You can't get there from here: Millions of student borrowers are in Income-driven repayment plans but only 32 got debt relief

 Everyone knows the story about the hapless motorist who gets lost in rural Maine. When he finds a farmer and asks for directions, the farmer says, "You can't get there from here."

The U.S. Department of Education must be staffed by Maine farmers. DOE has made it almost impossible for student-loan debtors to benefit from DOE's income-based repayment plans (IDRs).  When it comes to getting debt relief from an IDR, DOE's position seems to be: You can't get there from here.

DOE and its loan servicers are responsible for administering the federal student-loan program, including its various income-based repayment plans. These IDRs allow borrowers to make payments on their student loans based on their income--with low-income borrowers making payments as low as zero.

As the National Consumer Law Center (NCLC) reported this month, more than 8 million people are enrolled in IDRs. Two million student debtors have been in an IDR for at least 20 years. 

Yet only 32 people--that's right, 32--have had their student loans canceled through an IDR.

NCLC blames private student-loan servicers for this dismal state of affairs. NCLC accuses the servicers of giving inaccurate or inadequate information to student borrowers and steering borrowers away from IDRs toward options that don't lead to eventual loan cancellation.

And there is another problem. According to NCLC, nearly 6 out of 10 people in IDRs lose their eligibility because they fail to recertify their income annually.

NCLC recommends canceling all student debt that has been in repayment for 20 years--whether or not a borrower was signed up in an IDR.  I agree.

After all, student debtors who have not paid off their college loans after 20 years will probably never pay them off. In fact, interest accruing on their debt will have built up over time so that their total outstanding debt will likely have doubled or tripled.

Another reform--less sweeping than loan forgiveness--would at least prevent a majority of borrowers from getting kicked out of their IDRs. DOE could stop requiring IDR participants to certify their income on an annual basis. Instead, DOE should simply assign that job to the Internal Revenue Service.

Over the past few months, the federal government has issued millions of coronavirus relief checks to Americans based on the recipients' income. This was a relatively easy task because the Internal Revenue Service knows every American's income based on tax returns.

Since the feds know everyone's annual income, DOE doesn't need to ask 8 million IDR participants to certify their income every year. Eliminating that unnecessary requirement would prevent more than half the people in IDRs from getting kicked out of their repayment plans.

But maybe that simple reform is too easy. Perhaps DOE and the student-loan processers don't care whether IDR programs operate as Congress intended.  

When only 32 people get their student loans forgiven under IDR programs intended to give debt relief, something is terribly wrong. Surely the U.S. Department of Education is capable of managing its IDR programs better than a Maine farmer.

You can't get there from here.

The SIMPLE Act is misnamed. It's really a Federal Sharecropper Enrollment Program for Distressed Student Borrowers

Hello, Americans. If you think you got screwed by Obamacare, brace yourselves. There may be more Congressional skulduggery ahead. A gang of wooden-headed legislators has conspired to introduce a bill called the SIMPLE Act, which, if passed, will push millions of Americans into becoming sharecroppers for the government for a majority of their working lives.

In keeping with Congressional tradition, the bill is known by a tortuous acronym. SIMPLE stands for Streamlining Income-Driven Manageable Payments on Loans--cute! But let's take a look at the guts of this pernicious legislation, and we will see that a more accurate title of the bill would be the Federal Sharecropper Enrollment Act:

If enacted into law, this is what the SIMPLE Act will do:

First, the bill authorizes the Internal Revenue Service to automatically recertify the income of student borrowers in income-driven repayment plans (IDRs).

Second, the bill allows the government to automatically enroll delinquent student borrowers into IDRs. The enabling language is complicated, bu this is how Representative Ryan Costello (one of the bill's cosponsors) described an earlier iteration of the bill in 2016:

Under our bill, the Department of Education would auto-enroll certain borrowers who have missed payments into a lower monthly payment plan in order to reduce administrative burdens and decrease the risk of those borrowers being placed into more expensive plans. 

Admittedly, the bill has some good features. It makes sense for the IRS to certify the annual income of IDR participants rather than force the borrowers to do it themselves. In fact, the Government Accountability Office noted last year that about half the people in IDRs get kicked out of those plans for failing to certify their income on an annual basis.

