Betsy DeVos, Trump's choice for Secretary of Education, has the power to ease the suffering of student-loan debtors

Betsy DeVos, Donald Trump's choice for Secretary of Education, has no experience in higher education, and that may be a good thing for student-loan debtors.

Most commentators on the student-loan crisis are insiders who want to maintain the status quo regarding the federal student loan program. The universities depend on regular infusions of student-loan money, which enables them to raise their tuition prices year after year at twice the rate of inflation.

But DeVos has no ties to higher education at all, and thus she has the capacity to look at the student-loan catastrophe from a fresh perspective. In fact, DeVos has the power to do one simple thing that could potentially bring relief to millions of distressed student-loan debtors.

Under current bankruptcy law, debtors cannot discharge their student loans in bankruptcy unless they can show that repaying the loans will cause them "undue hardship."  In nearly every case, the Department of Education and the student-loan guaranty companies argue that student-loan debtors should be denied bankruptcy relief under the undue hardship standard.

Instead, they routinely demand that distressed college borrowers enroll in long-term income-based repayment plans that can last for 20 or even 25 years.  And DOE and its debt collectors make this demand even when debtors' income is so low that they pay nothing or next to nothing under the terms of these plans.

Here are some examples:

• In the Edwards case, decided last spring, Educational Credit Management (ECMC) argued that Rita Gail Edwards, a woman in her mid-50s, should pay $56 a month for 25 years to service a debt of almost a quarter of a million dollars! 

• In the Roth case, ECMC opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on Social Security income of less than $800 a month. Instead, ECMC wanted Roth to enter a long-term repayment plan even though ECMC conceded that Roth's income was so low that she would pay nothing under the plan. 

• In the Abney case, DOE wanted Abney, a 40-year-old father of two, to enter a 25-year income-based repayment plan. Abney was living on $1200 a month and was so poor he couldn't afford a car and rode a bicycle to get to his job.

In essence, DOE and the debt collectors maintain that almost no one is entitled to discharge their student loans in bankruptcy and that everyone should be placed in long-term, income based repayment plans.

What if Secretary DeVos simply decreed that DOE and the loan guaranty agencies will stop pushing long-term repayment plans in the bankruptcy courts and would consent to bankruptcy discharges for people like Roth, Edwards, and Abney? (Incidentally, in all three cases, the bankruptcy courts rejected the creditors' arguments and discharged the student loans in their entirety.)

By consenting to bankruptcy discharges for people like Abney, Edwards and Roth, the Department of Education would signal to the bankruptcy courts that it supports a less harsh interpretation of the "undue hardship" standard. That would open the door for thousands of people of distressed debtors to file bankruptcy to discharge their student loans.

Some people might argue that my proposal would unleash a flood of bankruptcy filings that would undermine the financial integrity of the federal student loan program. But let's face facts. People like Roth, Edwards and Abney would never have paid back their student loans, and placing them in 25-year repayment plans that would have obligated them to make token payments that would have done nothing more than maintain the cynical fiction that their loans weren't in default.

Wouldn't it be better for DOE to be candid about the student-loan crisis and admit that millions of people will never pay back their loans? Wouldn't it be better public policy to allow honest but unfortunate debtors to get the fresh start that the bankruptcy courts are intended to provide?

Betsy DeVos is fresh on the scene of the student-loan catastrophe. Let's hope she brings some fresh thinking to the U.S. Department of Education.

Mark http://www.nytimes.com/2016/11/23/us/politics/donald-trump-president-elect.html?action=click&contentCollection=Opinion&module=RelatedCoverage&region=EndOfArticle&pgtype=article

Educational Credit Management Corporation and the U.S. Department of Education: Are They Co-Conspirators in Accounting Fraud?

Last March, an Arizona bankruptcy court discharged $245,000 in student loan debt owed by  Rita Gail Edwards, a 56-year-old single woman earning a tenuous living as a counselor. Educational Credit Management Corporation (ECMC), her student-loan creditor, fought the discharge. ECMC wanted Edwards placed in a 25-year income-based repayment plan. Under such a plan, Edwards would only pay $84 a month on her loans for 25 years.

