Showing posts with label bankruptcy. Show all posts
Showing posts with label bankruptcy. Show all posts

Thursday, October 26, 2017

Like a Galapagos tortoise, Education Department ponders debt relief for students victimized by the for-profit colleges

Corinthian Colleges filed for bankruptcy in 2015, and ITT Tech went bankrupt a year later. Together, the two for-profit college companies left more than half a million students and former students in the lurch. Thousands of these victims filed so-called borrower-defense claims with the Department of Education, asking DOE to forgive their student loans on the grounds that they were defrauded.

The Obama administration approved regulations for processing these claims, but Betsy DeVos put them on hold. She was concerned, she said, that the Obama rules might give undeserving students "free money."

Now DOE has approved a panel of 17 experts to overhaul the Obama regulations. According to a story in Inside Higher Ed, the DeVos Department anticipates the new rules won't go into effect until 2019. Under that timetable, defrauded borrowers won't even have an avenue of relief until four years after Corinthian filed for bankruptcy.

Meanwhile, hundreds of thousands of student borrowers who attended one of the Corinthian schools, ITT Tech, and dozens of other dodgy for-profit colleges will be making monthly loan payments for worthless education experiences. Hundreds of thousands of others will put their loans into deferment, which will relieve them from making loan payments but will cause their loan balances to go up due to accruing interest. And thousands more will simply default, which will allow the federal government's sleazy loan collectors to slap on penalties and fees to their loan balances.

But DeVos doesn't give a damn about the carnage wreaked by the corrupt for-profit college industry. In fact, she is doing everything she can to prop it up.

And so, Betsy DeVos, Amway heiress and for-profit co-conspirator, lumbers along like a Galapagos tortoise, oblivious to the misery experienced by millions of student debtors--who are now defaulting at the rate of 3,000 a day.

The DeVos Education Department ponders student-loan debt relief.
References

Danielle Douglas-Gabriel. Former ITT Tech students fight for some money in the company's bankruptcy case. Los Angeles Times, January 3, 2016.

Andrew Kreighbaum. Education Dept. Borrower-Defense Negotiators. Inside Higher Ed, October 26, 2017.

Shahien Nasiripour. Corinthian Colleges files for bankruptcy. Huffington Post, May 5, 2015.

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

Saturday, October 7, 2017

Alan and Catherine Murray discharged more than $200,000 in student loans in a Kansas bankruptcy court and their victory was affirmed on appeal: Good news for middle-income college borrowers

In a previous essay, I wrote about Alan and Catherine Murray, a married couple in their late forties who defeated Educational Credit Management Corporation in a Kansas bankruptcy court.  ECMC appealed, and the Murrays prevailed again--a victory that has important implications for middle-income student-loan debtors.

The Murrays took out student loans in the 1990s to obtain undergraduate degrees and master's degrees. Their total indebtedness was $77,000, which they consolidated in 1996 at an interest rate of 9 percent.

Over the years, the Murrays paid $54,000 toward paying off these loans--70 percent of the amount they borrowed. But they obtained economic hardship deferments during periods of financial stress, which allowed them to skip some loan payments.  And they entered into an income-based repayment plan to lower their monthly payments to a manageable level.

Although the Murrays handled their student loans in good faith, interest on their debt continued to accrue; and they made no progress toward paying off their debt. In fact, when they filed for bankruptcy in 2014, their loan balance had ballooned to $311,000--four times what they borrowed!

Judge Dale L. Somers, a Kansas bankruptcy judge, gave the Murrays a partial bankruptcy charge. It was clear, Judge Somers ruled, that the Murrays could not pay off their total student-loan indebtedness and maintain a minimal standard of living. And it was also clear that their financial situation was not likely to change. Finally, Judge Somers concluded, the Murrays had handled their student loans in good faith--an essential requirement for discharging student loans in bankruptcy.

On the other hand, Judge Somers determined, the Murrays could pay off the original amount they borrowed ($77,000) and still maintain a minimal standard of living. Thus, Judge Somers discharged the accumulated interest on the Murrays' debt, but required them to pay back the original amount they borrowed.

ECMC, the Murrays' ruthless creditor, appealed Judge Somers' decision. ECMC argued, as it always does, that the Murrays should be put in a long-term income-based repayment plan (IBR) that would last from 20 or 25 years.

But U.S. District Court Judge Carlos Murguia, sitting as an appellate court for the appeal, affirmed Judge Somers' decision. "The court agrees with Judge Somers' findings and conclusions that [the Murrays] made a good faith effort to repay their loans," Judge Murguia wrote.

Significantly, Judge Murguia, ruling in the capacity of an appellate judge, explicitly rejected ECMC's argument that the Murrays should be placed in an IBR and that none of the Murrays' $311,000 debt should be forgiven.

"The court disagrees," Judge Murguia wrote. "Under the circumstances of this case, debtors' payments under an IBR plan are insufficient even to stop the accrual of additional interest, and such payments directly contravene the purpose of bankruptcy."  Judge Murguia noted that Judge Somers had not discharged all of the Murrays' indebtedness--only the accumulated interest. "He discharged that portion--the interest--that had become an undue hardship on debtors, denying them a fresh start."

ECMC v. Murray is an important case for two reasons: First, this is one of the few student-loan bankruptcy court decisions that have granted relief to middle-income student borrowers. The Murrays' combined income was about $95,000.