Second, automatically putting delinquent borrowers in IDRs with lower monthly payments is sensible if the alternative is default. And the bill allows borrowers to opt out of being placed in an IDR.

But here's the overarching problem with the SIMPLE Act.  The bill assumes the status quo for the federal student loan program, and its only solution for people who are overwhelmed by their student loans is to shove them into twenty- or twenty-five year repayment plans.

In other words, the SIMPLE Act is streamlining the process of transforming student borrowers into sharecroppers--bound to pay the government a percentage of their income for the majority of their working lives.  And most people in these plans will be making payments so low they won't even be servicing their interest. People in IDRs will see their debt grow larger with each passing year even if they faithfully make payments for a quarter of a century.

The SIMPLE Act is not a solution to the student loan crisis. Basically, its a form of accounting fraud that maintains the fiction that people are paying back their student loans when in fact almost everyone in these plans will never pay off their student loans.

How will Americans react to being transformed into sharecroppers for Uncle Sam? Not well, I predict. Eventually, student borrowers will rise up in fury. Let's hope they vent their anger at the ballot box and not in destructive acts of desperation.

Look on the bright side. We only have to do this for 25 years. 

References

Andrew Kreighbaum. Bipartisan Legislation Tackles Student Loan Defaults. Inside Higher ED, August 4, 2017.

Press release of Representative Suzanne Bonamici. Bonamici, Costello Introduce Bill to Reduce Student Loan Defaults. September 8, 2016.

Edwards v Navient: A single mom's private student loans are discharged in bankruptcy but not her federal loans

Edwards v. Navient Solutions, Inc., decided last November, contains both good news and bad news for distressed student loan debtors.

The good news is this: Paula Maxine Edwards, a single mother of two children, was able to discharge $56,640 in private student loans under the Bankruptcy Code's "undue hardship" standard. Judge Janice Miller Karlin, a Kansas bankruptcy judge, ruled that Edwards had managed her private loans in good faith, in spite of the fact she had made only a few payments on them.

And this is the bad news: Judge Karlin ruled that Edwards could not discharge $72,000 in federal student loans because Edwards was eligible to enter an income-driven repayment plan (IDR) that allowed her to make loan payments based on her income over a 20-year span.  At her current income, Edwards would only be obligated to pay $21 a month. Obviously, this token monthly payment will not cover accruing interest on $72,000, which means Edwards will never pay off her federal loans.

The Edwards case: Another chronicle of student-loan misery

Paula Edwards, age 36, obtained a bachelor's degree in education from Newman University, a small Catholic college located in Wichita, Kansas. Newman University is expensive; currently, tuition and fees total about $28,000 a year. Although Edwards worked as a paralegal while she was in school and took no unnecessary courses, she wound up owing $151,000 in student loans.

Edwards' degree from Newman qualified her for a job as an elementary school teacher. At the time of her bankruptcy proceedings, she was in her fourth year as a teacher, and her annual salary was only $35,300. Unless Edwards obtains more education, which she cannot afford, her salary is capped at $35,700.

Edwards' student-loan debt fell into two categories. First, she borrowed $72,000 in federal student loans, which were eligible for modified payment terms. Second, she took out  private loans totally $56,640 from Navient Solutions. Her private loans contained no provision for modified payment terms and bore interest at the rate of 9.75 percent. (She also borrowed $8,354 from Navient for Stafford loans, which she did not attempt to discharge).

Judge Karlin refused to discharge Edwards' federal loans. The Department of Education represented that Edwards was eligible to participate in the Department's REPAYE program, which allowed her to make payments based on her income over 20 years. At her current salary, DOE told the court, Edwards would only be obligated to make payments of $21 a month.  Edwards admitted she could make payments in this amount, and this debt was not discharged.

Applying the Brunner test, Judge Karlin discharged Edwards' private student loans

However, Judge Karlin discharged Edwards' private loans owed to Navient. The judge noted that private loans, unlike federal loans, contain no provisions for alternative repayment plans such as REPAYE. Applying the three-pronged Brunner test, Judge Karlin concluded that repaying the private loans would be an undue hardship for Edwards.

