford, or Yale.

The HBCUs will also do all right under any rating system that the Obama administration designs; nobody wants to increase pressure on them. And, judging by their past success in fending off effective federal oversight, most of the for-profits will also manage to thrive under any new college rating system that is likely to be put in place.

But, as Ms. Dynarski pointed out, the new rating system will probably hurt the private, nonprofit colleges most, particularly the non-selective nonprofits that do not have large endowments.  Many may be forced to close their doors. She is right to warn that these colleges "will do everything they can to avoid this, including lobbying to tweak the ratings."

I hope President Obama and Secretary Duncan heed Ms. Dynarski's advice and put their college-rating system on the back burner.  If Obama and Duncan want to bring costs under control, they should continue putting the heat on the for-profit college sector, where tuition costs are highest. In my view, the for-profits should be kicked out of the federal student-aid program, which would cause most of them to be shut down. The federal aid money that now goes to the for-profits receive--about $35 billion per year-should be invested in low-cost community colleges.


Dynarski, Susan. Why Federal College Ratings Won't Rein in Tuition. New York Times, September 20, 2014. Accessible at:

Saturday, September 20, 2014

Time To Stop the Sob Stories About Student Loan Debt, Jeffrey Dorfman Said in a Forbes Article. But Dorfman Failed To Analyze Key Signs of Crisis.

Jeffrey Dorfman wrote an online essay for Forbes this week entitled "Time To Stop the Sob Stories About Student Loan Debt."  Basically, Dorfman argued that there is no student-loan crisis, pointing out that most students have only modest student-loan debt loads, usually smaller than a typical car loan.

Mr. Dorfman is right to point out that the number of people who have borrowed extravagantly to
attend college is relatively small. "In fact," Dorfman wrote, "only four percent of households headed by people between 20 and 40 years old have student loan debt of over $36,000 per person and two-thirds of those have a graduate degree to show for that debt."

But I think Mr. Dorman's article overlooked some key data that are very troubling. First, as Mr. Dorfman pointed out, the three-year student-loan default rate is 14.7 percent, and that number is disturbing by itself.  Student-loan default rates have doubled in just six years.

Moreover, the Department of Education's official student-loan default rate only measures people who default in the first three years of the repayment period.  Many people default on their loans after three years. And the student-loan default rate for people who attended for-profit colleges is more than 20 percent.  That's right--one out of five people who attended for-profit colleges during DOE's latest measurement period defaulted within the first three years of repayment!

And, as Senator Tom Harkin's Senate Committee report pointed out, the for-profit colleges are encouraging their former students to get economic hardship deferments that temporarily excuse debtors from making loan payments.  This strategy helps the for-profits keep their institutional default rates down.

But in reality, many people who obtained economic hardship deferments will never pay back their loans, and their loan balances get larger as interest accrues during the time they are not making loan payments.

In my opinion, the student-loan default rate for people who attended for-profit colleges is probably 40 percent when measured over the lifetime of the loan repayment period, and that should alarm everybody--even Mr. Dorfman.

And Mr. Dorfman did not comment on recent reports that more and more people in their late 20s and early 30s are living with their parents and that more than 40 percent of college graduates hold jobs that don't require college degrees. Nor did he comment on recent efforts by the Obama administration to lure student-loan debtors into long-term income-based repayment plans that will require debtors to pay on their loans for 25 years.  Isn't that a sign that the student-loan program is in trouble?

Finally, although Mr. Dorfman is correct to say that most people with student loans have modest loan balances, even $10,000 is very hard to pay off if you are holding a minimum-wage job.  Many of the people who borrowed money to attend for-profit colleges are from low-income families. If those people dropped out of a for-profit college without getting a degree (and a large percentage of people fall into this category), paying off even a small loan may be impossible.

 The Brookings Institution, which Mr. Dorfman cited, has been downplaying the student-loan crisis even as it advocates for long-term repayment plans.  But the crisis is real.

A lot of people who live in Mr. Dorman's world are making money off the federal student loan program or the private student loan industry. Sallie Mae is making money off of student loans, the banks are making money off of private student loans, the loan servicing companies are making money chasing down student-loan debtors who are in default,and colleges and universities are making money as they raise their tuition every year. Goldman Sachs owns an interest in Education Management Corporation, the entity behind several for-profit colleges, and the Washington Post Company has a stake in Kaplan University.

But millions of Americans are suffering under unsustainable student-loan debt, and the crisis grows larger every day. Mr. Dorfman is living in a fantasy world if he thinks otherwise.


Dorfman, Jeffrey. Time To Stop the Sob Stories About Student Loan Debt. Forbes, September 18, 2014. Accessible at http://www.forbes.com/sites/jeffreydorfman/2014/09/18/time-to-stop-the-sob-stories-about-student-loan-debt/

Ashlee Kieler. For-Profit Colleges: Good For Investors. . . Not-So-Good For Students. Consumerist, April 24, 2014. Accessible at: http://consumerist.com/2014/04/24/your-college-education-might-be-a-better-investment-for-goldman-sachs-than-it-is-for-you/

Friday, September 19, 2014

Is it OK to beat a dead horse? The Consumer Financial Protection Bureau sues Corinthian Colleges

According to Chronicle of Higher Education, the Consumer Financial Protection Bureau has sued Corinthian Colleges, accusing the company of "predatory lending and illegal collection tactics." 

As the Chronicle noted, Corinthian is "the crippled for-profit higher-education company that is in the process of winding down its operations."  In fact, Corinthian has entered into a deal with the U.S. Department of Education, whereby the company will sell or close most of its campuses in exchange for continued access to federal student aid money.

The CFPB is accusing Corinthian of some pretty bad stuff. "We believe Corinthian lured in consumers with lies about their job prospects upon graduation, sold high-cost loans to pay for that false hope, and then harassed students for overdue debts while they were still in school," Richard Cordray, the CFPB chief,was quoted as saying in the Chronicle article.

If Corinthian Colleges did the things the CFPB accused it of doing, then it certainly deserves to be sued. But, as the Chronicle of Higher Education pointed out, the company was already in financial trouble. 

I am happy to see the Consumer Financial Protection Bureau take some strong action against the for-profit college industry, which has been wracked by reports of abusive behavior.  Several for-profits have been accused of engaging in unsavory practices. But I would be happier still if the CFPB would go after abusive for-profit colleges that are not teetering on the edge of closure.  

It is OK, I suppose, to beat a dead horse now and then. But I would like to see the CFPB to beat a few live ones.


Field, Kelly. Federal Watchdog's Lawsuit Accuses Corinthian Colleges of Predatory Lending. Chronicle of Higher Education, September 16, 2014. 

Thursday, September 11, 2014

But who really cares? Rosemary Anderson, age 57, borrowed $65,000 in college loans and now owes $152,000

Let's take a minute to examine what happened to Rosemary Anderson, a student-loan debtor who was featured in two CNN stories recently. More than twenty years ago, Rosemary began borrowing money to attend college; and she eventually got a bachelor's degree and a master's degree in human resources. She has a job and she makes pretty good money.

Nevertheless, Rosemary is now 57 years old, and the $65,000 she originally borrowed has grown to $152,000! How did that happen?

As for so many Americans trying to survive in today's dog-eat-dog economy, life got in the way. Rosemary experienced a divorce, a job loss, and a family illness. Loans got out of hand, and she stopped making payments for a period of time. Later, she consolidated her loans at an interest rate of 8.25 percent--far higher than the prevailing rate.  Interest accrued, penalties were tacked on to what she borrowed; and now Rosemary owes $$152,000.

Although the CNN article didn't make her current situation entirely clear, apparently Rosemary is now in a 25-year Income-Based Repayment Plan, because CNN reported she will be paying nearly $700 a month until she is 81 years old!

That's right--she will finally finish paying off her student loans more than 40 years after she got her undergraduate degree. "I will be working for as long as I'm employable. I will never be able to retire," Rosemary said in the CNN story.

Is that how the American dream is supposed to work? Is this how higher education is supposed to pay off?

Some people might tell Rosemary that she has no one but herself to blame. You borrowed too much money, they might tell her, or you should never have stopped paying on your loans.

Well, sure, Rosemary probably made some mistakes in financing her higher education, but a lot of people make mistakes. That's what bankruptcy is for. But people like Rosemary will find it very difficult to discharge their student loans in bankruptcy court.

