Tuesday, May 30, 2017

Discharging Student Loans in Bankruptcy: A Field Guide For People Who Have Nothing To Lose

Student loans cannot be discharged in bankruptcy. How often have you heard that said? But that bromide is not true. Student loans are being discharged--or at least partly discharged--in the bankruptcy courts every year.

So if you are a distressed student borrower who will never pay back your student loans, why not attempt to discharge your college loans through bankruptcy? What have you got to lose?

You say you don't have money to pay a lawyer to represent you in bankruptcy court? Then represent yourself. Again--what have you got to lose?

This essay is a field guide for struggling debtors who are thinking about filing for bankruptcy to discharge their student loans.  This is a difficult process, and not everyone will be successful. In fact, much depends upon drawing a sympathetic bankruptcy judge. But you will not know whether your college debt is dischargeable through bankruptcy unless you make the effort. So let's get started.

I. The standard for discharging student loans in bankruptcy--the "undue hardship" rule.

Section 523(a)(8) of the Bankruptcy Code states that a student loan cannot be discharged in bankruptcy unless the debtor can show that paying the loan would pose an "undue hardship" on the debtor and his or her dependents.

Congress did not define undue hardship when it adopted this provision, so it has been left to the courts to define it. Most federal circuits have adopted the Brunner test, named for a 1987 federal court decision. The Brunner test contains three parts:


(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; 

(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 

(3) that the debtor has made good faith efforts to repay the loans.

Although most bankruptcy courts and federal appellate courts utilize the Brunner test when deciding student-loan bankruptcy cases,  there is a remarkable variations among the courts about how the Brunner test is interpreted, with some courts interpreting it more favorably for debtors than others.

II. Filing an adversary complaint

Filing for bankruptcy is a relatively straightforward process--particularly for people who have no assets. Many lawyers will walk you through a Chapter 7 bankruptcy for a flat fee.


But discharging your federal student loans requires you to file an adversary action--a separate lawsuit--against your student loan creditors, which may be the U.S. Department of Education, a student loan guaranty agency, or one of the government's approved debt collectors. And if you have private student loans you will need to sue your private creditor as well.

Drafting a complaint for your adversary action is not difficult; you can find forms on the web or in published bankruptcy guides.

III. Gather your evidence before you filed your adversary complaint

In my view, you should gather all your documentary evidence before you file your adversary complaint. That evidence should include:
  • all the records you have of payments you made, 
  • correspondence with your creditor, 
  • documents supporting efforts you made to find employment, 
  • evidence of health problems, disability status, and any other documents that support your claim that paying off your student loans would be an undue hardship.
In addition, if you negotiated with your creditor about entering into a long-term income-based repayment plan, gather the documents that show what efforts you made to explore repayment options.

If relevant, you should also gather evidence showing the  job market for your profession is bad. People who attended law school, for example, should provide evidence of the bad job market for newly graduated lawyers. If you failed the bar exam or another pertinent licensing exam, you should gather evidence establishing that fact.

If you attended a for-profit school that has been found guilty of fraud or misrepresentation, you should obtain documents to educate the bankruptcy judge about your school's misbehavior.

Why is it important to gather your evidence before you file your adversary complaint? Two reasons:

First, one of the first things your creditor will do after you file your lawsuit is send you discovery requests: 1) interrogatories (questions) about your financial status and your expenses,
2) requests for  production of your documents, and
3) requests for admissions (more about requests for admissions later.)

Having your documents prepared in advance will enable you to respond to your creditor's requests for documents in a timely manner and will subtly communicate that you are prepared to have your case go to trial.

Secondly, assembling your documents early will help you determine the strengths and weaknesses of your case before you file your adversary complaint. For example, if you are disabled or have medical problems, evidence about your health status will be helpful in establishing undue hardship.

On the other hand, if you made few or no payments on your student loans over the years, that is a negative fact for you because the creditor will argue that you did not manage your loans in good faith. Courts have discharged student loans in several cases in which the student debtor made no voluntary loan payments, but you will want to be able to argue you that you meet the good faith test in spite of your spotty payment history.

IV. Know the case law about student loans and bankruptcy in your jurisdiction.

It is also important that you know how courts have ruled in student-loan cases in your jurisdiction. If you live within the boundaries of the Ninth Circuit, you will want to be familiar with the Roth decision, Hedlund, Scott and Nyes. If you live in the Tenth Circuit, you will want to know about the Polleys decision.  If you are in the Seventh Circuit, the Krieger decision is important to you.

V. Be psychologically prepared for a long court battle.

Published court decisions show that the Department of Education and the student loan guaranty agencies are sometimes willing to fight student debtors in the courts for a long time. In the Hedlund case, for example, involving a law graduate who failed to pass the bar exam, the creditor fought Mr. Hedlund in the federal courts for ten years.

Why do the student-loan creditors drag out litigation with bankrupt student borrowers? Two reasons: First, the student loan guaranty agencies are reimbursed by the federal government for their attorneys fees, so they have little incentive to stop litigating. And of course, the Department of Education has free government attorneys to represent its interests.

Secondly, by filing appeals and driving up litigation costs, the Department of Education and the student loan guaranty agencies know they are demoralizing student debtors, making it more likely they will abandon their lawsuits. And of course, by imposing heavy financial and psychological costs on people who file adversary actions, the Department of Education knows that it is discouraging distressed debtors from even trying to discharge their student loans in bankruptcy.

