Education Corporation of America files for receivership: Using lawyers' tricks to suck up more federal student-loan money

Education Corporation of America (ECA), a for-profit college chain, filed a lawsuit a few days ago in an Alabama federal court. The lawsuit seeks to put ECA into receivership, and it asks the court to halt all litigation against it. ECA also wants Betsy DeVos and the Department of Education to keep showering it with student-loan money while it straights out its financial affairs.

ECA is closing more than two dozen of its campuses; and it needs to keep getting federal student-loan money, it argues, so it can do a "teach out" at campuses it intends to close. If it allows current students to finish their academic programs (through a teach-out), those students won't be eligible to have their student loans forgiven under the "closed school" rule. That will save the Department of Education a lot of money, ECA says.

This line of bull reminds me of the story about a man who murdered his parents and then begged the court for leniency on the grounds he was an orphan.

ECA operates  under numerous brand names, including Virginia College, New England College of Business, Brightwood College, and Golf Academy of America; and it is in big financial trouble. It submitted a list of legal claims against it to the Alabama court, which is 15 pages long. Landlords are suing for back rent and other litigants have sued for breach of contract, fraud, failure to pay wages,  race discrimination, age discrimination, false advertising and some other stuff. 

Why doesn't ECA just file for bankruptcy? One reason: Under federal law, ECA would immediately lose access to all federal money if it filed for bankruptcy. It is hoping to keep federal money flowing as a long as possible.

I hope Judge Abdul Kallon sees through ECA's dodgy litigation ploy and refuses its plea for a receiver and an injunction against its creditors. (Judge Kallon granted ECA a temporary restraining order on October 19, but he will have to extend it to keep ECA's creditors at bay.)

  ECA needs to close, and it needs to close NOW. Every day it continues operating is another day uninformed students will be taking out student loans to pay for an ECA education that probably won't get them a good job. In fact, ECA's own accrediting agency scored ECA's campus-level job placement rate at only 16 percent.


References

David Halperin. For-Profit College Chain Claims Financial Distress, Sues DeVos. Republic Report, October 18, 2018.

Steve Rhode. Education Corporation of America Whines Over Failure. Get Out of Debt Guy (blog), October 22, 2018.

Alan White. For-profit college chain files (for receivership). Credit Slips, October 22, 2018.

FedLoan Servicing is accused of fraud. What did the Department of Education know about how FedLoan treated student debtors in the PSLF program?

As Alan White reported in Credit Slip yesterday, the U.S. Department of Education assigned the complex task of monitoring the Public Service Loan Forgiveness (PSLF) program to its worst-performing student-loan servicer--FedLoan Servicing (Fedloan).  In 2017, DOE ranked FedLoan last among 9 student-loan servicers "based on delinquency rates and customer satisfaction survey results."

PSLF, created by Congress in 2007, is a federal program designed to make it easier for student-loan borrowers in public service jobs to pay off their loans. And it is a very big program. Almost 1.2 million people have applied to have their student loans certified for PSLF participation; and 890,000 borrowers have been approved so far.

PSLF borrowers are entitled to have their student loans forgiven after 120 on-time loan payments. The first PSLF participants became eligible for debt relief in September of last year. As of last month, 28,000 borrowers had applied for debt relief, but DOE had approved less than 100.

What's going on?

According to a federal lawsuit filed in Pennsylvania earlier this year, FedLoan has fraudulently administered the PSLF program to enrich itself at the expense of student borrowers (paragraphs 80-91). Plaintiffs in the suit claim FedLoan penalized borrowers who made extra payments by posting all subsequent payments as being paid late. Since late payments don't qualify toward the 120 on-time payments, student debtors who made extra payments in good faith actually increased the number of months they would have to make loan payments. Since FedLoan gets a service fee for managing student loans, the longer a borrower makes payments, the more money FedLoan earns in fees.

In addition, FedLoan reputedly made bookkeeping errors while administering the PSLF program; and when borrowers tried to straighten out these mistakes, FedLoan put their loans into forbearance. Student debtors whose loans are in forbearance do not get credit for loan payments they make, and this practice also extended the time borrowers are obligated to make student-loan payments.

Plaintiffs in the federal lawsuit allege FedLoan engaged in these activities to increase its revenues. And indeed, FedLoan is making a bundle of money in the debt collection business. According to the plaintiffs' complaint (paragraph 33), FedLoan earned net revenues of more than $220 million in 2014 and owns assets worth $700 million!

But here is a question the Pennsylvania plaintiffs did not ask: Why did DOE permit FedLoan to allegedly defraud student debtors?

After all, DOE must have known something was wrong based on the sheer volume of complaints that student borrowers were filing against FedLoan. All DOE would had to have done to bring FedLoan into line was write a letter telling it not to interpret the PSLF program in a way that harms PSLF participants.

I think DOE intentionally allowed FedLoan to operate the PSLF program so unfairly because DOE knows the PSLF program will cost the government billions if every PSLF applicant gets the debt relief the program promises. In other words, DOE knew exactly how FedLoan would behave if it got the PSLF servicing project, and that's why DOE chose FedLoan.

I hope a federal court ultimately finds FedLoan liable for defrauding PSLF participants. And if it does, then DOE should be named as a co-conspirator in a scandalous fraud.

References

Danielle Douglas-Gabriel. Watchdog agency blasts government contractor for mishandling student loan forgiveness program. Washington Post, June 27, 2017.

Student loans--the other debt crisis. Credit Slips essay by Alan White

Student loans - the other debt crisis

posted by Alan White at creditslips.org

In a low unemployment economy, an entire generation is struggling, and millions are failing, to repay student loan debt. As many as 40% of ALL borrowers recently graduating are likely to default over the life of their student loans, according to a recent Brookings Institute analysis. Total outstanding student loan debt is approaching 1.5 trillion dollars, exceeding credit card debt, exceeding auto loan debt. Two other key points from the Brookings analysis: 1) for-profit schools remain the primary driver of high student loan defaults, and 2) black college graduates default at five times the rate of white college graduates, due to persistent unemployment, higher use of for-profit colleges and lower parental income and assets.

The rising delinquency (11% currently) and lifetime default rates are all the more disturbing given that federal student loan rules, in theory, permit all borrowers to repay based on a percentage of their income. Most student loans are funded by the U.S. Treasury, but administered by private contractors: student loan servicers. Study after study has found that student loan borrowers are systematically assigned to inappropriate payment plans,  yet the U.S. Education Department continues renewing contracts with these failing servicers. The weird public-private partnership Congress has created and tinkered with since the 1965 Higher Education Act is broken.

Unmanageable student loan debt will saddle a generation of students with burdens that will slow or halt them on the path to prosperity. Student loan collectors have supercreditor powers, to garnish wages and seize tax refunds without going to court, to charge collection fees up to 40%, to deny graduates access to transcripts and job licenses, and to keep pursuing debts, zombie-like, even after borrowers go through bankruptcy and discharge other debts. Recent graduates cannot get mortgages to buy homes, even if they are not in default, because their student loan payments are taking such a bite out of their monthly incomes. State legislatures have piled on educational requirements for a variety of entry-level jobs (nurse's aides, child care workers, teachers, etc.) while cutting state funding for public colleges and increasing tuition: unfunded job mandates. Finally, the combination of high debt and the harsh consequences of default are widening the racial wealth and income gaps.

Current reform proposals would make a bad situation worse. For example, it is difficult to see how increasing the percentage of income required for income-based repayment plans will help student borrowers, nor how extending the repayment period before loan retirement would reduce defaults. What is needed instead is to 1) deal with the for-profit school problem, 2) restore the state-level commitment to funding public colleges, 3) fix the broken federal student loan servicer contracting, 4) rethink the collection and bankruptcy regime for student loans and 5) repeal the student loan tax, i.e. the above-cost interest rates college graduates pay to the Treasury. Among other things. More on these themes in later posts.