But who really cares? The media is obsessed with what happened in Ferguson, Missouri and the details of Ray Rice's elevator assault on his girl friend. Rosemary Anderson got featured in a couple of CNN stories, but millions of people in similar situations suffer in silence.

Meanwhile, college and universities, both public and private, gorge on federal student loan money and the money students borrow from private banks to pay for their college education. University presidents may pretend to care  about distressed student debtors, but they are focused on raising money to construct more buildings. President Obama pretends to care, but he's not doing anything much to help people like Rosemary Anderson. Maybe Rosemary could get a golf date with the President so she could explain her situation to him personally.

No sensible person can read Rosemary Anderson's story without coming to the conclusion that people like Rosemary need easier access to bankruptcy. But that's not going to happen any time soon. Why? Because the people who have the power to come to Rosemary's aid don't really care about people like Rosemary.

And that's pretty scary to think about because there are literally millions of distressed student-loan debtors, and the number grows larger every day.


Blake Ellis. Student Loan Debt Surges for Senior Citizens. CNN, September 11, 2014. http://finance.yahoo.com/news/student-loan-debt-surges-senior-211900000.html

Patrick M. Sheridan. I'm 57 and owe $152,000 in student loans. CNN, August 14, 2014. http://money.cnn.com/2014/08/13/news/economy/older-student-debt?source=yahoo_hosted

The General Accounting Office's Report on Student Loan Indebtedness Among Elderly Americans: Scary Reading

The General Accounting Office released a report this week on elderly Americans with student loan debt. The report is 30 pages long but can be summarized in a few paragraphs.

First, the percentage of people aged 65 through 74 who have outstanding student loans is small but growing. In 2004, only 1 percent of people in this age category still owed on student loans. By 2010, that percentage had grown to 4 percent.

Second, the amount of student-loan debt held by elderly Americans is also growing. It grew six fold between 2005 and 2013--from $2.8 billion in 2005 to $18.2 billion last year.

Third, the number of elderly Americans who are having their Social Security Checks garnished because they defaulted on student loans has increased dramatically in recent years. In 2002, only 31,000 people had Social Security benefits garnished because they had defaulted on their student loans. That number has ballooned five fold in just 11 years; 155,000 Americans saw their Social Security checks reduced in 2013 because they had defaulted on student loans.

On one level, the GAO's report is no big deal. Currently, there are 39 million people with outstanding student loans. The number of elderly student-loan defaulters who are having their Social Security checks garnished---155,000--is only a drop in the bucket.

But that number will undoubtedly grow larger in the coming years. GAO reported that 6.9 million people who are 50 years old or older are carrying student-loan debt. That number has gone up 130 percent since 2005.

Moreover, the GAO pointed out that the amount of student loan debt held by elderly Americans grew much faster in recent years than it did for the general population. Between 2005 and 2013, the total amount of student loan indebtedness more than doubled, from $400 million to $1 trillion. But for people in the 65 to 74 age group, the amount of student loan debt grew six fold during those years.

And here's the scary part. Elderly student-loan debtors have higher default rates than younger people. Only 12 percent of federal student loans held by people in the 25 to 49 age bracket are din default. Among people 75 or older, more than half are in default!

I will make just a couple of points about this useful report.

First, in my view, a humane society should not garnish people's Social Security checks because they defaulted on their student loans. As I have said many times, Congress needs to amend the law to stop the garnishment of Social Security checks of elderly student-loan defaulters.

Let's face it, taking a small portion of people's Social Security checks (a maximum of 15 percent) probably won't even put a dent in individual debtors' total loan balances. Undoubtedly, most of them owe far more than they borrowed due to accruing interest and penalties.

Second, the Obama administration's proposal to encourage student-loan debtors to sign up for 20- and 25-year Income Based Repayment Programs (IBRPs) will only make this problem worse. A lot of people will be in their late 20s, early 30s, or even older when they begin paying off their student loans under 25-year repayment plans. Without a doubt, the percentage of people who enter retirement with outstanding student loan debt is going to increase as more and more people elect IBRPs to service their student loans.

The Department of Education, the Brookings Institution and several other education policy groups have endorsed IBRPs as a good way to help people manage their burgeoning student-loan obligations; and the New York Times also seems to like IBRPS.

But IBRPs are a terrible idea. Our nation cannot prosper economically if we have a high percentage of Americans paying on their student loans over the majority of their working lives.

It will take political courage to solve the student-loan crisis, and we won't solve it until we begin reducing the amount of money people borrow to attend college.

But we are going in the wrong direction. Every year, Americans borrow more and more money to attend college, and every year the average amount of individual indebtedness goes up. Encouraging people to pay off their loans over 25 years instead of 10 years just postpones the day when Americans will finally admit that the federal student loan program is out of control.

The federal student loan program is slowly destroying our economy and the integrity of higher education in the United States. And--with the advent of IBRPs--the number of elderly Americans who will see their retirement years blighted by student-loan debt is going to go no direction but up.


General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

Monday, September 8, 2014

There's No Fool Like an Old Fool: The New York Times Just Doesn't Get It When It Comes to the Student Loan Crisis

Today, the New York Times published an editorial on the Obama administration's efforts to encourage student-loan  servicers to be less rapacious.  According to the Times, the government is changing the incentive structures so that loan-collection companies have a financial incentive to help rehabilitate student loans that are delinquent instead of pushing borrowers into default.

The Times approves of reforms that will encourage students to sign up for Income-Based Repayment Plans, plans that will have borrowers paying a percentage of their income for the next 25 years. Some reform!  The Times also likes the new rule that will give more weight to customer satisfaction surveys "in determining how well servicers do their jobs."  That idea is about as radical as Aunt Sadie's Buick Regal.

The Times editorial then goes on to say that Obama's reform efforts don't go far enough. So what does the Times suggest? "More should be done to improve competition and transparency [among loan servicers]," the Times recommends.  Borrowers should be able to jump from one loan servicer to another, the Times adds, and "set significant penalties for poor practices and create a portal where borrowers can get information about their accounts and report abuses to the Education Department instead of to the abusers."

This is the kind of timid advice you would expect from a newspaper that gets a lot of its revenue from advertising luxury goods that are targeted at its fat cat readers. I'm glad the Times wasn't in charge of negotiating with Adolph Hitler during World War II. It probably would have editorialized that Hitler needed to paint the concentration-camp barracks a more soothing color.

The Times does not seem to realize that people who fall into the hands of the student-loan servicers are dealing with truly heartless entities.  Here are some examples:

  •  Educational Credit Management Corporation (ECMC) opposed bankruptcy relief for a 63-year old man who had been unemployed for 12 years, whose home was going into foreclosure, and who had been living with his wife below the poverty level.  This man had accumulated student-loan debt in the neighborhood of $240,000. Murphy v. Educational Credit Management Corporation (2014). 
  •  ECMC opposed bankruptcy relief for an elderly student-loan defaulter who had chronic health problems and who was living solely on Social Security checks of less than $800 a month. Roth v. Educational Credit Management Corporation (2013). 
  •  ECMC opposed bankruptcy relief for another elderly woman with student-loan debt that was more than twenty years old and who had a salary of about $500 per month and a history of homelessness. Stevenson v. Educational Credit Management Corporation (2011).

How much do ECMC executives pay themselves to chase down poor and elderly student-loan debtors? A lot. Bloomberg reported in 2012 that Richard Boyle, ECMC's Chief Executive at the time, made $1.1 million  in 2010. I could not find more recent compensation information on Educational Credit Management Corporation's new CEO, a guy named Dave Hawn, but I'll bet that Hawn is making at least as much as Boyle made four years ago.

So, New York Times editorialists, take your tepid and inadequate editorial recommendations and stick them "where the sun don't shine"--which is within your timid and obsequious little hearts.

You want to clean up the student-loan collection business? Here are some suggestions:

1) First, President Obama and Secretary of Education Arne Duncan should instruct all the student-loan servicers not to oppose bankruptcy relief for any elderly student-loan debtor who is living solely on Social Security, who has suffered long-term unemployment, or who has no real prospect of every paying off student-loan debt.  And they should follow up with regulations or legislation that would make those instructions stick.

2)  The government needs to put an upper-limit on fees and accrued interest that get tacked on to student-loan defaulters' total loan obligations.  Several bankruptcy decisions have documented that debtors' original student loan balances had more than doubled by the time they filed for bankruptcy due to accrued interest, penalties and fees.

3) The Obama administration should propose amendments to the bankruptcy laws that will allow distressed student-loan debtors who took out loans in good faith to discharge their student loans in the bankruptcy process without going through expensive and traumatic adversary proceedings.

4) Obama should propose legislation to reinstate a reasonable statute of limitation on the collection of delinquent student-loan debt--say six years, which is the same time period that applies to the collection of most monetary obligations.

5) The President should demand legislation that would stop the federal government from garnishing the Social Security checks of elderly student-loan defaulters who are totally dependent on their Social Security pensions.

6) All the companies participating in the student-loan servicing industry should be required to post the compensation of all its senior executives online so that Americans can see just how much money so-called non-profit agencies are making on the suffering of student-loan debtors.

All these recommendations are reasonable and all are more humane than the puny little recommendations the Times made in its editorial page.  If the Times can't offer any suggestions more robust than it offered in its September 8th issue, then it should keep its mouth shut about the student-loan crisis and admit that all it is really concerned about when it comes to domestic economic issues is supporting Barack Obama and maintaining Democratic control of the White House.


A Fairer Shot for Student Debtors. New York Times, September 8, 2014, p. A16. 

John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html

Brown, M., Haughwout, A., Lee, D., Mabutas, M., and van der Klaauw, W. (2012). Grading student loans. New York: Federal Reserve Bank of New York. Accessible at: http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (7th Cir. 2013).
Lockhart v. United States, 546 U.S. 142, 126 S. Ct. 699 (2005).

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013).

Stevenson v. Educational Credit Management Corporation, 463 B.R. 586 (Bankr. D. Mass. 2011). 

Sunday, September 7, 2014

It's All About the Money: Louisiana State University, Coached by Fried Chicken Huckster Les Miles, Whipped Sam Houston State By a Score of 56-0

Louisiana State University's varsity football program brings big money to the local Baton Rouge economy.  The liquor store not far from my home opens at 6:00 AM on days when LSU plays at home: 6:00 AM! A Baton Rouge citizen who bought his bourbon at that hour yesterday had a solid 12 hours to drink before kickoff at 6:30 in the evening.  So the liquor business makes good money off of LSU football.

And the restaurants and hotels also make money when LSU plays at home. According to The Baton Rouge Advocate, room rates go up by an average of 34 percent on the weekends that LSU plays in Tiger Stadium. 

Other sectors of the Baton Rouge economy benefit as well.  LSU added 10,000 seats to its stadium last year at the cost of $80 million, making Tiger Stadium one of the largest college football coliseums in the country. It also added two high definition video screens that are so large that they can be seen from the Interstate 10 bridge over the Mississippi River. 

But the big money goes to the coaches and athletic administrators. Les Miles, LSU's head football coach, makes $4.3 million a year, about five times what LSU's president makes; and that doesn't include bonuses and and any product endorsement deals Miles might pick up.  His face has appeared on advertisements for Raising Cane, a regional fried chicken chain, and I'm sure Les didn't lend his mug for free.

Joe Alleva, LSU's Athletic Director, is another guy who makes a handsome salary. The Baton Rouge Advocate reported that Alleva has been offered a contract extension that calls for  a $725,000 yearly salary and includes incentive bonuses that could push his annual pay to $900,000.  He will get a $100,000 bonus if LSU ranks in the top 5 in the NACDA Directors' Cup rankings--whatever that means.  And Alleva will get an additional $25,000 if he maintains "financial solvency, no major infractions, [and makes] substantial contributions to [the] university and surrounding community" (as quoted in The Baton Rouge Advocate).  What nonsense.

Of course, university professors have groused about the salaries of football coaches for as long as I can remember, and it's been at least 30 years since football coaches first began making more money than university presidents.