VI. Be appropriately suspicious of any document a creditor's attorney asks you to sign.

Once you file your lawsuit, be aware of two potential dangers. First, the Department of Education or one its debt collectors will probably send you a "Request for Admissions." Do not ignore that document. If you fail to respond to a Request for Admissions, the statement you are asked to admit is deemed admitted.  It is very important to remember that.

Second, it is improper for a party to ask an opposing party to admit a principle of law. For example, it would be improper for a Request for Admission to ask you to admit that it would not be an undue hardship for you to repay your student loans.

Obviously, you should answer all interrogatories and requests for admissions truthfully, but do not admit to propositions that you are unclear about or which you do not understand. If you do not know the answer to a question, it is permissible to state that you do not know.

Similarly, don't sign a stipulations of facts that a creditors' attorneys asks you to sign unless you are very clear that signing a stipulation won't prejudice your case in court. And remember--when a government attorney waves a stipulation in your face and asks you to sign it, the attorney is not making that request to help you. The lawyer drafted that stipulation to help the government.

VII. What do you do if you win your adversary action and the creditor appeals?

 In several instances, student-loan debtors have gone to court without an attorney and won their case. It has been my observation that some bankruptcy judges are sympathetic to people who are overwhelmed by student loan debt, and these judges have written remarkably thorough decisions ruling in the debtor's favor.

But sometimes the creditor appeals, forcing the debtor to figure out how to file a strong appellate brief. For example, Alexandra Acosta-Conniff won a student-loan discharge in an Alabama bankruptcy court, and George and Melanie Johnson won their case before a Kansas bankruptcy judge. In both cases, the debtors were opposed by Educational Credit Management Corporation (ECMC); and in both cases, ECMC appealed.

In my view, debtors need an attorney to represent them in appellate proceedings, so debtors who win their cases at the bankruptcy-court level without lawyers need to find an appellate lawyer to help them if their bankruptcy court victory is appealed.

If it is absolutely impossible to hire an appellate attorney and you are forced to file an appellate brief without an attorney, then you should at least try to find appellate briefs filed in other cases to help you file your own appellate brief.  You can contact me, and I will be happy to help you find pleadings that will be helpful to you.

VIII. A few words about private student loans


Thanks to the deceptively named "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," private student loans are as difficult to discharge in bankruptcy as federal student loans. For both types of loans, the "undue hardship" rule applies.

To protect their own interests, the banks and other private student-loan defenders (Sallie Mae, etc.) usually require student borrowers to find a co-signer to guarantee the loan. Generally, the co-signer is a parent or other relative.

So remember, even if you discharge a private student loan in bankruptcy, your co-signer is still liable to pay back the loan. And the co-signer, like you, must meet the "undue hardship" test if he or she tries to cancel the debt in bankruptcy.

Conclusion

The student loan crisis grows worse with each passing month. As the New York Times noted recently, 1.1 million student borrowers defaulted on their student loans in 2016--that is an average of 3,000 defaults a day!

Bankruptcy judges read the newspapers, and many of them have children or relatives who are overwhelmed by their student loans. I think the judges are beginning to be more sympathetic to "honest but unfortunate" student-loan debtors who acted in good faith and simply cannot pay back their student loans.

Some student borrowers have a better case for a bankruptcy discharge than others, but hundreds of thousands of people have a decent shot at getting their student loans cancelled through bankruptcy if they just make the effort.

Filing an adversary complaint in a bankruptcy court takes courage, fortitude and hard work--particularly in gathering evidence necessary to show a bankruptcy judge that repaying your student loans truly constitutes an undue hardship. And not everyone who seeks relief from student loans through bankruptcy will be successful

Nevertheless, if you are a student debtor with crushing student loans, you should consider filing for bankruptcy. If, after careful thought, you determine that you have nothing to lose by filing, then you should file an adversary complaint and fight for relief from oppressive student debt. Others have been successful, and you too might be victorious in a federal bankruptcy court.

References

The Wrong Move on Student LoansNew York Times, April 6, 2017.





Sunday, May 28, 2017

Department of Education executives pay themselves cash bonuses while federal student loan program goes to hell

At last the secret is out. The federal student loan program is out of control and millions of borrowers cannot pay back their loans. As the New York Times pointed out recently, student debtors are defaulting at an average rate of 3,000 a day--more than a million people went into default last year alone.

But the Department of Education hacks who oversee the student loan program have been paying themselves performance bonuses. James Runcie, Chief Operating Officer for DOE's student loan program, received $433,000 in bonuses; and then he resigned rather than testify before the House Oversight Committee about what the heck was going on in the student loan program.

And Runcie was not the only DOE executive to get bonuses. The National Association of Student Financial Aid Administrators (NASFAA) released a report earlier this month that provides some useful information about how DOE's bonus program works.

As the NASFAA report explains, the Federal Student Aid Office (FSA) set performance goals for the organization  and then basically assessed itself with regard to whether the office met those goals. According to NASFAA, "self-assessments are a common way to begin performance evaluations, but they are usually signed off on by a person or board with oversight responsibility."  The Federal Student Aid office, however, let its own evaluations stand "without pushback, oversight, or accountability, which often easily allows the organization to excuse away failure to meet goals and targets."

FSA's self-assessment program permitted senior executives to get bonuses if they excelled at their work. The program identified three categories of performance: "exceptional," "high results," or "results achieved." Note that there was not even a category for poor performance.

