Showing posts with label The Great College Loan Swindle. Show all posts
Showing posts with label The Great College Loan Swindle. Show all posts

Thursday, November 16, 2017

College dropouts who don't pay off their student loans: The village of the damned

About 70 percent of high school graduates go on to college, but a lot of them drop out before getting their college degrees. And a good number of dropouts took out student loans to finance their studies.

What happens to these people?

A recent survey polled college dropouts who had outstanding student loans; and this is what the pollsters found.
  • Respondents reported that they had, on average, almost $14,000 in student-loan debt.
  • More than half of college dropouts said they were not making any payments on their student loans.
  • More than a third of the survey respondents (35 percent) said they had not made a single payment on their student-loan debt
What are we to make of this?

First of all, indebted college dropouts are probably underestimating how much they owe on student loans. Other studies have shown that a lot of student borrowers are hazy about how much they borrowed, and some don't know the interest rate on their loans. Quite a few don't know the difference between federal loans and private loans, and aren't sure which type of loans they have.

So it seems fair to conclude that if indebted college dropouts report that they owe an average of $14,000, they probably owe more--maybe a lot more. For one thing, dropouts who aren't making loan payments may not understand how much accrued interest has been added to their loan balances. And dropouts who defaulted on their student loans may not realize that the debt collectors undoubtedly added default penalties to their accumulated debt.

It is true that some dropouts who aren't making student-loan payments may have obtained economic hardship deferments that temporarily excuse them from making monthly loan payments. But interest accrues on a student loan while it is in economic hardship status, which means that the loan balance is growing month by month.

This is what we can say for sure: Last year, 1.1 million student-loan borrowers defaulted on their loans at an average rate of 3,000 people each day.  And some percentage of that number are people who took out student loans to attend college and then dropped out.

Indebted college dropouts don't know it, but they have entered the village of the damned. If they defaulted on their student loans, the loan balances ballooned due to default penalties. Even if their loans are in forbearance, interest continues to accrue. At some point, these unfortunate dropouts will realize they are carrying debt loads they can't pay off.

At that point, they will only have two options. They can enter an income-driven repayment plan, which will stretch their payments out for 20 or 25 years. Can you imagine making monthly payments on student loans for a quarter of a century even though you dropped out of college without a degree?

The other option is bankruptcy, and that option is going to be more and more viable as the bankruptcy courts wake up to the fact that the student-loan program is a catastrophe that has wreaked misery and suffering on millions.

In my view, now is the time for people who are overwhelmed by student debt to file for bankruptcy.  It is true that student-loan debtors must prove undue hardship in order to get bankruptcy relief. But, as Matt Taibbi's article in Rolling Stone documented, a lot of people are suffering at the undue hardship level.


College droputs with student-loan debt: The village of the damned


References

Tyler Durden. (2017,November 7). About 33% of Students Drop Out of College; Here's How Many Go On to Default On Their Student Debt. zerohedge.com (blog).

LendEDU (2017, November 2). College Dropouts and Student Debt. LendEDU.com (blog).

Matt Taibbi. (2017, October). The Great College Loan SwindleRolling Stone.

The Wrong Move on Student LoansNew York Times, April 6, 2017.




Thursday, November 9, 2017

Matt Taibbi's Rolling Stone article on student loans: Why don't distressed student borrowers file bankruptcy?

Matt Taibbi wrote a terrific article for Rolling Stone about the student loan crisis. Titled "The Great College Loan Swindle" Taibbi's piece told the story of two distressed student-loan borrowers: Scott Nailor and Veronica Martish.

Nailor borrowed $35,000 to get a college degree in education. Unfortunately, his first teaching job only paid $18,000; and he fell behind on his payments. Ultimately, he filed for bankruptcy and defaulted on his student loans. Apparently, he did not try to expunge his student-loans in bankruptcy, because he still paying on them. Due to penalties and accrued interest, Nailor estimates he now owes $100,000.

Veronica Martish, a 68-year-old military veteran, borrowed $8,000 to take courses at Quinebaug Valley Community College; and her investment in higher education did not pay off any better than Nailor's.  She fell behind on her student-loan payments and her debt swelled to $27,000 due to fees and interest. Martish eventually entered a loan "rehabilitation" program, but her payments hardly put a dent in the loan principle. She told Taibbi that she's paid $63,000 on her student loans and is nowhere near paying them off.

Taibbi's article about the student-loan crisis is excellent, and he choose two people--Nailor and Martish--who could be the poster children for this catastrophe. Unfortunately, Taibbi's article did not mention the one avenue of relief that is probably open to both Martish and Nailor--bankruptcy.

It is true that student loans are very hard to discharge in bankruptcy, but it is not impossible.  Debtors must show that their student loans constitute an "undue hardship," and the courts have traditionally defined undue hardship quite harshly.  Most federal courts have adopted the Brunner test for determining whether undue hardship exists.

The Brunner test ask three questions:

1)Can the debtor maintain a minimal standard of living for himself or herself and dependents and pay off the student loans?

2) Are the debtor's financial circumstances likely to change in the reasonably foreseeable future?

3) Did the debtor handle his or her student loans in good faith?

In the past, the bankruptcy courts applied the Brunner test quite harshly, and many worthy debtors were denied relief. In fact, a myth has developed that it is impossible for debtors to discharge their student loans in bankruptcy.

In recent years, however, more and more student debtors have gone into the bankruptcy courts and gotten their loans discharged in bankruptcy or at least partially discharged. In fact, several debtors have gotten bankruptcy relief from their student loans even though their circumstances were less dire than either Nailor's or Martish's. 

Indeed, I feel confident that Nailor and Martish could wipe out their student loans in bankruptcy if only they had competent legal counsel to guide them through the process.

After all, what bankruptcy judge would deny relief to Veronica Martish, a 68-year-old military veteran who borrowed $8,000 and has paid more than $60,000 toward paying off the debt?

What judge would deny relief to Scott Nailor who borrowed $35,000, now owes $100,000 and is so depressed by his debt that he contemplated suicide.

Nailor would be interested to know that several bankruptcy courts have considered the psychological stress of long-term indebtedness when applying the undue hardship rule. And Martish would be interested in knowing that the Ninth Circuit's Bankruptcy Appellate Panel discharged the debt of Janet Roth, a woman about the same age as Martish and who probably made fewer payments on her loans than Martish did.

I feel sure most bankruptcy judges would be quite sympathetic to both Martish and Nailor. Someone needs to tell these distressed debtors that they should file bankruptcy and attempt to get their student loans discharged in bankruptcy through an adversary proceeding.

References

Matt Taibbi. (2017, October). The Great College Loan SwindleRolling Stone.