Second, the key ruling by both Judge Somers and Judge Murguia was their finding that the interest on the original debt would constitute an undue hardship for the Murrays if they were forced to pay it back. Furthermore, this would be true even if the Murrays were placed in an IBR because the monthly payments under such a repayment plan were insufficient to stop the accrual of interest.

There are hundreds of thousands of people in circumstances very similar to the Murrays. Their loan balances have doubled, tripled or even quadrupled due to accumulating interest. People in this situation will never pay off their total indebtedness. But most of these people, like the Murrays, can pay off the amount they originally borrowed if only the accumulated interest were wiped out.

Let us hope student loan debtors situated like the Murrays will learn about ECMC v. Murray and find the courage to file bankruptcy and seek a discharge of their student loans--or at least the accumulated interest.  After all, it is the accumulated interest, penalties and fees that have put millions of student borrowers in a hopeless situation. The Murray decision offers a fair and reasonable solution for these people and gives them a fresh start. A fresh start, after all, is the core reason that  bankruptcy courts exist.


References

Murray v. Educational Credit Management Corporation (Bankr. D. Kan. 2016), aff'd, No. 16-2838 (D. Kan. Sept. 22, 2017).


Wednesday, October 4, 2017

Betsy DeVos sabotages Obama's borrower-defense rule for processing student borrowers' fraud claims: She fears students will get "free money"

The collapse of Corinthian Colleges and ITT Tech shined a light on the seedy for-profit college industry.  Both for-profit college companies filed for bankruptcy under a cloud of accusations of fraud and misrepresentation.

Together, Corinthian and ITT Tech had more than half a million former students. Thousands of them filed so-called "borrower defense" claims, petitioning the Department of Education to forgive their student loans because they were defrauded by the institutions they attended. About 65,000 borrower-defense claims are now pending.

What to do? The Obama Administration prepared borrower-defense regulations that were scheduled to take effect on July 1, 2017; but Secretary of Education Betsy DeVos blocked their implementation, saying the rules would be rewritten through the "negotiated rule making" process. DeVos' decision will allow the for-profit industry a voice in reshaping the rules to their liking.

Why did DeVos block the Obama-era regulations? She said the regulations drafted by the Obama administration would allow students to get "free money" by having their loans forgiven.  In other words, DeVos apparently assumes students who file fraud victims are themselves engaging in fraud by seeking debt relief.

This latest caper from DeVos' Department of Education tells us all we need to know about President Trump's least qualified cabinet appointee . Time and time again, DeVos has made decisions to benefit the for-profit colleges at the expense of students; and she has hired consultants who have worked in that sleazy industry.

Millions of people have borrowed money to attend overly expensive for-profit colleges only to receive educational experiences that are virtually worthless. Some were defrauded, some obtained degrees that did not lead to good jobs, and some just paid too much for substandard postsecondary programs. Unless these people obtain relief from their student-loan debt, they will never get on their feet financially.

The Obama administration's borrower-defense regulations were drafted to determine which for-profit students are fraud victims entitled to student-loan debt relief. In my mind, however, it is impossible to efficiently decide on a case-by-case basis which student borrowers are entitled to debt relief due to fraud. That would require hundreds of thousands of individual due-process hearings.

No, the only way to give worthy student-loan debtors a fresh start is through bankruptcy. Congress must amend the Bankruptcy Code to treat student loans like any other consumer debt.

If insolvent student-loan debtors were given reasonable access to bankruptcy, millions of cases would be filed and at least half a trillion dollars in debt would be wiped out.

A half trillion dollars in student-loan debt relief would be a big hit to the U.S. treasury, but let's face it. Millions of student loans will never be paid back. It would be far better for the overall national economy if student borrowers were given a fresh start rather than be forced into 20- and 25-year repayment plans in which borrowers make token monthly payments that don't even cover accruing interest.

DeVos either doesn't understand the magnitude of the student-loan debt crisis or she doesn't  care. Either way, she is a disaster who needs to be cashiered.

Betsy DeVos: Having a good laugh at college students' expense

References

James Briggs. Former ITT Tech students got promise of help, then silence. USA Today, May 22, 2017.

Corinthian Colleges Students Eligible For Loan Discharge. National Bankruptcy Forum, June 22, 2017.

Andrew Kreighbaum. Devos: Borrower-Defense Rule Offered 'Free Money'. Inside Higher ED, September 26, 2017.

Chad Miller.  Understanding 'Borrower Defense to Repayment": A New Yellow Brick Road to Federal Student Loan Forgiveness. American Action Forum, November 1, 2016.

Michael Stratford. More Debt Relief for Corinthian Students. Inside Higher Ed, March 28, 2016.

Thursday, September 21, 2017

Does Citizens Bank routinely make student loans to people attending non-approved foreign colleges?

Awhile back, I posted an essay on Decena v. Citizens Bank, a bankruptcy court case that was decided last year in New York. Lorelei Decena had borrowed $161,000 to attend St. Christopher's College of Medicine in Senegal, West Africa. At the time Decena was studying at St. Christopher's, the school was not on the Department of Education's approved schools list.

After graduating, Ms. Decena returned to the United States to pursue a medical career. To her dismay, she discovered that her St. Christopher medical degree did not qualify her to take her medical boards exams in the U.S.; and she filed for bankruptcy.

As almost everyone knows, student loans cannot be discharged in bankruptcy unless the debtor can meet the "undue hardship" standard articulated in 11 U.S.C. sec. 523 of the Bankruptcy Code. The undue hardship standard applies not only to federal student loans but to private student loans as well. This is a very difficult standard to meet, and some courts have applied it harshly.

Fortunately, for Ms. Decena, the bankruptcy court ruled that her loans from Citizens Bank were not covered by the undue hardship rule because St. Christopher's College of Medicine was not on the Department of Education's approved schools list when she studied there. Thus her student loans could be discharged in bankruptcy like any other consumer loan.  A great victory!

A few days ago, I was contacted by another New Yorker who had borrowed about $160,000 in student loans from Citizens Bank to attend a medical school in Great Britain. This school, like Decena's school, was not on DOE's approved schools list when he attended. And somewhat like Decena, this New Yorker discovered that his overseas medical degree does not qualify him to practice medicine in New York.

Obviously, this fellow has a very good argument that his student loans can be discharged in bankruptcy in the same manner as Ms. Decena's loans.  He contacted Citizens Bank and was told that the bank had sold the loan to a debt collection company.  He then wrote the debt collector and enclosed a copy of the Decena case. So far, no response.

What's going on here? Is Citizens Bank routinely making student loans to people enrolled in overseas medical schools?  And is it lending money to people attending foreign schools that are not on the Department of Education's approved schools list?

Although it is not well known, the Department of Education gives out student loans for Americans to attend foreign colleges and universities; and there are universities from all over the world on DOE's approved schools list.  Some of these institutions are foreign medical schools.

In my view, the government should not be lending money for people to study at foreign universities. The United States has plenty of colleges. Moreover, post-secondary enrollments are in decline in the U.S.; and there are lots of empty seats at American institutions.

And I don't think private banks should be lending money to people so they can study at foreign medical schools, particularly when it is unclear whether a foreign medical degree qualifies graduates to practice medicine in the U.S.

But if our government and the banks are going to continue the reckless practice of handing out student loans for people to study in foreign countries, then the people who accept those loans should be able to discharge their student debt in bankruptcy if they discover that their foreign degrees are worthless to them.



References

Decena v. Citizens Bank, 549 B.R. 11 (Bankr. E.D.N.Y. 2016).

Note: Citizens Bank appealed the bankruptcy court's decision to a federal district court, arguing that it had not received proper service of the lawsuit. The district court vacated the bankruptcy court's ruling based on a technicality without disturbing the underlying rationale of the bankruptcy court's decision in favor of Ms. Decena. Citizens Bank v. Decena, 562 B.R. 202 (E.D.N.Y. 2016).










Friday, January 6, 2017

Globe University and Minnesota School of Business are closing: We need federal legislation to manage college shutdowns

Globe University and Minnesota School of Business (MSB) began closing their campuses last month. The two for-profit institutions once operated in three states--Minnesota, South Dakota, and Wisconsin; but a series of regulatory and court actions brought them down.

In September, a Minnesota court ruled that Globe and MSB committed fraud by inducing students to enroll in their criminal justice programs.  Not long after, the Department of Education cut them off from federal student-aid funding. No for-profit college can survive a month without federal student-loan revenue, so DOE's action amounted to a death sentence for both institutions.

The demise of Globe and MSB follow in a train of college shutdowns over the past couple of years. The casualty lists includes Corinthian Colleges and ITT, two for-profits that declared bankruptcy. St. Catharine College and Dowling College also shut their doors, along with Virginia Intermont College.

DOE has more than 500 colleges on its "heightened cash monitoring" watch list, and many of these schools will shut down within the next three or four years. In a 2015 report, Moody's Investment Services predicted colleges would close at the rate of 15 per year commencing this year.

Now is the time for Congress to pass legislation to protect colleges' former students when the institution they attended shuts down. At a minimum, Congress should do the following:

I. Congress should pass legislation requiring every defunct college to deposit all student records in a central federal depository.

First student records at failed colleges must be preserved. Former students will need access to their official transcripts for decades after their alma mater closes, but how will they get those transcripts 25 years after the institution they attended shut its doors?

Currently, some closing colleges are voluntarily making arrangements to preserve student records. Dowling College, for example, which filed for bankruptcy in 2016, sent its student records to nearby Long Island University.

But not all closing colleges will act as responsibly as Dowling. In particular, colleges that are accused of defrauding their students have no incentive to preserve student records because those records might be used against them in legal proceedings.

Congress needs to adopt legislation that requires every college that receives federal funds to send all student records, including transcripts, to a federal records depository in the event of a closure. And colleges should be required to digitize their student records according to a standardized protocol so that the process of transferring records after a college closes can be done quickly and efficiently.

II. Non-operating colleges should forgive any loans owed to them by former students.

Most nonpublic colleges depend on federal student aid money for the bulk of their revenues, but some also lend money directly to their students.  For example, Globe and MSB loaned money to their students at interest rates as high as 18 percent. According to a Minnesota court decision, the two institutions  loaned money to approximately 6,000 students between 2009 and 2016.

Globe and MSB will be defunct in a matter of weeks, but the loans they made to students are debts they may try to collect. Federal law should require every college that loans money to students to forgive those loans if the college closes. As a matter of simple justice, a college that shuts down shouldn't be chasing after students who owe it money.

III. Congress should ease the path to bankruptcy relief for students who attended for-profit colleges.

Finally, Congress needs to streamline the loan-forgiveness process for students who attend for-profit colleges and received no economic benefit from the experience. It is particularly unjust for students to be on the hook for student loans taken out to attend a for-profit college that closed after being found guilty of fraud.

Under DOE regulations, students can apply to have their student loans discharged if they can make one of two showings: 1) they were induced to enroll based on fraud, or 2) they took out loans to attend a college that closed while they were enrolled or within 120 days of being enrolled.

Unfortunately, the administrative process for resolving discharge applications is slow and entirely inadequate to deal with the potential volume of claims. After all, Corinthian Colleges and ITT, which are both in bankruptcy, have around a half million former students between them.

Currently, the Bankruptcy Code bars debtors from discharging student loans in bankruptcy unless they can show that paying back their loans would create an "undue hardship."  Most bankruptcy courts have interpreted the undue hardship standard harshly, making it incredibly difficult for most college borrowers to clear their student loans through the bankruptcy process.

Congress should pass legislation that eliminates the undue hardship standard for all people who took out loans to attend a for-profit college and wound up broke.  The five-year default rate for a recent cohort of students who attended for-profit colleges is 47 percent--a clear indication that a lot of people got no benefit from attending a for-profit institution.

Conclusion: The Nation faces a swelling tide of college closures and needs an orderly process for shutting down higher education institutions.

One thing is certain: colleges are closing at an accelerating rate; and the Nation need an orderly process to minimize the harm to defunct colleges' former students. Student records must be safeguarded, student debt to failed institutions should be wiped out, and Congress needs to amend the Bankruptcy Code to allow former for-profit college students to obtain bankruptcy relief.

Photo credit: Wisconsin Public Radio


References

Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.

Rick Seltzer. Virginia Intermont's campus sale begs question of how colleges close accounts. Inside Higher Ed, January 5, 2017.

State of Minnesota v. Minnesota School of Business, 885 N.W.2d 512 (Minn. Ct. App. 2016).

Alia Wong. Farewell to America's Small Colleges, Atlantic, October 2, 2015.

Wednesday, November 30, 2016

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

Monday, September 26, 2016

Department of Education strips the Accrediting Council for Independent Colleges and Schools (ACIS) of its accrediting authority

DOE drops the hammer on ACICS

Last week, the U.S. Department of Education announced that it is stripping the Accrediting Council for Independent Colleges and Schools (ACICS) of its accrediting authority. As Donald Trump might put it, this is a HUUGE deal.

ACICS is the biggest accrediting body for the for-profit college industry. As of last June, ACICS accredited 245 schools enrolling about 800,000 students. All those schools must be credentialed by an accreditation agency approved by DOE in order to obtain federal student aid money. So when DOE decertified ACICS, it put more than 200 for-profit institutions at extreme risk of closing.

Why did DOE take such drastic action against ACICS?

Why did DOE take this drastic action? DOE accuses ACICS of lax oversight of the  for-profit college industry. Two large for-profits filed for bankruptcy recently--Corinthian Colleges and ITT Tech; both companies were accredited by ACICS. Other for-profits have been investigated for fraud, misrepresentation, and high-pressure recruiting tactics.

The industry as a whole has notoriously high student-loan default rates. According to a Brookings Institution report, almost half of a recent cohort of for-profit students defaulted on their student loans within five years of beginning repayment. Ben Miller, a senior spokesperson for the Center for American Progress, approved of DOE's action: "With its lengthy track record of shoddy oversight--that has led to billions of dollars squandered--ACICS had abused the public's trust and could not be allowed to continue granting access to federal dollars."

What will happen to the 200 plus colleges and schools that were accredited by ACICS?

What will happen to the 200 plus for-profit colleges that are no longer accredited by a DOE-approved accrediting body? Assuming ACICS loses its appeal of DOE's decision, which seems likely, for-profit colleges will have 18 months to obtain accreditation by another DOE-approved accreditor.  That will be very difficult to do--especially for small for--profit colleges,  As one West Virginia educator explained: "There aren't thousands of accreditors that schools can go to, there's really just a handful. They all have very specific niches to fill." And those accrediting bodies will likely be deluged with applications from colleges that were formerly accredited by ACICS.

In short, the fall of ACICS will inevitably have a domino effect on for-profit colleges. Those that don't quickly become re-accredited by a DOE-approved agency will lose access to federal student-aid money and will collapse. When the colleges collapse, their students' studies will be disrupted. The vast majority of all for-profit students took out federal student loans to finance their tuition. If their college closes, they will have just two choices:  They can transfer to another institution that will take their former college's credits or they can apply to DOE to have their loans  forgiven under DOE's"closed school" exemption process.

Does DOE have a sinister motive in disrupting the for-profit college industry?

The Obama administration will say its drastic action against ACICS is a justified response to the accreditor's shoddy oversight of the for-profit college industry. And maybe that explanation is sincere.

But why did DOE wait until the waning days of President Obama's second term in office to act? I wonder whether DOE might be intentionally disrupting the for-profit college industry so that inside players can step in and scoop up some faltering for-profit colleges in order to reap huge profits.