Judge Karlin ruled that Edwards met the first prong of the Brunner test, which required her to show she could not maintain a minimal standard of living if she were forced to pay back her private loans. Moreover, in Judge Karlin's opinion, Edwards met Brunner's second prong by showing that her financial situation was not likely to improve any time soon. As the judge pointed out, Edwards worked in a low-paying profession, and it was "highly unlikely" that Edwards' salary would increase significantly.

Finally, and perhaps most importantly, Judge Karlin ruled that Edwards met the third prong of the Brunner test, which obligated her to show she had made a good faith effort to repay her student loans. Although Edwards had made no payments on her private student loans over the previous six years, her payment history did not preclude a good faith finding.

As Judge Karlin explained, the Brunner test "requires the Court to determine if the debtor has made a good faith effort to repay the loan as measured by his or her efforts to obtain employment, maximize income and minimize expenses . . . .  A finding of good faith is not precluded by a debtor's failure to make a payment."

In Judge Karlin's view, Edwards had demonstrated "that she was really unable to make anything but a de minimus payment, if at all, on her student loans during the last six years." While it was true, the judge acknowledged, that Edwards had received tax refunds from time to time, good faith was not precluded by the fact that she had used the refunds to meet other pressing financial obligations rather than apply the refunds to her student loans.

[W]hile it would be better for her case had she paid even $10 a month from her tax refunds, in light of her life situation--attempting to raise two children on her own with very little child support, and with a small income even giving her teaching degree--her minimal efforts should qualify under the totality of circumstances. There was no evidence she willfully or negligently caused her own default, and the Court does not believe she did.

Conclusion: A Pyrrhic victory 

Edwards v. Navient Solutions, Inc. is a mixed bag for student-loan debtors. On the positive side, the court interpreted the "good faith" prong of the Brunner test in a sensible way. A debtor's good faith is not determined by the number of loan payments made but rather on whether the debtor made good faith efforts to repay student loans by maximizing income and minimizing expenses. In Judge Karlin's view, Edwards met Brunner's good-faith prong even though she made no payments on her private loans for six years.

Unfortunately, Judge Karlin refused to discharge Edwards' federal student loans due at least partly to the fact that Edwards was eligible to participate in REPAYE, which allows Edwards to make minimal payments of only $21 a month based on her current income. Since monthly payments of $21 won't cover accruing interest, Edwards' federal loans will negatively amortize--her debt will grow larger with each passing year.

Other courts have rejected creditors' arguments that college debtors should be forced into income-driven repayment plans as an alternative to bankruptcy relief. In the Abney case, the Lamento case and the Halverson case, courts explicitly recognized the psychological stress a long-term repayment plan can put on a debtor.

Paula Edwards won a Pyrrhic victory in a Kansas bankruptcy court. She shed $58,000 in private student-loan debt, but she was forced into a long-term repayment plan for her federal loans that will require her to make token payments for 20 years. Given Edwards' likely income trajectory, she will undoubtedly owe double the amount she borrowed at the end of the 20 year payment term--not a just outcome for a single mother of two who made a good faith effort to pay off her student loans.

References

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

Edwards v. Navient Solutions, Inc., 561 B.R. 848 (Bankr. D. Kansas 2016).

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

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

Student-Loan Default Rates Go Down As Enrollment in Income-Driven Repayment Plans Goes Up:" It Hurts So Much To Face Reality"

Earlier in the week, the Department of Education issued a press release that contains good news about the student loan program. Or does it?

DOE reported that enrollment is increasing in the Department's various income-driven repayment plans (IDRs), including PAYE, REPAYS and six other income-based student loan repayment programs.  About 5 million are now enrolled in IDRs, up 117 percent from March of 2014.

At the same time, student-loan hardship deferments, loan delinquencies, and new defaults are going down.  According to DOE:

As of March 31, 2016, about 350,000 [Direct Loan] recipients were deferring their payments due to unemployment or economic hardship, a 28.6 percent decrease from the prior year. In that same time period, there was a 36.6 percent decrease in the number of FFEL recipients in a deferment status due to unemployment or economic hardship.

DOE also reported that delinquency rates are down 10.6 percent from last year, and student-loan default rates are also down.