The Student Loan Crisis is WORSE than the 2008 Housing Crisis: The Return of "The Big Short"

As everyone knows, the housing market collapsed in 2008, triggering a major economic crisis in the United States. The nation descended into recession, and the national economy is still recovering from this catastrophe.

Steve Rhode and others have described a student loan "bubble," and I share these commentators' view that the federal student loan program as it functions now is unsustainable.  Approximately 42 million borrowers collectively owe $1.4 trillion in student-loan debt, and families are beginning to experience sticker shock. Enrollments are declining at the for-profit schools, and nonprofit liberal arts colleges are desperately scrambling to maintain their enrollments.

Many people may think the student-loan crisis--no matter how bad it is--is just a small tremor compared to the 2008 housing crisis, which was an earthquake.

But in fact, the student loan crisis has produced more casualties in terms of human suffering than the housing collapse ten years ago.

Earlier this week, Alan White of Credit Slip, an online news source on economic matters, commented on a housing-data report released recently by the Urban Institute. Based on the Urban Institute's data, White assessed the total damage from the subprime housing crisis. From 2007 to 2016, 6.7 million homes went into foreclosure and another 2 million homes were lost through short sales or deeds-in lieu of foreclosure. Thus the total number of homeowners who lost their homes in the subprime housing debacle is about 8.7 million. If we assume a majority of those homes were owned by married couples, then the total number of individuals who were injured in the housing crisis is about 16 million.

That's a lot of people, but the casualty list from the student loan crisis is larger. 

As the New York Times reported in 2015, about 10 million student borrowers have defaulted on their loans or have loans in delinquency. Almost 6 million debtors are now in income-driven repayment programs (IDRs), and those people are locked into repayment plans that last from 20 to 25 years. A majority of those people are making payments so low they are not servicing accruing interest, which means their student loans balances are growing larger (negatively amortizing) with each passing month.

So we're talking about 16 million people who defaulted, have delinquent loans, or who are in IDRs. And millions more have student loans in forbearance or deferment, which means they are not making payments on their loans but are not counted as defaulters. For most of those people, interest is accruing, which means their student loan balances are growing. The Consumer Financial Protection Bureau reported a total of about 9 million people in deferment or forbearance in its 2013 report titled A Closer Look at the Trillion. 

All these numbers are fluid. Some delinquent student-loan borrowers will bring their loans current, and some defaulters will rehabilitate their loans. And some people will move from deferment status to some form of IDR.

But it is safe to say--indeed conservative to say--that about 20 million Americans have outstanding student loans they can't pay back. That's 4 million more people that were injured by the housing crisis. It's The Big Short all over again.

Alan and Catherine Murray, who received a partial discharge of their student loans in a Kansas bankruptcy court last year, are the poster children for this calamity. They borrowed $77,000 to finance their studies, and both obtained a bachelor's degree and a master's degree. They paid back $54,000--about 70 percent of what they borrowed. 

But the Murrays experienced hard times and put their loans into deferment for a few years while interest accrued at the rate of 9 percent. They now owe $311,000! Will they ever pay that back? No, they won't.

Yes, the federal loan program is in a bubble, and the suffering has already begun. The federal government is propping up this house of cards and disguising the real default rate. Congress doesn't have the courage to address the problem, and the Trump administration appears to be clueless

We must look to the federal bankruptcy courts for relief. The Murrays obtained a partial dischage of their their loans from a Kansas bankruptcy judge last year, but their case is now on appeal.  

Stay tuned for further developments.

The Big Short

References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26.

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).

Steve Rhode. The Student Bubble That Many Don't Want To See. Get Out Of Debt Guy, July 15, 2016.

Jill Schlesinger. Looking for the next bubble. Chicago Tribune, August 24, 2016.

Alan White, Foreclosure Crisis Update. Credit Slip, April 5, 2017.