When Corinthian Colleges filed for bankruptcy last year, DOE engineered a deal for a subsidiary of Educational Credit Management Corporation to buy some of Corinthian's operations. ECMC's unit bought 56 of Corinthian's campuses for only $24 million. Who benefited financially from that deal?

And Apollo Education Group, owner of the University of Phoenix, is being bought out by a consortium of equity groups led by Martin Nesbitt, President Obama's former campaign manager and president of the Obama Foundation.  Tony Miller, a former Deputy Secretary of Education,  will run the University of Phoenix. Cozy!

Time will tell us what is going on here. The for--profit college industry is a sleazy business, and I have argued repeatedly that DOE should shut it down. DOE's decision last week to strip ACICS of its accrediting authority is a big step toward doing just that.

But if we see more political insiders come in and buy struggling for-profits as Martin Nesbitt is doing with the University of Phoenix, that may be an indication, that DOE's death sentence for ACICS is nothing more than a calculated play to drive down the value of for-profit colleges so that powerful financial interests can scoop them up.

One thing we know for sure: Bill and Hillary Clinton are very close to the for-profit college racket. Bill, we remember, got paid nearly $18 million to serve as "Honorary Chancellor" of Laureate Education Group; and Hillary is tight with Goldman Sachs, which has an ownership interest in a for-profit education company.

Image result for bill clinton and laureate education

References

Lauren Camera. Education Department Strips Authority of Largest For-Profit Accreditor. U.S. New & World Report, September 2, 2016. Accessible at http://www.usnews.com/news/articles/2016-09-22/education-department-strips-authority-of-acics-the-largest-for-profit-college-accreditor

Paul Fain. Federal panel votes to terminate ACICS and tightens screws on other accreditors. Inside Higher Ed, June 24, 2016. Accessible at https://www.insidehighered.com/news/2016/06/24/federal-panel-votes-terminate-acics-and-tightens-screws-other-accreditors

Jake Jarvis. In wake of ACIS decision, a crisis for WV's for profit schools. Charleston Gazette-Mail, September 25, 2016. Accessible at http://www.wvgazettemail.com/news-education/20160925/in-wake-of-acics-decision-a-crisis-for-wvs-for-profit-schools

Ronald Hansen. Apollo Education sale 'golden parachute' could be worth $22 million to executives. Arizona Republic, March 8, 2016. Accessible at http://www.azcentral.com/story/money/business/2016/03/08/apollo-education-sale-executives-payout-22-million/81483912/

Rosiland S. Helderman and Michelle Ye He Lee. Inside Bill Clinton's nearly $18 million job as 'honary chancellor' ofr a for-profit college. Washington Post, September 5,  2016. Accessible at https://www.washingtonpost.com/politics/inside-bill-clintons-nearly-18-million-job-as-honorary-chancellor-of-a-for-profit-college/2016/09/05/8496db42-655b-11e6-be4e-23fc4d4d12b4_story.html

Abby Jackson. An embattled for profit education company partly owned by Goldman Sachs keeps downsizing. Business Insider, June 13, 2016. Accessible at http://www.businessinsider.com/for-profit-brown-mackie-shutting-down-2016-6

Patria Cohen and Chad Bray. University of Phoenix Owner, Apollo Education Group, Will Be Taken Private. New York Times, February 8, 2016. Accessible at http://www.nytimes.com/2016/02/09/business/dealbook/apollo-education-group-university-of-phoenix-owner-to-be-taken-private.html

John Sandman. Debt Collector ECMC Closes Deal for Corninthian College Campuses. Mainstreet.com, February 9, 2015. Accessible at https://www.mainstreet.com/article/debt-collector-ecmc-closes-deal-for-corinthian-college-campuses

Soyong Kim. Apollo teams with Washington insider for education deal. Reuters, January 12, 2016. Accessible at http://www.reuters.com/article/us-apollo-education-m-a-apollo-global-idUSKCN0UQ23W20160112




Tuesday, September 20, 2016

ITT Tech files for bankruptcy, leaving more than 35,000 students in the lurch. 23 Democrat Senators ask the Department of Education to give ITT students special assistance

ITT Educational Services, a for-profit corporation operating more than 130 vocational and technical training schools, filed for bankruptcy earlier this month. The Department of Education shut off student aid money to ITT in late August, and the corporation quickly collapsed.

ITT's bankruptcy left  about 35,000 students in the lurch.  Most of them took out federal student loans to pay ITT's extraordinarily high tuition, and none of them will be able to complete their studies. DOE Secretary John King sent a message to these students telling them they had just two options: transfer their credits to other institutions or file for loan forgiveness under DOE's "closed school"forgiveness regulations.

On September 15, 23 Democratic Senators sent Secretary King a letter asking DOE to grant ITT's former students special assistance. The letter is slightly incoherent, which is understandable given the fact that 23 politicians had to agree on the text. Nevertheless, the Senators articulated several specific requests for relief.

Extending the eligibility guidelines for total student-debt relief for ITT's former students. First, the Senators want DOE to loosen the eligibility requirements for ITT students who file for total loan forgiveness under DOE's "closed school" relief regulations.  Under current DOE guidelines, ITT's former students can apply for debt relief under DOE's "closed school" procedures if they were enrolled at ITT at the time it closed or withdrew from ITT up to 120 days prior to closure.

