I Got a Sweet Deal! Is Biden's new income-driven repayment plan too generous?

 College debtors definitely have a friend in President Biden.  So far, his administration has approved $25 billion in loan forgiveness. In addition, it paused student borrowers' monthly payment obligations until the end of 2022.

More relief is on the way. President Biden announced loan cancelation of up to $20,000 per student borrower.  The Congressional Budget Office predicts the program will cost $400 billion.

And that ain't all. The U.S. Department is working on a more generous income-based repayment plan (IBRP), which--for some borrowers--will amount to a free college education. 

Adam Looney, writing for the Brookings Institution, analyzed Biden's new IBRP; his findings are astonishing. As Mr. Looney explains, undergraduate borrowers can enter into an IBRP that only requires them to pay 5 percent of their annual income over $33,000.         

For example, unmarried college graduates who make $50,000 a year will only be obligated to pay about $70 per month on student loans--regardless of how much they borrowed.

What if the monthly payment isn't enough to cover accruing interest? No problem! The government will forgive the unpaid interest, so loan balances don't grow.

Now that's a sweet deal!

On average, Looney concludes, student borrowers can expect to pay back only 50 cents on every dollar borrowed, and some will never make a single loan payment. 

Looney predicts the new IBRP will lead to increased borrowing. Why? "Because when . . . students are offered a substantial discount by paying with a federal loan, they will borrow billions more each year."

As Looney pointed out in his report, students can take out student loans to cover their tuition and living expenses. Students who receive checks for living expenses can deposit them in their bank accounts, knowing they may not have to pay back their student loans.

As Looney put it, "Some people will use [student] loans like an ATM, which will be costly to taxpayers and is certainly not the intended use of the loans."

Looney also predicts that Biden's incredibly generous IBRP will lead to tuition inflation. 

He thinks the new IBRP will prompt colleges to create new and expensive programs to juice their revenues. "My fear," he wrote, "with regards to overall college costs, is that institutions will have an incentive to create valueless programs and aggressively recruit students into those programs with promises they will be free under an IDRP plan. 

I'm in favor of student-loan relief. Millions of Americans are saddled with crippling debt for college degrees that did not benefit them financially.  Let's give those folks a break.

But President Biden's new IDRP program goes too far. Adam Looney is right: Biden's poorly-designed IBRP will encourage students to borrow more and more money to attend college, knowing they will not be obligated to pay back their loans.

A  student-loan bonanza is coming soon to your hometown.

You should die before you pay off your student loans: Estate planning for elderly student-loan debtors

Steve Rhode posted an essay yesterday titled "Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven." As Mr. Rhode explained, the federal government cancels all unpaid student loans owed by debtors who die before their loans are repaid. The cancelled debt is not a burden on the deceased debtor's estate.

On the other hand, people in 20- and 25-year income-based repayment plans (IBRPs) who receive loan forgiveness when they complete their repayment terms, will owe federal taxes on the amount of their forgiven loans. Why? Because the IRS considers a forgiven loan to be taxable income. If that tax bill comes due and the student-loan borrower can't pay it before dying, the unpaid tax becomes a claim on the decedent's estate.

"So," Mr. Rhode advises, "if you are older it may make more sense and cost less money overall if you extend out the repayment term past when you estimate you will die. When you pass, the student loan can pass with you."

Steve Rhode is absolutely right. You may think this is a technical detail of the student-loan program that only concerns a few people. But you would be wrong.

More than 7 million people are in IBRPs, and the number grows with each passing month. Nearly all these people will not have payed off their student loans before their repayment terms come to an end due to accruing interest. That means nearly all 7 million will receive tax bills when their accumulated student-loan debt is forgiven.

And these tax bills could be enormous. Remember Mike Meru, who borrowed $600,000 to go to dental school and is paying it back in an IBRP? The Wall Street Journal estimated that his debt would grow to $2 million by the time he completes his income-based repayment plan due to accruing, compound interest. That $2 million will be forgiven but it will also be taxable income for Dr. Meru.