Senior people who scored "exceptional" or "high results" were eligible for bonuses; and not surprisingly, performance scores got higher and higher as the years went by. In FY 11,  "66 percent of  senior FSA leaders received an "exceptional" or "high results" performance rating that qualified them for bonuses. In FY 2015, 90 percent of senior administrators got those ratings.

Correspondingly, the percentage of eligible employees who only scored "results achieved," making them ineligible for bonuses, decreased from 34 percent to only 10 percent between FY 2011 and FY 2015.

Bottom line is this: In FY 2015, 89.8 percent of FSA senior administrators ranked high enough to get a cash bonus, and 89.8 percent of those administrators got cash bonuses. How big were the bonuses? I haven't seen a list showing bonus amounts and who got them. Huffington Post reported that that at least one bonus was $75,000.

No wonder Mr. Runcie resigned rather than answer questions before the House Oversight Committee. "I cannot in good conscience continue to be accountable as Chief Operating officer given the risk associated with the current environment at the Education Department," he is quoted as saying.


What the hell does that mean?  I have no idea. It must be one of those phrases Mr. Runcie learned when he was getting his MBA at Harvard.


James Runcie testifying about the student loan program


References  


Danielle Douglas-Gabriel. It's time to reform the financial arm of the Education Department, report says. Washington Post, May 16, 2017.


Adam Harris. Top Federal Student-Aid Official Resigns Over Congressional Testimony. Chronicle of Higher Education, May 24, 2017.

Shahien Nasiripour. Education Department Secretly Reappoints Top Official Accused of Harming StudentsHuffington Post, May 7, 2016.

National Association of Student Financial Aid Administrators. Improving Oversight and Transparency at the U.S. Department of Education's Financial Aid: NASFAA's Recommendations. (May 2017).

The Wrong Move on Student Loans. New York Times, April 6, 2017.

Saturday, May 27, 2017

James Runcie, Chief Administrator of DOE's Federal Student Aid Program, resigns rather than testify before Congress. Will he take his bonuses with him?

James Runcie, Chief Operating Officer for the Department of Education's Student Aid Office, resigned a few days ago rather than testify before the House Oversight Committee. Good riddance!

Runcie, who has an MBA from Harvard, was appointed to the COO's position by the Obama administration in 2011. In December 2015, Secretary of Education Arne Duncan secretly reappointed Runcie to the position just before  Duncan stepped down as Education Secretary. In fact, Runcie's reappointment was one of Duncan's last official acts.

The Runcie-supervised student aid program has come under severe criticism over the last several years.   Recently, the press reported that the program misspent a total of $6 billion in federal money in the Pell Grant program and the Direct Student Loan program. A Huffington Post article, published about a year ago, noted that "government investigators from other agencies routinely slammed Runcie's division for failing to aid distressed borrowers and protect students, or they unearthed evidence of mistreatment that Runcie's deputies missed."

In fact, reports from multiple sources make clear that the Federal Student Aid office is a mess. The Government Accountability Office reported in December that DOE had underestimated the cost of its income-driven repayment programs. GAO concluded that the true cost was about double what DOE estimated.

And in Price v. U.S. Department of Education, decided recently by a Texas federal court, we got a glimpse of how poorly DOE responds to student complaints. Phyllis Price, filed an administrative complaint seeking to have her student loans discharged because the University of Phoenix, the school she attended, had falsely certified that she had a high school diploma.  DOE took six years to resolve Price's claim, and then it got it wrong. Price had to sue the Department to obtain the relief to which she was clearly entitled under federal law.

But sloppy administration did not prevent James Runcie and his close cronies from getting big salaries and handsome performance bonuses. As the Huffington Post reported, the typical Federal Student Aid employee makes more than $100,000, about a third more than typical federal employees are paid.

Runcie himself got a lot of bonus money. Just a few days ago, U.S. Congressman Jim Jordan (R-Ohio), accused Jordan of receiving $433,000 in performance bonuses while working for DOE!

Just think how big his bonuses would have been had he performed his job competently?

I hope the House Oversight Committee orders Runcie to appear under subpoena and explain what the hell he was doing while he was in charge of the Federal Student Aid program.

It is probably impossible to get Runcie's bonus money back, but surely Congress can stop the Department of Education's practice of giving cash bonuses to people overseeing the federal student loan program--a program that has brought so much misery to millions of Americans.

Will Mr. Runcie return his bonus money?

References

Sabrina Eaton. Rep. Jim Jordan blasts student loan official's $433,000 in bonuses despite failing grades. Cleveland.com, May 25, 2017.

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

Christopher Maynard. Education Department blasted over $6 billion in improper student aid payments. consumeraffairs.com, May 26, 2017.

Price v. U.S. Dep't of Education, 209 Fed. Supp. 3d 925 (S.D. Tex. 2016).

Shahien Nasiripour. Education Department Secretly Reappoints Top Official Accused of Harming Students. Huffington Post, May 7, 2016.

Top Federal Student-Aid Official Resigns Over Congressional Testimony. Chronicle of Higher Education, May 24, 2017.

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, May 24, 2017

Bankruptcy Relief Bill H.R. 2366, "Discharge Student Loans in Bankruptcy Act of 2017": Does it have a prayer of becoming law?