ECMC's position was absurd, of course. A woman in her late 50s  will never pay off a $245,000 loan by making monthly payments of $84. The only possible purpose that is served by jamming Ms. Edwards into a 25-year repayment plan is to carry her student-loan debt on the Department of Education's books as a performing loan.

In ruling for Ms. Edwards, the bankruptcy judge questioned the wisdom of a system that allowed Edwards to borrow so much money. "In hindsight, it is a shame that [Edwards] ever incurred these student loan debts," the court observed.

While her Ottawa University education may have given her the tools and credentials to work in an emotionally satisfying role [as a counselor] and may have provided a well needed skilled counselor in her rural community, the predictable economic burden was never likely to justify the massive economic burden she incurred.

The Edwards case demonstrates the insanity of the federal student-loan program. Our government allows people to borrow extravagant amounts of money for educational programs that will never pay off, and then it engages debt collectors to push borrowers into long-term income-based repayment plans that stretch out over 25 years and will almost never result in the loans being repaid.

And the Edwards case is not an anomaly. In the Roth case, ECMC opposed a bankruptcy discharge for an elderly woman with chronic health problems who was living on less than $800 a month. In fact, Roth's income was so low that ECMC acknowledged that Roth's monthly payments under an income-based repayment plan would be zero!

In the Halverson case, ECMC opposed a discharge for a man in his sixties making less than $14 an hour as a substitute teacher and who owed almost $300,000 in student loan debt. Mr. Halverson borrowed less than half the amount he owed when he filed bankruptcy and was never in default. His debt ballooned mostly due to accruing interest while his loans were in deferment.

The Department of Education itself has taken the same irrational stance regarding bankruptcy discharge for student debtors. In the Myhre case, DOE opposed a discharge for a quadriplegic, and in the Abney case, it opposed a discharge for  a single father of two children who was living on less than $1200 a month and could not even afford to own a car.

Why?

 I can think of only one reason. ECMC and DOE are engaged in a massive accounting fraud, trying to convince the public that the federal student loan program is solvent and fiscally sound. But in fact the student loan program is a disaster. Eight million people are in default and and one out of four debtors are either in default or behind on their loan payments.

ECMC benefits from the status quo--that is clear. According to a Century Foundation report, it has $1 billion in unrestricted assets, most of it obtained from its loan-collection activities. The Westlaw database shows that ECMC has  appeared as a named party in over 500 federal court rulings; it has spent literally millions of dollars in attorney fees chasing after people like Gail Edwards and Janet Roth.

And who pays those fees?  According to a law review article written by Rafael Pardo, ECMC draws money from a Federal Reserve Fund to finance its loan-collection activities and has access to "significant [federal] resources when litigating against student-loan debtors" (p. 2145).  Pardo cites a document showing that DOE allowed ECMC to keep a quarter of a billion dollars that it drew from DOE's Federal Reserve Fund to finance its activities in 2008 (p. 2145).

So you, Mr. & Ms American taxpayer, are paying ECMC to engage in unproductive litigation against impoverished debtors--litigation intended to keep the student-loan crisis under wraps.

And ECMC is a nonprofit organization--supposedly devoted to the public good.

But ECMC is not acting for the public good. On the contrary, ECMC is DOE's hit man--the entity DOE sends to beat down bankrupt student debtors and prevent them from getting the bankruptcy relief they deserve.

 ECMC's senior executives are getting well paid to be DOE's "Mac the Knife."  Its CEO makes at least a million dollars a year.

References

Annual Report of the CFPB Student Loan Ombudsman. Consumer Financial Protection Bureau, September 2016. Available at http://files.consumerfinance.gov/f/documents/102016_cfpb_Transmittal_DFA_1035_Student_Loan_Ombudsman_Report.pdf

Edwards v. Educational Credit Management Corporation, Adversary No.. 3:15-ap-26-PS, 2016 WL 1317421 (Bankr. D. Ariz. March 31, 2016). Available at http://www.azb.uscourts.gov/sites/default/files/opinions/024139558300_dmd.pdf

In re: Halverson, 401 B.R. 378 (Bankr. D. Minn. 2009).

Rafael Pardo. The Undue Hardship Thicket: On Access to Justice, Procedural Noncompliance and Pollutive Litigation in Bankruptcy. 66 Florida Law Review 2101-2178. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2426744

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013). Available at http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf