Showing posts with label PLUS loans. Show all posts
Showing posts with label PLUS loans. Show all posts

Friday, October 16, 2015

All Student Loan Debtors Should Read Natalie Kitroeff's Recent Online Article in BloombergBusiness.Com

Every distressed student-loan debtor should read Natalie Kitroeff's recent article in BloombergBusiness.com about Murphy v. U.S. Department of Education and Educational Credit Management Corporation, now pending before the First Circuit Court of Appeals.  And any student-loan debtor who is trying to discharge a student loan in bankruptcy should read the amicus brief filed in that case by the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys.

The essence of the Murphy case can be summarized in a few words. Robert Murphy took out federal PLUS loans (student loans taken out by parents to pay their children's college costs), but he lost his job as the president of a manufacturing firm.  He's been unemployed for 13 years--too old, he says, to find comparable employment and overqualified for lower-paying jobs in his field.

Today, Murphy is 65 years old, and his total student-loan indebtedness has grown to almost a quarter of a million dollars due to accumulated interest. He and his wife are living on an income of $15,000 a year, which his wife earns working as a teachers aide.

Murphy filed for bankruptcy, seeking relief from his PLUS loans, but a bankruptcy court refused to discharge the debt. Like so many debtors who try to shed their student loans in bankruptcy, Murphy is acting as his own attorney.  His case is now on appeal before the First Circuit.

Murphy hopes to persuade the First Circuit to abandon the harsh Brunner test for determining when it would be an "undue hardship" for insolvent debtors to be forced to repay their student loans. That test requires debtors to show that they cannot repay their student loans and maintain a minimal standard of living, that their financial circumstances aren't likely to change soon, and that they made good faith efforts to repay their loans.

In the Ninth Circuit BAP Court's Roth decision, Judge Pappas filed a concurring opinion arguing that the Brunner test no longer makes sense. He pointed out that the Brunner test was devised at a time when student-loan debtors could discharge their student loans without restriction after a relatively short period of time--after five or seven years.

Today, Judge Pappas explained, student-loan debtors hold a trillion dollars in outstanding student-loan debt. And Congress amended the Bankruptcy Code so that insolvent debtors must prove "undue hardship" no matter when they file for bankruptcy, even if it is decades after the loans were taken out.

John Rao, attorney for the National Consumer Law Center, filed a brilliant amicus brief in support of Murphy, arguing that the Brunner test should be overturned. Rafael Pardo, a nationally renowned legal scholar from Emory Law School, also filed an amicus brief in support of Murphy's position.

If the First Circuit rules in Murphy's favor, bankruptcy might become a viable option for millions of distressed student-loan debtors. And if that happens, the world will turn upside down for the federal government, the federal student-loan program, and the colleges and universities that have feasted off of student-aid money without regard to whether their students could pay off their student loans.

Kitroeff's article pointed out that total outstanding indebtedness has doubled in just seven years. At the current rate of growth, total indebtedness will double again within 10 years, ballooning to well over two trillion dollars.

Let's all say a prayer for Robert Murphy and the two amicus attorneys who came to his aid: John Rao and Rafael Pardo. Ten million people are now delinquent on their student loans or are in default, and nine million more hold deferments or forbearances that temporarily excuse them from making payments.  Almost 4 million people are making payments under income-based repayment plans, which means total indebtedess for most of them is going up, not down, because their loan payments don't cover accruing interest.

This situation can't go on forever, and Robert Murphy may be the guy that ushers in relief for millions of fellow sufferers.  If you are a student-loan debtor in bankruptcy, you must read the amicus briefs in the Murphy case and get the arguments made in those briefs before your bankruptcy judge. Mr. Murphy, Mr. Rao, and Mr. Pardo are on the side of the angels, and I think their arguments will be persuasive to many bankruptcy judges around the United States regardless of what the First Circuit does.

References

Amicus Brief filed by National Consumer Law Center and National Association of Consumer Bankruptcy Attorneys in Support of Appellant (Robert Murphy) in Murphy v. U.S. Department of Education & Educational Credit Management Corporation. (Written by John Rao, esq.) Accessible at: https://www.nclc.org/images/pdf/bankruptcy/brief-murphy-1st-cir-amicus.pdf

Amicus Brief filed by Rafael Pardo, arguing for reversal of District Court's decision in Murphy v. U.S. Department of education and Educational Credit Management Corporation. Accessible at: http://www.businessweek.com/pdfs/murphy-pardo-brief.pdf

Natalie Kitroeff. This Court Case Could Unshackle Americans From Student Debt. BloombergBusiness.com, October 8, 2015. Accessible at:  http://www.bloomberg.com/news/articles/2015-10-08/this-court-case-could-unshackle-americans-from-student-debt

Friday, April 4, 2014

More Bad News About Student Loans: The Default Rate for Parent PLUS Loans Has Nearly Tripled Since 2006

Inside Higher Education reported today that the default rate for Parent PLUS loans has nearly tripled since 2006.  According to the Department of Education's most recent report, the three-year default rate on these loans is 5.1 percent.  In 2006, the PLUS loan default rate was only 1.8 percent.

The higher PLUS loan default rate doesn't sound too bad when compared to the overall student-loan three-year default rate--about 14 percent, according to DOE's report last October.  But let's look at the PLUS Loan default rate for parents of students attending for-profit colleges--13.3 percent! 

That's a scary number. And keep in mind that parents are not required to begin making loan payments until their children complete their studies.  If a student takes six years to graduate  (which is typical) or enrolls for graduate studies, the parent is not obligated to make loan payments until those studies are complete. Meanwhile, the interest is accruing on those loans--making them more difficult to repay.



Some institutional players--the Historically Black Colleges and Universities, in particular, are protesting recent efforts by DOE to tighten loan standards for PLUS loans. They say that making it more difficult for parents to borrow money for their children to attend college will disproportionately effect African American families and make it more difficult for African Americans to attend college.

But the HBCUs are primarily thinking about themselves, don't you think?  They don't want the feds to reduce the flow of federal student-aid dollars by making it harder for parents to take out PLUS loans.

A number of people commented on today's Inside Higher Education article, and it is clear to me that many of the commentators know a lot about the PLUS loan issue.  But as of this morning, not a single commentator pointed out that PLUS loans, like all federally-sponsored student loans cannot be discharged in bankruptcy unless the parents can show "undue hardship."

In other words, parents who borrow money under the PLUS program don't have reasonable access to the bankruptcy courts if they run into financial trouble caused by illness or the loss of a job. Thus, if their children get in over their heads by borrowing more money than they can pay back, both the student and the parents will be saddled with a debt that cannot be discharged in bankruptcy absent very unusual circumstances.

The higher education industry's discussions about the federal student loan crisis has an Alice in Wonderland quality about it.  The colleges and universities--whether public, private, for-profit or HBCUs--are primarily interested in keeping that federal student aid money flowing. They are like crack addicts--addicted to federal money just to keep their doors open.

We should be making every effort to keep college costs from continuing to rise. We should discourage parents from taking out personal loans to pay for their children's education. And--this is very important--we should amend the Bankruptcy Code to allow overburdened student loan debtors to discharge their debts in bankruptcy, whether they are students or the parents of students.

References

Michael Stratford, Education Department releases default rate data on controversial Parent PLUS loans. Inside Higher Education, April 3, 2014.  Available at: