Showing posts with label Susan M. Shaffer. Show all posts
Showing posts with label Susan M. Shaffer. Show all posts

Sunday, January 10, 2016

Know when to fold 'em: Dropping out of graduate school may make more economic sense than continuing in a program that will not pay off

You've got to know when to hold'em, know when to fold'em.
                                 Know when to walk away, know when to run.


The Gambler
Sung by Kenny Rogers
Lyrics by Don Schlitz

Graduate school has gotten incredibly expensive, and it is increasingly obvious that borrowing money to obtain a graduate degree is not always a good financial bet. In fact, in Don't Go to Law School (Unless), law professor Paul Campos argued that law students who borrow a lot of money to attend a second- or third-tier law school and don't  excel academically in their first year should quit law school rather than borrow more money to get a degree that probably won't lead to a good job.

It is true that people who quit law school lose their entire investment. They've taken out loans to pay for  degree they will never get. And many people will be tempted to borrow more money in order to pay for two more years of study that will lead to a JD degree. But Campos argues that this is the wrong choice for many people--particularly people who got mediocre grades during their first year at a mediocre law school.

Campos' advice to law students applies to all kinds of graduate programs. People who borrow money to get a Ph.D. in sociology, medieval history, or English from a second-tier graduate school may realize early in their studies that getting a well-paying job in their chosen field is highly unlikely. For these people, it may make financial sense to drop out of graduate school rather than continue to borrow more money.

But graduate students who quit their degree programs and then seek to discharge their student loans in bankruptcy will inevitably face opposition from student-loan creditors who will argue that the dropouts failed to make a good faith effort to maximize their income and thus should be denied bankruptcy relief.

Fortunately, the Eighth Circuit Court of Appeals, in the case of Shaffer v. United States Department of Education, understood the economic rationale behind some people's decision to drop out of graduate school. The case involved Susan Shaffer, a woman with significant mental health problems who borrowed $204,000 for her postsecondary studies, including money she borrowed to pursue a graduate degree at Palmer College of Chiropractic Medicine.

A bankruptcy judge discharged all of Shaffer's loans, but the Iowa Student Loan Liquidity Corporation,  one of her creditors, appealed the decision. Iowa Student Loan argued that Shaffer's low income (she was living on about $1700 a month) was self-imposed because she had dropped out of her chiropractic program. According to Iowa Student Loan, Shaffer should have borrowed more money in order to stay in school and get her chiropractic degree, which would have led to a high paying job that would have allowed her to pay off her student loans.

But a panel of Eighth Circuit judges emphatically rejected that argument, saying there was no support for Iowa Student Loan's position in the trial court record. On the other hand, the appellate court pointed out, the bankruptcy court heard Shaffer's explanation for why she dropped out of the chiropractic program and had found her testimony credible. 

As the Eighth Circuit colloquially put the matter, Iowa Student Loan's contention that Shaffer should have stayed in graduate school were "contrary to the sage advice of both Will Rogers, who said, "When you find yourself in a hole, stop digging," and Kenny Rogers, who sang, "You got to . . . know when to fold 'em . . ."

Apparently, the bankruptcy court had concluded that Shaffer's mental health challenges made her unfit for some higher-paying jobs, presumably including a job in the field of chiropractic medicine. As the Eight Circuit observed:
The bankruptcy court determined that [debtor] could endure only work that was essentially ministerial and that she suffered from the stress of increased responsibility due to a lack of self-confidence. While there was no evidence that the debtor was clinically disabled or maladjusted, the bankruptcy court expressly found that [debtor] was not fit for the higher responsibility and higher paying positions she tried and then left. 
Interestingly, Shaffer presented no expert witnesses to buttress her testimony about her mental health challenges. Iowa Student Loan argued that the bankruptcy court had engaged in impermissible speculation when it concluded that Shaffer's mental health issues were an obstacle to getting a high paying job.

But the Eighth Circuit disagreed. "The bankruptcy court heard Debtor's testimony, judged her credibility, and accepted her description of her mental health issues and their effect on her ability to maintain employment. . . . Consequently, we cannot say the bankruptcy court's findings were clearly erroneous."

The Shaffer decision is a good decision for any student-loan debtor in bankruptcy who borrowed money to go to graduate school and then dropped out. The court accepted Shaffer's explanation for why it did not make economic sense for her to continue her chiropractic studies, and the court did not require Shaffer to hire an expert witness to corroborate her testimony.

References

Shaffer v. U.S. Department of Education, 481 B.R. 15 (8th Cir. 2012).