It is true the IRS will not assess a forgiven-loan tax on people who are insolvent when their student loans are forgiven. But that's no comfort. How many people want to pay on student loans for 25 years and be insolvent on the day their loans are forgiven?

Of course there is a simple solution to this problem: Congress can pass legislation that would remove the tax liability  of people who complete IBRPs and have their student loans forgiven. In fact, this fix could probably be achieved through a federal regulation without Congressional action.

Alternatively, bankruptcy courts could simply discharge student-loan debt held by overburdened student-loan borrowers.  Some federal bankruptcy courts have concluded that IBRPs are not a feasible alternative to bankruptcy relief. They have countenanced the tax consequences of IBRPs, and some have recognized the enormous mental stress that debtors experience when they are burdened by student loans that can never be repaid. For example, the bankruptcy courts in the Fern case, the Martin case, and the Abney case have taken this sensible and compassionate view.

Perhaps Congress will do the right thing and fix this problem. After all, the Democrats will control the House of Representatives in January. If they were to present a bill to remove the tax consequences of forgiven student loans, what Republican would oppose it?

We shall see. In the Metz case, Judge Robert E. Nugent referred to an IBRP as a "pay-as-she-earns time bomb," and he is certainly correct. What a tragedy if this nasty time bomb goes off for millions of IBRP participants, when it could be so easily defused.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Vicky Jo Metz v. Educational Credit Management Corporation, 589 B.R. 750 (D. Kan. 2018).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

Steve Rhode, Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven. Get Out of Debt Guy (blog), December 17, 2018.

Hopson v. Illinois Student Assistance Commission: A clueless bankruptcy judge sentences a 63-year-old student-loan borrower to a lifetime of indebtedness

Janice Faye Hopson, 63 years old, went to trial in an Illinois bankruptcy court last spring, hoping to discharge more than $100,000 in student loans. The Illinois Student Assistance Commission and the U.S. Department of Education opposed her plea for relief; and Judge Jacqueline Cox, the bankruptcy judge who heard Hopson's case, ruled against her.

At the time of Judge Cox's ruling, Hopson was in a 25-year income-based repayment plan (IBRP) that required her to make monthly payments of zero due to her low income. Indeed, Judge Cox ruled that Hopson could maintain "a substantial standard of living" while making student-loan payments of zero dollars a month (588 B.R. 518).

Hopson argued that she would never pay back $100,000 in student loans under a 25-year IBRP and that the principal on the loan will continue to grow in the coming years due to accruing interest. When the 25-year plan ends, Hopson will likely be in her 80s. Moreover, although DOE will write off the amount of her unpaid debt when the 25-year repayment plan is completed, that amount will be taxable to her as income.

Judge Cox was unsympathetic. If Hopson is insolvent when her 25-year plan ends, Judge Cox pointed out, she can file for bankruptcy a third time and discharge her tax bill on the grounds that she is broke (588 B.R. at 515).

Will Ms. Hopson be insolvent when her IBRP ends two decades from now? Of course she will. At age 63, she has virtually no retirement savings (as Judge Cox acknowledged). Twenty years from now, she undoubtedly will be living entirely off her Social Security checks, estimated to be only $1430 a month.

Although Judge Cox probably did not realize it, she essentially ruled that no student debtor who is eligible for a long-term income-based repayment plan is entitled to bankruptcy relief. Of course it is true in one sense that a person allowed to make student-loan payments of zero dollars a month cannot claim her student loans constitute an "undue hardship" in the present moment. But people making token monthly payments or even monthly payments of zero are burdened by student-loan debt that grows with each passing month due to accruing interest and which will never be repaid.

They are also burdened by the specter of a huge tax bill when DOE eventually writes off their loans two decades or more into the future. Like Ms. Hopson, many people will be long past retirement age when their IBRP payment obligations come to an end. And like Ms. Hopson most people in IBRPs won't have sufficient retirement savings to live their last years in comfort and dignity.