The Democrats asked Secretary King to expand the 120-day window to a little more than two years. If King grants this request, any student who withdrew from ITT on or after March 1, 2014 will qualify to have their ITT student loans forgiven under DOE's "closed school" discharge process.

Preservation of ITT's student records. The Senators also asked DOE to preserve all of ITT's documents and records that might be relevant to an ongoing investigation of ITT's  activities or that could be helpful to students seeking to get their loans discharged..

Explore legal authority to automatically discharge ITT students' federal loans.  Finally, the Senators urged DOE to determine its authority to automatically discharge student loans of ITT    students and to consider discharging loans of all students who don't transfer their ITT credits to another institution within three years and who are otherwise eligible for a "closed school" discharge.

All these recommendations are commendable but they are far too timid. After all, as the Senators attested in their letter, DOE shut off ITT's funding based on serious concerns about "ITT Tech's deceptive practices, dubious educational quality, and financial integrity."

As reported in Bloomberg News, the U.S. Securities and Exchange Commission sued ITT for fraud in 2015, and the Consumer Financial Protection Bureau sued the company in in 2014, "accusing it of overstating students' job prospects and potential salaries and then pushing them into high-cost private loans that were likely to default." Both suits are still pending.

ITT has enrolled thousands of students over the years. Many of these students--my guess is most of them--received little or no economic benefit for their ITT tuition dollars.

I'm sure ITT can point to some students who completed their ITT studies and found good paying jobs, but I think for every success story  there is surely one or more students who  got no economic benefit from their ITT studies and wound up heavily in debt.

One thing is certain. The for-profit college industry is imploding, and DOE needs a comprehensive process for assisting students who attended one of the collapsing for-profit schools.  Several years ago, Professor Robert C. Cloud and I proposed a change in the Bankruptcy Code that would allow anyone who accumulated student-loan debt from attending a for-profit college and who is insolvent to receive a bankruptcy discharge of student-loan debt without having to show "undue hardship."

In other words, we argued that student debt acquired to attend a for-profit college should be treated like any other unsecured debt, which would make it readily dischargeable in bankruptcy. In my view, this proposal makes more sense than for DOE to deal with each collapsing for-profit college on an ad hoc basis.

Let's see if our U.S. Senators have the courage to offer broader relief for for-profit college students than the tepid proposals contained in the Democratic Senators' recent letter.


References


Richard Fossey, Robert C. Cloud, R. (2011). From the cone of uncertainty to the dirty side of the storm: A proposal to provide student-loan debtors who attended for-profit colleges with reasonable access to the bankruptcy courts. Education Law Reporter, 272, 1-18.

Secretary of Education John B. King Jr. A Message from the Secretary of Education to ITT Students. Accessible at http://blog.ed.gov/2016/09/message-secretary-education-itt-students/

Letter to the Honorable John King, Secretary of Education, from 23 Democratic Senators, September 15,2016. https://www.insidehighered.com/sites/default/server_files/files/9_15_16%20ITT%20Tech%20ED%20Letter%20(1).pdf

Dawn McCarty and Shahien Nasirpour. ITT Educational Services Files for Bankruptcy After Shutdown. Bloomberg, September 16, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-09-16/itt-educational-services-files-for-bankruptcy-after-shutdown-it6byu6t

Reuters. ITT Educational Services Files for Bankruptcy After Aid Crackdown. International New York Times, September 17, 2016. Accessible at http://www.nytimes.com/2016/09/18/business/itt-educational-services-files-for-bankruptcy-after-aid-crackdown.html?_r=0

Wednesday, August 31, 2016

Quantitative Easing and the Student-Loan Crisis: The Government Loans Money to Students Who Don't Have a Prayer of Paying It Back

Investipedia defines quantitative easing as the process of increasing the money supply "by flooding financial institutions with capital in an effort to promote increased lending and liquidity."  Or more simply--quantitative easing is printing new money.

The Obama administration has done a lot of quantitative easing. At the height of its QE program, the government was pumping a trillion bucks a year into the economy. But there is another type of quantitative easing that is less well known. The government has been loaning billions of dollars to students under the federal student loan program, and it is only getting about half that money back. 

Who benefits? The higher education industry has gotten this money, including the stock holders and equity funds that own private colleges and universities.  

Conner v. U.S. Department of Education, a recent federal court decision, illustrates how QE works in the education sector. Patricia Conner, a Michigan school teacher, took out 26 separate student loans over a period of 14 years to pursue graduate education in three fields: education, business administration, and communications. By the time she filed for bankruptcy at age 61, she had accumulated over $214,000 in student-loan debt. According to the bankruptcy court, Conner did not make a single voluntary payment on any of her loans.

In the bankruptcy court, Conner argued that her debt should be discharged under the Bankruptcy Code's "undue hardship" standard, citing her advanced age as a factor that should weigh in her favor. 

But a Michigan bankruptcy court refused to release Conner from her debt, and a federal district court upheld the bankruptcy court's opinion on appeal. The district court  ruled that Conner's age could not be a consideration since she borrowed the money in midlife knowing she would have to pay it back. The court also indicated that Conner should enroll in an income-based repayment plan (IBRP) that the government had offered her, which would obligate her to pay only $267 a month on her massive debt. The court did not say how long she would be obligated to make payments under an IBRP, but these plans generally stretch out for at least 20 years.