In fact, almost everyone in higher education admits that varsity sports--and football in particular--is all about the money. Still, LSU's home field opener last night was a particularly disgusting spectacle. It has become traditional for the nation's top college football teams to open their seasons by playing weak opponents who are lured into the stadiums by getting a share of the gate. This year, Sam Houston State University obligingly volunteered to be the sacrificial lamb, and got trounced before a crowd of about 100,000 fans (not counting thousands of fans who tailgated on the LSU campus yesterday).

The Baton Rouge Advocate reported this massacre on the sports page in headlines so  big you would have thought Les Miles had defeated ISIS.

Some day, of course, all these enormous college football stadiums will stand empty, just as the old Roman coliseums now do. People will wonder just what it was that people saw in watching young men assault each other on a field of artificial turf, just as we wonder why the Romans enjoyed seeing Christians being devoured by lions.

But for now, as Robert Earl Keen put it, "the road goes on forever and the party never ends."The executive sky boxes are full of wealthy businessmen who watch football games while sipping bourbon, and rich donors make tax-deductible contributions to LSU's three foundations, which have annual revenues totalling $100 million.  Who cares that Louisiana's educational system is crumbling and that almost half of Louisiana's children who start first grade never graduate from high school. All that matters, as LSU Athletic Director Joe Alleva phrased it,  is that LSU be "in the hunt" to win football championships.


Ross Dellenger. LSU proposes 3-year contract extension for Alleva. The Baton Rouge Advocate, September 7, 2014, p. 17C.

Scott Rabalais. Highlight Night. The Baton Rouge Advocate, September 7,2014, p. 1C.

Roar Of Approval. Baton Rouge Advocate, September 7, 2014 p. 1A.

Gary Laney. Les Miles Staying at LSU. ESPN, November 28, 2012.  Available at: http://espn.go.com/college-football/story/_/id/8687452/les-miles-remain-football-coach-lsu-tigers-receive-extension-raise

Saturday, September 6, 2014

Memo to Parents: For God's Sake, Don't Borrow Money to Pay For Your Kids' College Education

Are you a parent who is thinking about taking out a loan to pay for your child's college education? Before you do, read Murphy v. Educational Credit Management Corporation, a recent federal court decision.

In 2002, Robert Murphy lived in Duxbury, Massachusetts and was the president of a corporation. Unfortunately, he lost his job after the corporation was sold and its operations were moved overseas. Although he had diligently looked for a new job, he was still unemployed in 2014.

Between 2001 and 2007 Murphy took out 12 loans to finance a college education for each of his three children. This is remarkable, since he was unemployed during most of this six-year period. Apparently, Murphy had no difficulty borrowing money for his children's education even though he was out of a job. By May 2014, when a federal court issued its appellate opinion on his bankruptcy case, Murphy owed more than $240,000 on these loans.

By this time, Murphy was 63 years old, unemployed for almost 12 years, and in dire financial circumstances. He owed $700,000 on a home that was only worth $500,000, and his home was going into foreclosure. Although Murphy had once owned an IRA worth about a quarter of million dollars, he had cashed it out  to cover expenses. The court did not report on Murphy's family income in 2014, but it noted that Murphy and his wife had only earned about $13,000 in both 2010 and 2011, money his wife had earned as a teacher's aide.

Pretty sad story, you might think.  Nevertheless, a federal court upheld a bankruptcy court's decision to deny Murphy's request to have his children's student loans discharged.  Although the court admitted that Murphy had no current ability to pay off the loans, it noted that Murphy was in good health and might still find a high-earning job that would allow him to pay off his enormous debt.

Ending its opinion on a remarkably callous note, the court observed that Murphy had struck a bargain with the government when he borrowed money to pay for his children's college education.  "All bargains contain risks," the court pointed out, and Murphy's bargain was especially risky since he had been unemployed during the time he took out most of the loans. 

In short, the court ruled, Murphy's situation did not present "truly exceptional circumstances" that would permit him to shed his student-loan debt.  Thus, the federal court agreed with the bankruptcy court's  decision to deny Murphy relief in bankruptcy for his children's student loans.

The Murphy decision serves as a warning to all parents who are thinking about borrowing money to help their children get a college education. Whether the parent takes out a federal student loan or borrows money from a private bank, a college loan cannot be discharged in bankruptcy unless the parent can show "undue hardship."