*****

A few notes in closing. First, Judge Cox ruled that Ms. Hopson could maintain a "substantial standard of living" while making student-loan payments of zero dollars a month. Apparently, the judge concluded Hopson was living above a minimal lifestyle because she rented a two-bedroom apartment. Judge Cox pointed out Hopson could save $225 a month if she moved into a one-bedroom apartment.

Second, Adam Merrill, a Chicago lawyer, represented Ms. Hopson pro bono. I want to especially commend him for taking on Ms. Hopson's case without a fee.

Finally, Judge Cox did not state in her opinion when Ms. Hopson's 25-year repayment plan will end. Perhaps the date was not important to the judge.  In this essay I presumed that Hopson signed up for a 25-year repayment plan fairly recently and that it won't conclude until she is in her 80s.

Judge Jacqueline Cox: No mercy for a 63-year-old student-loan debtor

References

Hopson v. Illinois Student Assistance Commission, 588 B.R. 509 (Bankr. N.D. Ill. 2018).

Sue Reagan v. Educational Credit Management Corporation: "A camel whose back is already broken"

Sue Reagan is 60-years old and lives in a mobile home on rented land. She has a part-time job but lives near or below the poverty line. She took out student loans to obtain a bachelor's degree in administration of justice and a master's degree in criminology, but that was long ago.

Unable to pay back her student loans under a standard ten-year repayment plan, Reagan signed up for an income-based repayment plan (IBRP). Her income is so low, however--$1,286 a month--that her monthly payments are zero dollars.

Reagan filed for bankruptcy and brought an adversary action to discharge her student loans. She argued that her student loans constituted an undue hardship and that she could not maintain a minimal standard of living and pay back those loans.

Educational Credit Management Corporation, her creditor, filed a motion for summary judgment and asked the bankruptcy court to dismiss Reagan's case without a trial.  ECMC argued that since Reagan's monthly payments were zero dollars, she could not reasonably argue that her student loans constituted an undue hardship or that her loans forced her below a minimal standard of living.

But Bankruptcy Judge Gregory Taddonio disagreed with ECMC and refused to dismiss Reagan's case. In Judge Taddonio's view, it did not matter which debt drove Reagan to the edge of poverty. "If she finds herself financially underwater, the question of which obligation pushed her below the surface matters little. To a camel whose back is already broken, any straw in his pack is unwelcome."

Judge Taddonio looked at Reagan's financial information and noted that her expenses were $119 more than her income, which was less than $1,300 a month. Moreover, her expenses were reasonable--mostly going for basic necessities. Judge Taddonio said he could not identify any expenses that could be trimmed.

So Judge Taddonio allowed Sue Reagan's adversary proceeding to go forward. Will she ultimately prevail?

Who knows? ECMC's motion to dismiss was merely the first of many arguments ECMC will make to defeat Reagan's attempt to shed her student loans. And ECMC has unlimited resources. It can hound Reagan for years right up to the Third Circuit Court of Appeals.

But Reagan's initial victory is heartening, a sign perhaps that the federal bankruptcy judges have begun to acknowledge that the federal student loan program has destroyed the lives of millions of people, most of whom deserve bankruptcy relief.

Martin v. ECMC: Iowa bankruptcy judge discharges unemployed lawyer's student loans

In Martin v.  Educational Credit Management Corporation (ECMC), decided last February, Janeese Martin obtained a bankruptcy discharge of her student-loan debt totally $230,000. Judge Thad Collin’s decision in the case is probably most significant for the rationale he articulated when he rejected ECMC’s argument that Martin should be placed in a 20- or 25-year, income-based repayment plan (IBRP) rather than given a discharge.

Citing previous decisions, Judge Collins said an IBRP is inappropriate for a 50-year-old debtor who would be 70 or 75 years old when her IBRP would come to an end. An IBRP would injure Martin’s credit rating and cause her mental and emotional hardship, the judge wrote. In addition, an IBRP could lead to a massive tax bill when Martin's plan terminated in 20 or 25 years, when she would be "in the midst" of retirement.