Earlier this month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill in the House of Representatives that would eliminate the "undue hardship" rule contained in 11 U.S.C sec. 523(a)(8). H.R. 2366, if adopted into law, would put student loans on par with credit card debt and other consumer debt, making student loans more easily dischargeable in bankruptcy. As Congressman Delaney put it, "It doesn’t make sense for students with heavy debt burdens to be worse off than someone with credit card debt or mortgage debt."

How many student borrowers would qualify for bankruptcy relief if the Delaney-Katko bill becomes law?

This could be a very big deal. If "the undue hardship" rule is struck from the Bankruptcy Code, millions of student borrowers could seek relief from their student loans.  How many millions?

We know from looking at a 2015 Brookings Institution report that nearly half the people from a recent cohort of borrowers who took out student loans to attend for-profit colleges defaulted within five years.  Clearly, a great many of these people would qualify for bankruptcy relief.

And the Federal Reserve Bank of New York reported recently that a third of student borrowers who owed $5,000 or less defaulted in five years, while 18 percent of the people who borrowed $100,000 or more defaulted.  Assuming these defaulters are insolvent, nearly all them would be eligible for bankruptcy relief if the Delaney-Katko bill becomes law.

Who will opposed this legislation?

Obviously, most of the 44 million people weighed down by student-loan debt will support this bill. Who will opposed it?

The bill would give bankruptcy relief for people who took out both federal student loans and private student loans. Private lenders who are heavily invested in the student-loan business--Wells Fargo, Sallie Mae, etc.--will oppose this bill fiercely; and their lobbyists are probably already at work.

The nation's colleges and universities will also oppose this bill, but they won't be vocal about it. It is hard for universities to insist on getting billions of dollars in federal student-aid money every year while publicly opposing relief to people who went broke because they borrowed too much money to attend college.

But make no mistake: the colleges and universities understand that the Delaney-Katko bill, if it becomes law, will unleash a floodgate of bankruptcy filings; and this deluge will force Congress to clean up the student-loan scandal.  The colleges want the party to last a little while longer; and this legislation will help bring the party to an end if it ever gets enacted.

In the past, beneficiaries of the student-loan boondoggle  have used lobbyists and campaign contributions very effectively  to protect their interests, while student debtors suffered in silence. But the tables may be about to turn. More than 40 million people are burdened by student-loan debt, and these people vote.

Will the Delaney-Katko bill become law?

What are the chances that the Delaney-Katko bill will become law? It is hard to say. A bill was introduced several years ago to stop the government from garnishing Social Security checks of student-loan defaulters and that bill never made it out of committee.

So it is possible, that this bill will go nowhere.  Nevertheless, I am impressed by the fact that the Delaney-Katko bill has been framed as a bipartisan initiative. So far, it has at least ten co-sponsors:

Debbie Dingell (D-Michigan)

Paul Tonko (D-New York)
Kyrsten Lea Sinema (D-Arizona)
Zoe Lofgren (D-California)
*John Delaney (D-Maryland)
*John Katko (R-New York)
Edwin Perlmutter (D-Colorado)
Alan Lowenthal (D-California)
Catherine Castor (D-Florida)
Marc Veasy (D-Texas)

Let's all write our elected representatives and express our support for the Delaney-Katko bill.

The Delaney-Katko bill, if it becomes law, will afford relief to millions of people who have been pushed out of the economy by student loans. Let's watch this bill closely and give it all the support we can.

Every student-loan debtor should write his or her Senator and Congressperson to express support for the Delaney-Katko bill. They should stress that this proposed legislation is not radical. In fact, scholars and policy makers have advocated for years that distressed student-loan debtors should have easier access to the bankruptcy courts.

And let's take a moment to salute the political courage of Representative John Katko of New York--the first Republican to support this legislation.


Rep. John Katko (R-New York): Profile in Courage


References

Representative John Delaney press releaseDelaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.


Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.





Tuesday, May 23, 2017

Parents should NEVER co-sign a child's student loans: Don't throw your life away!

For pity's sake, Christine, say no! Don't throw your life away for my sake!

Raoul De Chagny
Phantom of the Opera 

If you are a parent of a college student and are thinking about co-signing your child's student loan, you should read an article posted recently on Moneytips.com and re-posted on Personal Finance Syndication Network.

Moneytips reported on a survey by LendEdu that asked parents to rate their experiences as co-signers of their children's student loans. The survey findings are harrowing:
  • 34 percent reported that their child failed to make a payment on time.
  • 34 percent reported that a co-signed loan hurt their ability to apply for financing.
  • 35 percent of survey takers regretted co-signing a loan for their child.
  • 57 percent said that a co-signed loan had hurt their own credit rating.
And contemplate this sobering statistic: More than half (51.2 percent) of the respondents believed that co-signing a student loan had put their own retirement in jeopardy!

Parents often fail to understand the catastrophic consequences that can result from co-signing student loans with their children:

First of all, co-signing parents are 100 percent liable for paying back the loan if their child fails to make loan payments.

Second, a parent will find it very difficult to discharge a co-signed student loan in bankruptcy. Like student borrowers, parent co-signers cannot discharge student-loan debt in a bankruptcy court unless they can demonstrate "undue hardship"--a very difficult standard to meet.

Third, if a co-signed loan goes into default, penalties will be assessed to the amount borrowed, and the parent's credit will be adversely affected.

There are exceptions for almost every rule, but there are no exceptions to this one: NEVER CO-SIGN A STUDENT LOAN FOR A CHILD.  If your darling child's college plans require you to co-sign a student loan, then your child needs to make another plan--a plan that doesn't put your financial future at risk.