Mr. Murphy was unable to show undue hardship in spite of the fact that he had been unemployed for 12 years, had liquidated his retirement account and was in the process of losing his house in foreclosure.

According to a recent article in the Huffington Post, parents currently owe an accumulated $62 billion in Parent Plus Loans, which are guaranteed by the federal government. And this figure doesn't include loans parents took out with private banks that are not federally guaranteed.  A  2012 Huffington Post article reported that about one million Parent Plus loans were taken out during 2011, totally more than $10 billion in just that one year.

Parents who guarantee their children's college loans or who take out loans to pay for their children's education put their financial futures at grave risk.  Before borrowing to pay for your children to go to college, you should think about Mr. Murphy. Sixty-three years old, unemployed, and living on an income near the poverty level, Mr. Murphy is burdened by almost a quarter million dollars of student-loan debt.  That's a pretty scary story.


Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

Friday, September 5, 2014

The Fed's Easy Redemption Plan for Student-Loan Borrowers in Default: Another Sign that the Federal Student Loan Program is a Train Wreck

All of us know people who appeared to radiate good health, but in reality they were terminally ill. Maybe we had a friend with clogged arteries but didn't know it. Perhaps a colleague had pancreatic cancer that hadn't been diagnosed.  These people went about their lives as if they would live forever and then the diagnosis came and shortly after they were dead.

This is exactly the situation the Federal Student Loan Program is in. All across America, colleges and universities, both public and private, depend on federal student aid money to pay the bills. Yes, the student-loan default rate has doubled in recent years; and yes, the average amount borrowed goes up every year. And yes, a high percentage of college graduates are unemployed or under-employed and thus are unable to pay back their loans.

But, hey, no big deal. Colleges will continue to raise their tuition on an annual basis, and the government will continue loaning more and more money. But someday--and soon--those little signs of sickness will become symptoms of a terminal disease; and the whole Federal Student Loan Program  will come crashing down.

And here's one of those little signs of trouble that portend the coming disaster. The New York Times reported recently that the Department of Education has made it easier for student-loan borrowers who defaulted on their loans to rehabilitate their loan status.  All they have to do is make payments based on a percentage of their income. Under the new rules, borrowers can bring their loans back into good standing if they pay 15 percent of their income after subtracting 150 percent of the federal poverty level.  Borrowers who are unemployed or who are working at or near the poverty level won't have to pay anything.   

According to the New York Times, this new rehabilitation policy is even available to debtors who have not been approved for Income-Based Repayment Plans (IBRPs). Pretty sweet deal, right?

What the New York Times article did not say is that interest will accrue on the loan balances of most people who make income-based payments because their monthly payments will not be enough to pay off accruing interest or pay down the principal of their loans. So for most people who choose the income-based option for rehabilitating their loans, the amount of money they owe will grow larger.

And, as the Times pointed out, people who make income-based payments who have not been placed in federally approved income-based repayment plans won't have the benefit of having their payments applied to the 20- or 25-year IBRP repayment plan terms.  In other words, people who make income-based payments who are not in IBRPs will fall into a kind of financial purgatory where they won't be considered defaulters but their loan balances will grow larger with each passing month.

I think it is interesting that the Times reporter who wrote about the new student-loan rehabilitation policy did not point out the pitfalls of the policy, probably because she wasn't aware of the policy's implications. Essentially, the federal government is postponing the day on which it will have to admit that millions of people are not making their student-loan payments or are making payments that are so low that their loan balances are actually growing.  Apparently, the Obama administration and Arne Duncan's Department of Education are hoping to skip town before this mess blows up.

But it is going to blow up. As I have said many times, the percentage of people who are actually paying off their loans is a lot lower than the federal government will admit. The true default rate--the percentage of people who will never pay back their loans--is at least double the rate that the government reports every autumn. 

In short, American higher education is much like France in 1940,  just before the Germans invaded. It is living in dream world that supposedly will last forever. But it won't last forever.  Eventually, this house of cards, which was constructed with federal student-aid money and which has been so profitable for the executives of the for-profit colleges, will come crashing down. And American higher education will be altered in ways we can't now imagine.


Ann Carrns. For Student Loan Borrowers in Default, Redemption Just Got Easier. New York Times, August 23, 2014, p. B6.