Janeese Martin, a 1991 law-school graduate, is unable to find a good law job

Janeese Martin graduated from University of South Dakota School of Law in 1991 and passed the South Dakota bar exam the following year. In spite of the fact that she held a law degree and a master's degree in public administration, Martin never found a good job in the field of law. 

Martin financed her undergraduate studies and two advanced degrees with student loans totally $48,817. In 1993, she consolidated her loans at an interest rate of 9 percent; and she made regular payments on those loans from 1994-1996. 

Over the years, there were times when Martin could make no payments on her student loans, but she obtained various kinds of deferments that allowed her to skip monthly payments while interest accrued on her loan balance. By 2016, when Martin and her husband filed for bankruptcy, her student-loan debt had grown to $230,000--more than four times what she borrowed.

As Judge Collins noted in his 2018 opinion, Janeese Martin was 50 years old and unemployed. Her husband Stephen was 66 years old and employed as a maintenance man and dishwasher at a local cafe. The couple supported two adult children who were studying at the University of South Dakota and had student loans of their own. The family's annual income for 2016 was $39,243, which came from three sources: Stephen's cafe job, his pension and his Social Security income.

Judge Collins reviewed Janeese's petition to discharge her student loans under the "totality of circumstances" test, which is the standard used by the Eighth Circuit Court of Appeals for determining when student loans constitute an "undue hardship" and can be discharged through bankruptcy. 

Martin's Past, Present, and Reasonably Reliable Future Financial Resources

Judge Collins surveyed Martin's employment history since she completed law school. In addition to three years working for a legal aid clinic, Martin had worked eight years with the Taxpayer's Research Council, a nonprofit agency located in Iowa.  Her maximum salary in that job had paid only $31,000, and Martin was forced to give up her job in 2008 when her family moved to South Dakota.

ECMC, which intervened in Martin's suit as a creditor, argued that Martin had only made "half-hearted" efforts to find employment, but Judge Collins disagreed. Martin "testified very credibly that she wants to work and has applied for hundreds of jobs," Judge Collins wrote. Nevertheless, in the nine years since her last job, Martin had only received a few interviews and no job offers. 

Judge Collins acknowledged that Martin had two advanced degrees, but neither had been acquired recently. In spite of her diligent efforts to find employment, the judge wrote, she was unlikely to find a job in the legal field that would give her sufficient income to make significant payments on her student loan.

Martin's Reasonable and Necessary Living Expenses

Judge Collins itemized the Martin family's monthly expenses, which totaled about $3,500 a month. These expenses were reasonable, the judge concluded, and slightly exceeded the family's monthly income. Virtually all expenses "go toward food, shelter, clothing, medical treatment, and other expenses reasonably necessary to maintain a minimal standard of living," Judge Collins ruled, and "weigh in favor of discharge" (p. 893).

Other Relevant Facts and Circumstances

ECMC argued, as it nearly always does in student-loan bankruptcy cases, that Martin should be placed in a 20- or 25-year income-based repayment plan rather than given a bankruptcy discharge. The Martin family's income was so low, ECMC pointed out, that Martin's monthly payments would be zero. 

Judge Collins' rejected ECMC's arguments, citing two recent federal court opinions: the 2015 Abney decision, and Judge Collins' own 2016 decision in Fern v. FedLoan Servicing. “When considering income-based repayment plans under § 523(a)(8),” Judge Collins wrote, “the Court must be mindful of both the likelihood of a debtor making significant payment under the income-based repayment plan, and also of the additional hardships which may be imposed by these programs” (p. 894, internal punctuation omitted).

These hardships, Judge Collins noted, include the effect on the debtor’s ability to obtain credit in the future, the mental and emotional impact of allowing the size of the debt to grow under an IBRP, and “the likely tax consequences to the debtor when the debt is ultimately canceled” (p. 894, internal citation and punctuation omitted).

In Judge Collins’ view, an IBRP was simply inappropriate for Janeese Martin, who was 50 years old:

If she were to sign up for an IBRP, she would be 70 or 75 when her debt was ultimately canceled. The tax liability could wipe out all of [Martin’s] assets not as she is approaching retirement, but as she is in the midst of it. If [Martin] enters an IBRP, not only would she have the stress of her debt continuing to grow, but she would have to live with the knowledge that any assets she manages to save could very well be wiped out when she is in her 70s. (p. 894)

Conclusion

Martin v. ECMC is at least the fourth federal court opinion which has considered the emotional and mental stress that IBRPs inflict on student-loan debtors who are forced into long-term repayment plans that cause their total indebtedness to grow. Together, Judge Collins' Martin decision, Abney v. U.S. Department of Education, Fern v. FedLoan Servicing, and Halverson v. U.S. Department of Education irrefutably argue that the harm IBRPs inflict on distressed student debtors outweighs any benefit the federal government might receive by forcing Americans to pay on student loans for 20 or even 25 years--loans that almost certainly will never be paid off.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

Quantitative Easing and the Student-Loan Crisis: The Government Loans Money to Students Who Don't Have a Prayer of Paying It Back

Investipedia defines quantitative easing as the process of increasing the money supply "by flooding financial institutions with capital in an effort to promote increased lending and liquidity."  Or more simply--quantitative easing is printing new money.

The Obama administration has done a lot of quantitative easing. At the height of its QE program, the government was pumping a trillion bucks a year into the economy. But there is another type of quantitative easing that is less well known. The government has been loaning billions of dollars to students under the federal student loan program, and it is only getting about half that money back. 

Who benefits? The higher education industry has gotten this money, including the stock holders and equity funds that own private colleges and universities.  

Conner v. U.S. Department of Education, a recent federal court decision, illustrates how QE works in the education sector. Patricia Conner, a Michigan school teacher, took out 26 separate student loans over a period of 14 years to pursue graduate education in three fields: education, business administration, and communications. By the time she filed for bankruptcy at age 61, she had accumulated over $214,000 in student-loan debt. According to the bankruptcy court, Conner did not make a single voluntary payment on any of her loans.

In the bankruptcy court, Conner argued that her debt should be discharged under the Bankruptcy Code's "undue hardship" standard, citing her advanced age as a factor that should weigh in her favor. 

But a Michigan bankruptcy court refused to release Conner from her debt, and a federal district court upheld the bankruptcy court's opinion on appeal. The district court  ruled that Conner's age could not be a consideration since she borrowed the money in midlife knowing she would have to pay it back. The court also indicated that Conner should enroll in an income-based repayment plan (IBRP) that the government had offered her, which would obligate her to pay only $267 a month on her massive debt. The court did not say how long she would be obligated to make payments under an IBRP, but these plans generally stretch out for at least 20 years.

Let's assume Conner signs up for an income-based repayment plan and begins paying $267 a month on her $214,000 debt. Let's also assume, that the interest rate on this debt is 6 percent. At 6 percent,  interest on $214,000 amounts to more than $12,000 a year, but Conner will only be paying about $3,200 a year toward paying off her student loans.

This means Conner's debt will be negatively amortizing--getting larger every year instead of smaller. After making payments for one year under her IBRP, Conner will owe $223,000. After the second year, she will owe around $233,000. After three years, Conner's debt will have grown to about a quarter of a million dollars, even if she faithfully makes every monthly loan payment.

Obviously, by the time Conner's IBRP comes to a conclusion in 20 or 25 years, she will owe substantially more than she borrowed, and she will be over 80 years old. In short, the government will never get back the money it loaned to Ms. Conner.

Who benefited from this arrangement? Wayne State University, where Conner took all her graduate-level classes, got most of Conner's loan money, which it used to pay its instructors and administrators.  But what did Wayne State provide Conner for all this cash? Apparently not much because Conner is still a school teacher, which is what she would have been even if she hadn't borrowed all that money to go to graduate school.

In my view, the Conner story is an illustration of QE in the higher education sector. The federal government is pumping billions of dollars a year into the corrupt and mismanaged higher education industry, and it is getting only about half of it back. Moreover, in far too many cases, the students who are borrowing all this money aren't getting much in value.