Let's assume Conner signs up for an income-based repayment plan and begins paying $267 a month on her $214,000 debt. Let's also assume, that the interest rate on this debt is 6 percent. At 6 percent,  interest on $214,000 amounts to more than $12,000 a year, but Conner will only be paying about $3,200 a year toward paying off her student loans.

This means Conner's debt will be negatively amortizing--getting larger every year instead of smaller. After making payments for one year under her IBRP, Conner will owe $223,000. After the second year, she will owe around $233,000. After three years, Conner's debt will have grown to about a quarter of a million dollars, even if she faithfully makes every monthly loan payment.

Obviously, by the time Conner's IBRP comes to a conclusion in 20 or 25 years, she will owe substantially more than she borrowed, and she will be over 80 years old. In short, the government will never get back the money it loaned to Ms. Conner.

Who benefited from this arrangement? Wayne State University, where Conner took all her graduate-level classes, got most of Conner's loan money, which it used to pay its instructors and administrators.  But what did Wayne State provide Conner for all this cash? Apparently not much because Conner is still a school teacher, which is what she would have been even if she hadn't borrowed all that money to go to graduate school.

In my view, the Conner story is an illustration of QE in the higher education sector. The federal government is pumping billions of dollars a year into the corrupt and mismanaged higher education industry, and it is getting only about half of it back. Moreover, in far too many cases, the students who are borrowing all this money aren't getting much in value.

How long can this go on?  I don't know, but it can't go on forever.

Image result for "quantitative easing"


Note: I am indebted to my friend Richard Precht for pointing out the relevancy of Quantitative Easing to the student loan crisis.

References

Conner v. U.S. States Department of Education, Case No. 15-1-541, 2016 WL 1178264 (E.D. Mich. March 28, 2016).

Thursday, August 25, 2016

Student Loans, Bankruptcy, and Creditors' Lawyers: If Auschwitz Comes to the United States, Will Attorneys Handle the Paperwork?

I was a child when I learned about the Nazi concentration camps. I was a voracious reader when I was young, and I often wandered around our town library, browsing through the books. One day, I pulled a book off a shelf because I was intrigued by the title, and the pages fell open to a photo of one of the German concentration camps. It might have been Auschwitz, but I don't remember.

The photo showed dozens of naked and emaciated corpses piled in a heap, and that was all. I remember being viscerally shocked and frightened by what I saw, and I immediately realized that the dead people who appeared in the photo were the victims of human monsters.

I thought about that photo for weeks, and I finally comforted myself with the childish conviction that the death camps would never come to America--that Americans could never commit such savage acts.

Image result for auschwitz death camp
I hope I get off work in time to see my kid's soccer game

I was naive of course.  As I grew older, I realized there are plenty of Americans who will do anything they are directed to do--no matter how much pain they inflict on other human beings.

The people who operated the Nazi death camps were, after all, ordinary people.  They probably read their morning newspapers over breakfast and played with their children after work in the evenings. They labored for the Nazi death machine for a variety of mundane reasons--maybe they just needed a paycheck.

And this brings me to the lawyers who work for Educational Credit Management Corporation, perhaps the federal government's most aggressive debt collector against student-loan borrowers. ECMC's attorneys have gone into bankruptcy court time after time to oppose debt relief for distressed student-loan debtors.  In the Roth case, for example, ECMC's legal counsel opposed bankruptcy relief for Janet Roth, an elderly debtor with chronic health problems who was living on less than $800 a month. ECMC harried Ms. Roth all the way to the Ninth Circuit's Bankruptcy Appellate Panel.

In a letter dated July 7, 2015, Lynn Mahaffie, a Department of Education bureaucrat, issued a letter advising creditors like ECMC not to oppose bankruptcy relief for student debtors if the cost of fighting a bankruptcy discharge did not make the effort worthwhile.

But that letter was just bullshit. The Department of Education and its loan collectors almost always oppose bankruptcy relief for student-loan debtors--whether or not it is cost effective to do so.  For example, in Acosta-Conniff v. Educational Credit Management Corporation, an Alabama bankruptcy judge discharged Alexandra Acosta-Conniff's student loan debt. Conniff was a single mother of two children working as a school teacher, and the court reasoned quite sensibly that Conniff would not be able to pay off her student loans.

ECMC dispatched six attorneys to appeal the bankruptcy court's decision: David Edwin Rains, Kristofer David Sodergren, Rachel Lavender Webber, Robert Allen Morgan, Margaret Hammond Manuel, and David Chip Schwartz. Six attorneys--and Conniff didn't even have a lawyer!

Not surprisingly, ECMC won its appeal.  Six lawyers against a single mother of two who can't afford an attorney--it was hardly a fair fight.

Conniff has a lawyer now, and she is appealing the district court's unfavorable decision to the Eleventh Circuit Court of Appeals. ECMC has a platoon of lawyers to represent it before the Eleventh Circuit, and who knows how much that costs?

But ECMC apparently doesn't care how much the appeal will cost, and the Department of Education obviously doesn't care either. Otherwise it would direct its loan collectors not to harass insolvent student-loan debtors in the bankruptcy courts.

Now I am not comparing ECMC's lawyers to Nazi death-camp workers. Being a debt collector's attorney is not intrinsically evil; and any misery inflicted on a student-loan debtor in a bankruptcy court is trivial compared to the horrors of Auschwitz. I feel sure ECMC's lawyers are all decent people.

Nevertheless, I personally could not sleep at night if I were representing ECMC in the bankruptcy courts against people like Janet Roth or Alexandra Acosta-Conniff.  I would ask myself whether I am serving the interests of justice by helping ECMC deprive honest but unfortunate college-loan borrowers of a fresh start in life.

But I don't imagine ECMC's attorneys ask themselves that question. And I doubt whether they have trouble sleeping at night. After all, the lawyers have their own student loans to pay off; and everyone has to make a living.


Note: A quick search in the Westlaw data base turned up 557 cases in which Educational Credit Management Corporation appeared as a named party.


References

Fossey, R. & Cloud, R. C. (2015). Tidings of comfort and joy: In an astonishingly compassionate decision, a bankruptcy judge discharged the student loans of an Alabama school teacher who acted as her own attorney. Teachers College Record Online, tcrecord.org. ID Number 18040. 

ECMC v. Acosta-Conniff, 550 BR 557 (M.D. Ala. 2016).

In re Roth, 490 B.R. 908 (9th Cir. BAP 2013).

Natalie Kitroeff. Loan Monitor Is Accused of Ruthless Tactics on Student Debt  New York Times, January 1, 2014.






Friday, August 12, 2016

Parents who take out PLUS student loans to pay for their children's college education: Don't be such a fool

I'm sorry, so sorry
That I was such a fool

I'm Sorry (1960)
Sung by Brenda Lee
Lyrics by Dub Allbritten & Ronnie Self

Most country and western songs are about regret: I'm sorry I cheated on my wife; I regret mouthing off to a biker in the honky-tonk, I wish I hadn't shot a man in Reno.

I don't know of any C & W song about student loans, but there should be. A recent survey reported that about 50 percent of student-loan debtors regretted how much they borrowed to go to college. More than a third said they would not have gone to college had they realized what it would cost them.

But the people who are really, really sorry are the parents who took out loans to pay for their children's college education.  If they co-sign a private loan for a child, they are on the hook for it even if their child dies.  And parents will find it is virtually impossible to discharge a co-signed student loan in bankruptcy, whether it is a private loan or a a federally subsidized loan.

In fact, I say this unequivocally: Parents should never borrow money to pay for their child's college education.

Yet our federal government peddles Parent Plus loans--student loans taken out by parents--as a good way to help finance a child's college costs. DOE recently posted a blog telling parents that "PLUS loans are an excellent option if you need money to pay your child's educational expenses," although it cautions that parents need to make sure they understand the loan terms before they take out a PLUS loan.

And what are those terms? DOE's blog posting says that the current interest rate is 6.31 percent and that monthly repayment begins immediately. Monthly PLUS loan payments are not postponed while the child is still in college.

DOE then summarizes various PLUS loan repayment plans, including an income-contingent plan (ICR) that allows parents to pay 20 percent of their discretionary income for 25 years.

Of course it is madness for parents to pay a fifth of their discretionary income for 25 years in order for their child to go to college. There are lots of college options that don't require that kind of sacrifice.

DOE assures parents that any unpaid balance on their PLUS loan will be forgiven after 25 years. But note that DOE doesn't tell parents that they could have a big tax bill for the amount of the loan that is forgiven.

And DOE didn't warn parents that they will find it almost impossible to discharge a PLUS loan in bankruptcy should they run into financial trouble due illness, job loss, or some other financial calamity.

DOE ends its deceptive blog on this cheery note. "Yes, there's lots to consider when it comes to taking out a Direct PLUS loan, but there are many benefits to getting one if you need help paying your child's education."

In fact, there's nothing to consider. If your children can't finance their college education without you going into debt, then they need to develop another plan.

My guess is that a lot of parents take out PLUS loans to help their kids go to some fancy East Coast private school, which is foolish.  If your children cannot afford to go to Harvard or Dartmouth or Amherst without putting you into debt, then they need to enroll at a nearby public university and take a part-time job at McDonald's.

Trust me. You and your children will be better off if you avoid all college options that force Mom and Pop to go into debt. Johnny Cash was sorry he shot that guy in Reno, but he was not any sorrier than you will be if you take out a loan to send your child to college.

Johnny Cash: He shot a man in Reno, but he's really, really sorry.
References

Jessica Dickler. Buyer's College buyer's remorse is real. CNBC News, April 7, 2016. Accessible at http://www.cnbc.com/2016/04/07/college-buyers-remorse-is-real.html

Jessica Dickler. College costs are out of control. CNBc News, July 16, 2016. Accessible at http://www.cnbc.com/2016/07/12/college-costs-are-out-of-control.html

Citizens Bank. Millennial College Graduates with Student Loans Now Spending Nearly One-Fifth of Their Annual Salaries on Student Loan Repayments. April 7, 2016. Accessible at http://investor.citizensbank.com/about-us/newsroom/latest-news/2016/2016-04-07-140336028.aspx

Lisa Rhodes. PLUS Loan Basics for Parents. Homeroom, August 8, 2016. Posted on the Official Blog Of the U.S. Department of Education. Available at http://blog.ed.gov/