Is this good news? Yes and no.

Obviously, a trend toward fewer economic-hardship deferments, fewer student-loan defaults, and fewer lower delinquencies is a good thing. It is especially heartening to see a decline in the number of people who have loans in deferment, because these people see their loan balances go up due to accruing interest during the time they aren't making loan payments.

But this good news comes at a cost. DOE's report is a clear indication that more and more people are signing up for long-term income-based repayment plans that stretch out their repayment period for as long as 20 to 25 years.  According to DOE, five million people are in IDRs now, and DOE hopes to enroll 2 million more by the end of 2017. Clearly, long-term repayment plans has become DOE's number one strategy for dealing with rising student-debt loads.

What's wrong with IDRs? Four things.

Growing Loan Balances. First, as I have said many times, most people in IDRs are making payments based on a percentage of their income, not the amount of their debt; and most people's payments are not large enough to cover accruing interest on their loan balances. Thus, for almost everyone in a 20- or a 25-year repayment plan, loan balances are going up, not down.

This was starkly illustrated by a recent Brookings Institution report. According to a paper published for Brookings by Looney and Yannelis, a majority of borrowers (57 percent) saw their loan balances go up two years after beginning the repayment period on their loans. For students who borrowed to attend for-profit instiutions, almost three out of four (74 percent) saw their loan balances grow two years after entering the repayment phase

Reduced Incentives for Colleges to Rein in Tuition Costs.  As more and more borrowers elect to join IDRs, the colleges know that tuition prices becomes less important to students.Whether students borrow $25,000 to attend college or $50,000, their payment will be the same.

In fact, some IDRs actually may act as an inverse incentive for students to obtain more postsecondary education than they need.  I have several doctoral students who are collecting multiple graduate degrees. I suspect they are enrolled in the 10-year public-service loan forgiveness plan, the government's most generous IDR. Since monthly loan payments are based on income and not the amount borrowed, I think some people have figured out that it makes economic sense to prolong their studies.

Psychological Costs of Long-Term Repayment Plans. Third, there are psychological costs when people sign up for repayment plans that can stretch over a quarter of a century, a cost that some bankruptcy courts have noted. And these psychological costs are undoubtedly higher for people who sign up for IDRs in mid-life. Brenda Butler, for example, who lost her adversary proceeding in January of this year, signed up for a 25-year income-based repayment plan when she was in her early 40s, after struggling to pay back her student loans for 20 years. As the court noted in Butler's case, her loan obligations will cease in 2037--42 years after she graduated from college. That's got to be depressing.

A Drag on Consumer Spending. Finally, people who are making loan payments for 20 years have less disposable income to buy a home or a car, to marry, to have children, and to save for their retirement.  In fact, in the Abney case decided in late 2015, a bankruptcy court in Missouri rejected DOE's argument that a 44-year old truck driver should enter a long-term repayment plan to service loans he took out years ago for a college education he never completed.

As the court pointed out, Mr. Abney was a truck driver who was not likely to see his income increase markedly. Forcing him into a long-term repayment plan would diminish his ability to save for retirement or even to buy a car.

"It Hurts So Much To Face Reality"

As Robert Duvall sang in the movie Tender Mercies (the best contemporary western movie of all time), "it hurts so much to face reality."

Without a doubt, DOE is refusing to face reality by huckstering college-loan debtors into long-term student-loan repayment plans. DOE has adopted this strategy to keep student-loan defaults down, but IDRs do not relieve the burden of indebtendess for millions of student borrowers. Lowering monthly loan payments by stretching out the repayent period makes rising tuition more palatable, but it does nothing to check the rising cost of a college education--which has spun out of control.

In short, IDRs are creating a modern class of sharecroppers, whereby millions of people pay a percentage of their incomes over the majority of their working lives for the privilege of getting a crummy education from a college or university that has no incentive to keep tuition costs within the bounds of reason.

"It hurts so much to face reality."

References

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

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

U.S. Department of Education, Education Department Announces New Data Showing FAFSA Completion by District, State. Press release, June 16, 2016. Accessible at http://www.ed.gov/news/press-releases/education-department-announces-new-data-showing-fafsa-completion-district-state