How long can this go on?  I don't know, but it can't go on forever.

Note: I am indebted to my friend Richard Precht for pointing out the relevancy of Quantitative Easing to the student loan crisis.

References

Conner v. U.S. States Department of Education, Case No. 15-1-541, 2016 WL 1178264 (E.D. Mich. March 28, 2016).

20-year Income-Based Repayment Plans for Student-Loan Debtors: A Return to Feudalism

Paul Craig Roberts wrote a chilling essay a couple of months ago in which he argued that Greece is being looted by its corporate creditors. According to Roberts, the banks don't want Greece to pay off its debts because the banks ultimately intend to strip Greece of its national assets, including its ports and nationally protected islands.

Here is the core of Roberts' argument:

The banks don't want Greece to be able to service its debt, because the banks intend to use Greece's inability to service the debt in order to loot Greece of its assets and resources and in order to roll back the social safety net put in place during the 20th century. Neoliberalism intends to reestablish feudalism . . . . The way Germany sees it, the [International Monetary Fund] is supposed to lend Greece the money with which to repay the private German banks. Then the IMF is to be repaid by forcing Greece to reduce or abolish old age pensions, reduce public services and employment, and use the revenues saved to repay the IMF. As these amounts will be insufficient, additional austerity measures are imposed that require Greece to sell its national assets, such as public water companies and ports and protected Greek islands to foreign investors, principally the banks themselves or their major clients. (emphasis supplied)

In essence, Roberts is predicting that Greece will eventually cease to be a sovereign nation; it will become a feudal serfdom controlled by private investors--principally German banks.

Something similar is occurring in American higher education. Private investors are operating for-profit colleges for the purpose of looting American taxpayers, who provide the federal student loan money that naive students use to pay the colleges' outlandish tuition prices. Almost half the students who take out student loans to attend for-profit colleges default within five years, but the for-profit colleges doesn't care. They got their money upfront.

How does this equate to feudalism? The Obama administration knows that student-loan default rates are shockingly high, but it is covering up this problem by forcing students into long-term income-based repayment plans--plans that require former students to pay a percentage of their income to the government for 20, 25, or even 30 years. In a very real sense, these long-term debtors have become feudal serfs, indebted for almost their entire working lives for the privilege of attending a shitty for-profit college. (Perhaps I should have used a different word than shitty--just can't think of one right now.)

And it's not just the for-profit college owners who benefit from this scam. The public colleges and the not-for-profit private colleges are collecting their share of the loot--jacking up tuition prices, knowing that students will simply borrow more and more money to pay their escalating tuition bills.

In fact, college presidents have become the 21st century equivalents of feudal lords--living in palatial presidential homes, flying around the world in private jets to hob nob with donors, and collecting unseemly salaries, while low-paid adjuncts teach the classes much like the serfs of the middle ages.

So, student-loan debtors, you aren't the only ones being raped by the transnational financial oligarchs. The Greek people are your companions in misery.

References

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Paul Craig Robert. We Have Entered the Looting Stage of Capitalism. Infowars, May 27, 2016. Accessible at http://www.infowars.com/we-have-entered-the-looting-stage-of-capitalism/

Hillary Clinton proposes a three-month moratorium on student-loan payments and massive loan refinancing: A good idea, but difficult to implement

According to the Washington Post, Hillary Clinton has proposed a three-month moratorium on student-loan payments to allow borrowers time to restructure their student loans at lower interest rates.

Let me say flat out that this is a good idea. As the press has widely reported, about 40 percent of college-loan borrowers who are in the repayment phase of their loans aren't making payments. These people are seeing their loan balances go up as interest accrues on unpaid debt, and they desperately need repayment options they can afford.

In addition, millions of people who are making their loan payments would benefit from repayment plans that would lower monthly payments and take advantage of lower interest rates.

Hillary's proposal underscores this stark fact: The federal student-loan program is in chaos. There are currently eight income-based repayment plans, and even experts are confused about how the different options work and which students are eligible for the various repayment plans. Giving students a three-month hiatus to sort all this out is an excellent idea.