References

Why Co-Signing a Loan Could Delay Your Retirement, Moneytips.com April 28, 2017. Re-posted on  Personal Finance Syndication Network, pfsyn.com

Monday, May 22, 2017

The White House wants to kill the Public Service Loan Forgiveness Program: But who can stop a tidal wave?

President Trump's White House proposes to eliminate the Public Service Loan Forgiveness Program (PSLF), which has triggered howls of protest. Jordan Weissmann, writing for Slate, described the proposal as a "sick joke" perpetuated by an out-of-touch President and an out-of-touch Secretary of Education:
A billionaire president and billionaire education secretary, neither of whom spent a single day of their lives in public service before stumbling their way into positions of immense power, are targeting a program that's basically meant to make life in underpaid government work a little more tenable. 
The Public Service Loan Forgiveness Program: A Very Generous Student Loan Program 

But in fact the issue of whether the PSLF program should be eliminated is a little more complicated than Weissmann described.  To get a clear understanding of what is at stake, people should read Jason Delisle's brief report on PSLF (only 5 pages of text) prepared for the Brookings Institution.


As Delisle explains,Congress initiated the PSLF program in 2007 along with the Income-Based Repayment Plan. (IBR). Student-loan borrowers who take public-service jobs are eligible to have their student loans forgiven after 10 years of loan payments. Furthermore, under IBR, student-loan borrowers' monthly payments were initially set at 15 percent of their gross adjusted income.

The PSLF program defines eligible public service broadly to include employment with a nonprofit agency or any federal, state, or local government. In fact, as Delisle points out, 25 percent of the American workforce qualify for PSLF under this definition of public service (p. 3).

As generous as the PSLF program was in 2007, the program became significantly more generous when the Obama administration introduced PAYE and REPAYE--two repayment plans that required borrowers to  make monthly loan payments totally only 10 percent of their adjusted gross income rather than 15 percent. As Delisle explains, "Had the [Obama] administration left the original IBR program in place, borrowers would have paid 50 percent more before having their remaining debt forgiven under PSLF" (p. 3).

PSLF: Distorted Incentives to Borrow Heavily for Graduate School

Significantly, the PSLF program set no cap on the amount students can borrow for their studies. Apparently, Congress did not anticipate that a high percentage of PSLF participants would be graduate students who would rack up six-figure student-loan debt to enroll in expensive graduate programs: law school, MBA programs, etc.

As Delisle explains, policy makers "who thought PSLF would be a small-scale program likely did not foresee that borrowers enrolled in PSLF would have some of the highest loan balances in the federal student loan program. In fact,  "[t]he median debt load of those enrolled in PSLF exceeds $60,000, and nearly 30 percent of PSLF enrollees borrowed over $100,000."

In essence, the PSLF program and the IBR program (including PAYE and REPAYE) act together to create a perverse incentive for graduate students to borrow excessive amounts of money because their monthly payments will not be affected. As Delisle explained:
Thanks to PSLF, [an already indebted graduate] student . . . who is faced with the choice of borrowing $10,000 to live frugally while enrolled in graduate school or $20,000 to support a more comfortable lifestyle is probably more inclined to choose the latter. (p. 6)
In short, as Delisle accurately summarizes, "[t]he high loan balances among enrollees helps to expose that PSLF is really a de facto loan forgiveness program for graduate students, who can borrow without limit" (p. 4, emphasis and italics supplied).

The Obama Administration Recognized that the PSLF Program Needed to Be Revised

To its credit, the Obama administration recognized that the PSLF program would soon be hemorrhaging money and needed to be revised to reduce the program's enormous costs. The administration proposed a cap of $57,000 on the amount that can be forgiven under PSLF and removing the cap on the amount of monthly payments. The Congressional Budge Office originally estimated these reforms would save the government about $400 million and then revised that estimate to $12 billion.

But the Obama reforms were never implemented, and the Trump administration inherited a program that is basically  providing free graduation education to most PSLF participants.


What will PSLF cost American taxpayers? No one knows

 How much will PSLF cost American taxpayers? No one knows. Approximately 432,000 people were officially certified to participate in PSLF according to government data Delisle reviewed in his 2016 paper. An article in the New York Times, published less than two months ago, reported a figure of 550,000 certified PSLF participants--25 percent higher than the number Delisle's paper reported.

But the number of PSLF participants could be considerably higher than any number reported so far because, as Delisle pointed out, people are not required to be get pre-certified as a condition of participating in the program. That's right, borrowers can apply to the PSLF program retroactively.

Conclusion: A Tidal Wave of  Forgiven Student Loan Debt is Bearing Down on the Trump Administration

The PSLF program is now ten years old, and the first group of PSLF borrowers will be eligible to have their loans forgiven by the end of this year. As Delisle explained so cogently in his Brookings essay, PSLF has turned out to be a bonanza for people to borrow unlimited amounts of money to go to graduate school. Because participants are only required to make token payments equal to 10 percent of their adjusted gross income for ten years, most PSLF participants are making payments so low that their payments are less than accruing interest.

Basically, the PSLF program is a tidal wave bearing down on the Trump administration.The White House has responded by defunding the program in its proposed budget, but shutting down PSLF may be politically impossible.  After all, as Weissmann pointed out, a lot of people went to graduate school based on the reasonable assumption that they were entitled to enroll in PSLF. It would be unfair to shut down the PSLF program precipitously, leaving thousands of student borrowers in the lurch.