But why is Hillary making this proposal now? Was she prompted by pure politics--making a play for young people's votes? Is her proposal an attempt to win over Bernie Sanders' supporters?

Obviously, Hillary's proposal was driven by political consideration. But I think there is something more going on--namely panic. I think Hillary and the Democratic establishment finally realize that millions of Americans are overwhelmed by unmanageable student-loan debt. These distressed debtors are frustrated, demoralized and angry; and they won't vote for Hillary unless they think she will provide them with tangible relief if she is elected President.

In short, the Democrats see blood in the water; they know they must do something substantive to keep young voters in the Democratic column in the November election.   And even Hillary's fiercest critics must admit that her massive student-loan refinancing proposal is substantive and significant.

Nevertheless, I don't see how Hillary's plan can be effectively implemented. The federal student loan program is like a massive battleship plunging across a raging ocean at full speed--it can't be turned around quickly.  Here are some of the problems:

First, simply determining who is eligible for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have outstanding student loans, and most of them are in the repayment phase.  Just figuring out who is eligible to stop making loan payments and who is not will be an enormous headache.

For example, a lot of borrowers took out private student loans that aren't part of the federal student loan program.  Of course, private loans won't be covered by Hillary's moratorium. But research has shown that many borrowers don't know whether their loans are federal or private, and some have both kinds of loans. If Hillary implements a moratorium, a good many borrowers will stop making payments on their private loans, which will get them in trouble with their lenders.

And 5 million borrowers are already in income-based repayment plans under very favorable terms. Can these people stop making payments for three months? If not, who is going to notify them that they are not eligible to participate in the moratorium?

Second, the Department of Education may not have the capacity to meet the bureaucratic challenge of refinancing millions of loans over a three-month period. There are 43 million people with outstanding student loans, but many borrowers signed multiple promissory notes--perhaps a dozen or more. And some of these documents date back 20, 25, and even 30 years.  

Refinancing all these loans will be a gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I seriously doubt whether DOE or the various creditors have the resources to refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy. 

Third, once college borrowers are given license to stop making payments for a brief period, it will be very difficult to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's decision to accept refugees from the Middle East. Once the stream of migrants began moving, the Europeans found themselves unable to handle the volume of refugees that crossed into the EU. And there was no effective way to regulate the flow.

Likewise, Hillary's proposal to allow millions of college borrowers to stop making loan payments while they refinance their student loans will create a massive upheaval in the federal student loan program. If her plan goes forward, I think we will see millions of people stop making loan payments, whether or not they are eligible for Hillary's moratorium. 

Finally, Hillary's student-loan refinancing plan may be nothing more than a way to shove borrowers into 20- and 25-year repayment plans.  The Obama administration has been aggressively pushing college borrowers into long-term income-based repayment plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of 2017.

Hillary's pan will accelerate the movement of student borrowers into long-term repayment plans.  If it is implemented, we will surely see 10 million people or more in IBRPs, which will effectively make them indentured servants to Uncle Sam, paying a percentage of their income to the government for a majority of their working lives just for the privilege of going to college.

As I have said repeatedly, IBRPs are a bad idea and nothing more than a way to keep a lid on the student-loan crisis. It would be very disappointing if Hillary implemented a student-loan refinancing plan that has the primary effect of lengthening the loan repayment period for millions of Americans.

Conclusion: In spite of its drawbacks, Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to Hillary's refinancing idea, I hope she goes forward with it if she becomes President. Almost anything is better than the present state of affairs.  Lowering interest rates will give millions of borrowers some relief from their debt. And even if her plan forces more borrowers into IBRPs, that option is better than having them continue to shoulder monthly payments that are so large as to be unmanageable.

Besides, Hillary's scheme, if implemented, will expose the utter chaos of the federal student loan program, which the federal government has hidden from the American people. Once the public realizes how many millions of people are suffering from their participation in the federal student loan program, maybe we will see real reform--which is nothing more and nothing less than reasonable access to the bankruptcy courts. 