In any event, who can stop a tidal wave?

The brutal reality is this: No matter what this presidential administration does about the PSLF program, it is going to cost taxpayers tens of billions of dollars.




References

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be Invalid. New York Times, March 30, 2017. 

 Jason Delisle. The coming Public Service Loan Forgiveness bonanza. Brookings Institution Report, Vol 2(2), September 22, 2016.

Jordan Weissmann. Betsy DeVos Wants to Kill a Major Student Loan Forgiveness Program, Slate, May 17, 2017.



Saturday, May 20, 2017

Manhattan Institute Report: State Pensions Costs Threaten Higher Education. Dancing on the Titanic

Earlier this month, Daniel DiSalvo and Jeffrey Kucik of the Manhattan Institute published a brief report (only 10 pages of text) that should scare the hell out of American higher education. In essence, the report made three main points:

  • States are cutting contributions to higher education, something we already knew.
  • Tuition costs are rising to deal with the shortfall, and tuition increases are not being matched by a rise in median family income. We already knew that as as well.
  • State pension costs are out of control and will absorb a larger and larger share of most states' budgets.
This last point--the catastrophic rise in pension obligations--is also something we already knew, but DiSalvo and Kucik's report drives this point home with brutal clarity. 

As the authors explain in their introduction, the stock market crash of 2008 led to a sharp devaluation of pension fund assets--about a $1 trillion loss. In addition, persistent underfunding of pension funds "has led to a net deficit across all states of about $4 trillion, or one-third of total U.S. GDP." (p. 5, emphasis supplied).

All states have reformed their pension programs in some way to respond to the shortfall, but these reforms are not enough to bring pension fund liabilities in line with pension fund assets.

Meanwhile, the average number of pension beneficiaries per state has tripled from 500,000 to 1.5 million, while the number of active public employees paying into pension funds has stayed roughly constant. (p. 7). Clearly, state pension funds are rapidly moving toward collapse

Let's look at the numbers for a few states.

California's pension liabilities have increased by 41 percent over just seven years to $890 billion in 2015. That was two years ago. By now California's pension liabilities must be nearly $1 trillion.  

New York's pension liabilities were nearly half a trillion dollars in 2015, a 30 percent increase over 2008. And Governor Andrew Cuomo is offering free college tuition to New Yorkers!

Texas, where my pension fund is located, had about a quarter of a trillion dollars in pension obligations in 2015--a 42 percent increase from 2008.

How is higher education impacted by this looming train wreck? States have no other choice but to reduce expenditures for higher education even further if they have any hope of meeting their pension obligations. 

Thus, it is clear, students will be forced to borrow more and more money in coming years in order to pursue postsecondary education.

Is anyone in higher education worried about this? No, college leaders are absorbed with more pressing matters--trigger words, safe spaces, and controversial commencement speakers.

In short, everyone in higher education--students, professors, and administrators--are behaving very much like the romantic couple in the movie Titanic--dancing in steerage while their ship steams closer and closer to a lethal iceberg.

Dancing on the Titanic

References

Daniel DiSalvo and Jeffrey Kucik. On the Chopping Block: Rising State Pension Costs Lead to Cuts in Higher Education. Manhattan Institute Report, May 2017.



Friday, May 19, 2017

Will the Student Loan Crisis Bring Down the Economy? My Pessimistic View

Mike Krieger recently posted a blog on Liberty Blitzkrieg in which he argued that two issues will dominate American politics in the coming years: health care and student loans.

"Going forward," Krieger wrote,  "I believe two issues will define the future of American politics: student loans and healthcare. Both these things . . .  have crushed the youth and are prevent[ing] a generation from buying homes and starting families. The youth will eventually revolt, and student loans and healthcare will have to be dealt with in a very major way, not with tinkering around the edges."

Krieger concluded his essay with this pessimistic observation:
Student loans and healthcare are both ticking time bombs and I see no real effort underway to tackle them at the macro level where they need to be addressed. Watch these two issues closely going forward, as I think fury at both will be the main driver behind the next populist wave.
Krieger's dismal projection regarding student loans is supported by recent reports from the Federal Reserve Bank of New York.  The Fed reported that more than 44 million people are now burdened by student loans. About 4.7 million borrowers are in default and another 2.4 million are delinquent.

Moreover, a lot of this debt is carried by older Americans. According to Fed data, $216 billion is owed by people who are 50 years old or older. And we know from other sources that student loan debt is following people into their retirement years. In fact, about 170,000 people are having their Social Security checks garnished due to student loans that are in default.

Borrowers carry debt levels of varying amounts, but the Fed reported that 2 million people owe $100,000 or more on student loans. Interestingly, people with small levels of debt are more likely to default than people who have high levels of indebtedness. In the 2009 cohort, 34 percent of people who owed $5,000 or less had defaulted within five years. Among people owing $100,000 or more, only 18 percent defaulted during this same period.

And of course default rates don't tell the full story. Almost 6 million people have signed up for income-driven repayment plans, and most are making payments so low they will never pay off their loans. Millions more have loans in deferment or forbearance; and these people aren't even making token loan payments. Meanwhile, interest is accruing on their loans, making it more difficult for borrowers to pay them off once they resume making payments.

Surely, this rising level of student-loan indebtedness has an impact on the American economy. According to the New York Times, student loans now constitutes 11 percent of total household indebtedness--up from just 5 percent in 2008.  Obviously, Americans with burdensome levels of student-loan debt are finding it more difficult to buy homes, start families, save for retirement or even purchase basic consumer items.  No wonder sales at brick-and-mortar retail stores are down and the casual dining industry is on the skids.

So far, as Krieger pointed out, our government is tinkering around the edges of the student loan crisis, making ineffective efforts to rein in the for-profit college industry and urging students to sign up for long-term income-driven repayment plans.

But this strategy is not working. According to the General Accounting Office, about half the people who sign up for income-driven repayment plans are kicked out for noncompliance with the plans' terms. The for-profit colleges, beaten back a bit by reform efforts during President Obama's administration, have come roaring back, advertising their overpriced programs on television.

All this will end badly, but our government is doing everything it can to forestall the day of judgment. In Price v. U.S. Department of Education, a case I wrote about earlier this week, the Department of Education took six years to make the erroneous decision that a University of Phoenix graduate was not entitled to have her loans forgiven. DOE's ruling clearly violated federal law, and the Phoenix grad finally won relief in federal court.

But DOE isn't concerned about following the law. It just wants to stall for time--knowing that a student-loan apocalypse is not too far away.
The Student Loan Apocalypse


References

Michael Corkery and Stacy Cowley. Household Debt Makes a Comeback in the U.S. New York Times, May 17, 2017.


Mike Krieger. Student Loans and Healthcare--Two Issues that Will Define American Politics Going Forward. Liberty Blitzkrieg, May 4, 2017.

Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw. Looking at Student Loan Defaults through a Larger Window. Liberty Street Economics (Federal Reserve Bank of New York. February 19, 2015.

Thursday, May 18, 2017

Private liberal arts colleges are discounting tuition by an average of 44 percent--undercutting the credibility of their sticker prices

Rouses Supermarkets, a Louisiana food chain, advertised a wine and spirits sale a few days ago. Three Olives root beer vodka--normally priced at $20 a bottle, was on sale--4 bottles for ten bucks!

Did I rush to my nearest Rouses grocery store to stock up on root beer vodka? No, I did not. Instead I formed a negative opinion of the stuff. I concluded that any vodka that can be purchased on sale for two dollars and fifty cents a bottle is probably not worth $20 a bottle.

Private liberal art colleges are risking their long term viability by slashing their posted tuition prices drastically. Last year, the colleges discounted freshman tuition by an average of 49 percent; and tuition for students as a whole were slashed by an average of 44 percent.

In an informative article for Inside Higher Ed, Rick Seltzer identified  two trends that are driving colleges to heavily discount their tuition prices.  First, students' families need increased levels of financial aid in the wake of the 2008 recession. Second, colleges are heavily competing for students due to a downward demographic trend of fewer college-age students in the population. Ken Redd, research director for the National Association of College and University Business Officers (NACUBO) was quoted as saying he saw nothing on the horizon that would dissipate those trends.

Not surprisingly, small colleges are discounting tuition more heavily than large comprehensive universities.  At the small schools, freshman tuition is being discounted by more than 50 percent.

According to NACUBO's report, tuition discounting is happening even as colleges raise their sticker prices. Unfortunately, for many colleges, this tactic has not increased net revenue. “If you adjust for inflation, many schools are actually seeing real decreases in net tuition revenue,” Mr. Redd said.

Increased tuition discounts is just another sign that private liberal arts colleges are under an existential threat. Several have closed already, and others are taking drastic action to cut their costs.

Holy Cross College in Indiana sold 75 acres of real estate to Notre Dame to bolster its financial picture even as it struggled to quell rumors that it will soon be closing. Wheeling Jesuit University is encouraging faculty members to retire early.  Mills College, a small women's college in California, is laying of faculty members. Mills is running a $9 million deficit on a $57 million operating budget--clearly not sustainable.

At some colleges, administrators are finding that a smaller and smaller percentage of applicants who are admitted actually show up as students.  Mills for example, admitted 1,242 applicants in 2013-2014; and only 217 applicants actually enrolled. In 2015, the enrollment picture was even bleaker: 639 applicants were admitted and only 139 students actually enrolled.

Some small private colleges will survive in spite of the bleak financial picture. Those that have real estate to sell, like Holy Cross, can keep the wolf from the door for a few more years. Colleges that have large endowments can draw down those funds to meet their budgets.

But ultimately, a lot of small liberal arts colleges are going to close. Their target customers won't be hurt by this trend; they will simply enroll at public institutions. But faculty and staff  from closed colleges are going to find it very difficult to find new jobs.




References

Scott Jaschik. 'Financial Emergency' at Mills. Inside Higher Ed, May 17, 2017.

Rick Seltzer. Discounting Keeps Climbing. Inside Higher Ed, May 15, 2017.

Rick Seltzer. Holy Cross College to Sell Land to Notre Dame. Inside Higher Ed, May 15, 2017.

Rick Seltzer. Early Retirements at Wheeling Jesuit. Inside Higher Ed, May 10, 2017.

University of Phoenix graduate got her student loans discharged on the grounds that Phoenix falsely certified she was eligible to receive the loans

 As the Department of Education attests on its own web site, DOE will forgive or cancel student loans under certain circumstances. For example, students are entitled to have their loans forgiven if the school they were attending closes while they were enrolled or shortly thereafter.   Students can also obtain a discharge if they can show they were induced to take out student loans through fraud. And students are also entitled to have their student loans discharged if the school they attended falsely certified that they were eligible to receive a federal student loan.

Unfortunately, the administrative process for obtaining a loan discharge is not easy to navigate. In fact, one might conclude that DOE sets up roadblocks to prevent student borrowers from obtaining the discharges to which they are legally entitled. Price v. U.S. Department of Education, decided last year, illustrates just how difficult it can be to obtain a loan discharge even when a student is clearly qualified for relief.

Price v. U.S. Department of Education: The facts

Phyllis Price graduated with a degree from the University of Phoenix in 2005. She paid for her studies by taking out student loans, which she consolidated into a single loan in the amount of $36,868 bearing interest at 5.3 percent.

Price was 52 years old when she began her studies at the University of Phoenix and had not graduated from high school. A university counselor "instructed her to state on the [admission] application that she had actually finished school and to fill in the year she 'should have graduated.'" Price filled out the forms as she was directed.

Apparently, Price's degree from Phoenix did not benefit her financially. She was working as a contract administrator at the time she began her studies and she was still doing substantially the same work ten years after obtaining her degree.

Price's first payment on her consolidated loan was due in August 2006. She did not make payments on the loan, and the Department of Education (DOE) declared her in default in October 2007.

In March 2008, Price filed a "False Certification (Ability to Benefit) Loan Discharge Application" in an effort to get her loans discharged. Essentially, she argued that her student loans should be cancelled because the University of Phoenix had falsely certified that she was eligible to receive federal student loans for her studies.

American Student Assistance (ASA), DOE's loan servicer, denied Price's application and told her to produce evidence that she did not have a high school diploma. Price produced her high school transcript, which was prominently stamped "DID NOT GRADUATE" and asked for a hearing.

On June 24, 2009, more than a year after Price produced her high school transcript, DOE affirmed ASA's original decision denying her a loan discharge.  On October 1, 2014--more than six years after she filed her discharge application, DOE issued its final decision denying Price's "false certification discharge application."  A short time later, Price received notice that her wages were subject to being garnished for failure to pay back her student loan. Price then brought suit in federal court.

Statutory and Regulatory Issues Pertinent to Price's case


Under the Federal Family Education Loan Program (FFELP), private lenders make loans to "eligible borrowers" to finance postsecondary studies. The loans are insured by student loan guaranty agencies and reinsured by DOE. Generally, an eligible borrower is someone who has a high school diploma or a GED. 

"However, a 'student who does not have a certificate of graduation from a school providing secondary education, or the recognized equivalent of such certificate,' may qualify for a loan if the school certifies that she has the ability to  benefit from the education it provides." Price v. U.S. Dep't of Educ., 209 F. Supp. 3d 925, 930 (S.D. Tex. 2016) (quoting 20 U.S.C. sec. 1091(d)). 

A school can certify that a student has the ability to benefit from its programs if the student passes an independently administered ATB ("ability to benefit") test.  However, the University of Phoenix did not require Price to take an ATB test.

What is the purpose of the "ability to benefit" rule? Congress adopted "ability to benefit" legislation in 1992, "spurred by public concern over unscrupulous schools exploiting student borrowers who received no benefit from expensive classes of little use." Id. Under federal law (20 U.S.C. sec. 1087(c) (1)), the Department of Education is required to discharge loans taken out by people who were falsely certified as being eligible to receive federal loans by the schools they attended. 

A federal magistrate rules in Price's favor

Price filled out an application to have her loans discharged in 2008, asserting under oath that she did not have a high school diploma at the time she took out federal loans and had not  been given an ATB test. End of story, right?

No, DOE refused to discharge her student loans on the grounds that it had no evidence that University of Phoenix had systematically violated the "ability to benefit" rules. In refusing to forgive Price's loans, a federal magistrate found, DOE violated federal law and DOE's own regulations. In essence, the magistrate observed, DOE's decision-making process "amounted to a cursory glance at the forest, with no attempt to spot the only tree that mattered."

DOE attempted to defend its decision by offering post-hoc rationalizations. In particular, the Department argued that Price obtained a degree from the University of Phoenix and should not be allowed to benefit from that degree without paying for it. But the federal magistrate rejected that argument, pointing out that Price was entitled to have her loans forgiven whether or not she obtained a degree. 

Furthermore, the magistrate noted, Price apparently had not benefited from her studies at the University of Phoenix. "Price is doing essentially the same job as before she enrolled, and any psychic benefit from achieving a degree is more than offset by eight years of fending off debt collectors." In any event,  the Magistrate continued, "Congress did not see fit to condition student loan relief upon a showing that the student ultimately failed to graduate." Id. at 934.

Why did DOE deny Price the relief to which she was legally entitled?

Clearly, Price was ill treated by DOE, which dragged her through a tedious administrative process for six years before ultimately denying her claim.  And, as a federal magistrate concluded, Price was clearly entitled to have her student loans forgiven under federal law and DOE's own regulations.

Why did DOE take the position it did? I can think of only one reason--DOE is so desperate to keep people from getting their loans forgiven that it is willing to ignore federal law. 

DOE is like the fabled Dutch boy with his thumb in the dike. Once a few people are granted relief from their student loans, it will be apparent that millions are entitled to relief. That will lead to a torrent of loan forgiveness, which will cause the federal student loan program to collapse.



References

Price v. U.S. Dep't of Education, 209 Fed. Supp. 3d 925 (S.D. Tex. 2016).