References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/

Brenda Butler,"poster child" for the student-loan crisis, will be done with her student loans in 2037--42 years after she graduated from college

You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

Tennessee Ernie Ford

If the student-loan crisis had a poster child, it might well be Brenda Butler, who lost her bankruptcy case last week in Illinois. Butler borrowed about $14,000 to get a degree in English and creative writing from Chapman University, which she received in 1995. Over the next 20 years, she made loan payments totally $15,000--more than the amount she borrowed.

Unfortunately, she was unable to make payments from time to time, and her debt grew due to accrued interest and penalties. When she filed for bankruptcy in 2014, Butler's debt had grown to almost $33,000, more than twice what she borrowed!

Did Butler get rich in the 21 years that passed since she graduated from college? No, she didn't. When she filed for bankruptcy she owned no real property and drove a 2001 Saturn that had logged 147,000 miles. According to the bankruptcy court, Butler never made more than about $35,000 a year, and her monthly income at the time of her bankruptcy filing was only $1,879, about $300 less than her expenses.

In spite of her bleak financial situation and an employment history of relatively low wages, a bankruptcy judge refused to discharge Ms. Butler's student loans. In fact, in applying the three-prong Brunner test, the court ruled that she failed to meet two of the prongs.

First, the court concluded that Butler was able to maintain a minimum standard of living, in spite of the fact that she was living on unemployment benefits at the time of her hearing and these benefits were about to run out. Indeed, the court admitted that Butler "had virtually no resources to support herself."

Nevertheless, in the court's view, Butler would likely find employment soon, which would enable her to maintain a minimum standard of living and make payments under an income-base repayment plan. Thus, Butler failed the first prong of the Brunner test.

Brunner's second prong required Butler to show that additional circumstances existed that prevented her from paying on her student loans in the future. Here again, the judge ruled against her. The judge found Butler to be "capable and intelligent with no health problems or other impediments to being gainfully employed." The court acknowledged that Butler had "an unfortunate employment history through no apparent fault of her own," but she could show no exceptional circumstances that would indicate that she could not pay back her student loans in the coming years.

Interestingly, the judge ruled in Butler's favor regarding one prong of the Brunner test. In the judge's view, Butler had met her burden of showing she had made good faith efforts to pay back her loans. As the judge acknowledged, Butler had made payments totally more than the original principal on her loans, and she had made diligent efforts to improve her financial status. "This is not a case of a recent graduate trying to escape student loan debts before beginning a lucrative career," the judge admitted. On the contrary, Butler had made "substantial, though futile, efforts to pay down her student loan debt."

So why did Butler lose her case? This is the bankruptcy judge's summary:

[Butler's] financial situation is unfortunate, but more than that is required for a finding of undue hardship under the demanding Brunner test. [Butler] has shown good faith in her efforts to remain employed and pay down her student loan debt. But as a healthy, intelligent, relatively young worker with a proven ability to secure productive employment, [she] is unable to prove that her student loan obligations prevent her from maintaining a minimum standard of living, now or in the foreseeable future. Thus. . ., [Butler's] student loan debt will not be discharged.

The Butler decision is particularly unfortunate because her situation is not untypical. Like a lot of people, she obtained a liberal arts degree from a private college that never led to a well-paying job. In spite of good faith efforts to pay back her loans, she was dragged down by exorbitant penalties and accruing interest, like thousands of other Americans.

And here is the final outcome. Brenda Butler will continue in a long-term income-based repayment plan that will not conclude until 2037--42 years after she graduated from college! 

Surely this is not what Brenda Butler envisioned when she enrolled at Chapman University in 1991 with bright hopes for a future as a writer.  And surely this is not what Congress envisioned when it passed the Higher Education Act more than 50 years ago.

And that is why Brenda Butler would make a good poster child for the student-loan crisis. A good person, who went to college in good faith and made good faith efforts to pay back her student loans, will be burdened with student-loan debt--mostly penalties and interest--until she reaches retirement age.

References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).