The Supreme Court will soon rule on legality of Biden's Student-Loan Forgiveness Plan

 Forty million student debtors are waiting anxiously for President Biden's loan forgiveness plan to kick in. Biden wants to knock off $10,000 from everyone's student loans who makes less than $125,000 a year. That won't mean much to people whose loans are in six figures, but it will mean a great deal to people with modest loan balances. 

Unfortunately for all those millions of college borrowers, the Eighth Circuit Court of Appeals halted Biden's plan.

President Biden appealed to the Supreme Court, and yesterday the Court agreed to consider his appeal. We should have a Supreme Court decision by early summer of next year.

I predict that the Supreme Court will strike down Biden's loan-forgiveness scheme as an unconstitutional usurpation of Congressional authority. If that happens, the President and Congress will be under heavy pressure to provide some sort of loan relief that isn't illegal.

As I have argued repeatedly, Congress should revise the Bankruptcy Code to allow honest debtors to discharge their student loans in bankruptcy. This simple action would do more than anything else to grant loan relief to deserving college borrowers without allowing unworthy student debtors to get a free ride.

If this is too much of a heavy lift for Congress, it could enact more modest reforms. Here are my suggestions:

1) Congress should forbid the Department of Education from garnishing the Social Security checks of elderly borrowers who defaulted on their student loans. 

2) Congress should shut down the for-profit college industry. There is no reason for private investors and hedge funds to profit from young people striving to get their college degrees.

3) We should end the Parent PLUS program, which has impoverished hundreds of thousands of low-income families who took out federal loans so their children could attend college.

4) Congress also needs to reform the Grad PLUS loan program, which currently has no cap on the amount of money students can borrow to attend graduate school.  It is ridiculous for people to borrow $100,000 or more to get a master's degree in journalism.

Will any of these reforms see the light of day? Doubtful. Universities, student-loan servicers, and the banks are all happy with the status quo. As someone remarked after the fall of France during World War II: "Reform was possible only through catastrophe."

Sadly, it will probably take the catastrophic collapse of the American economy before our politicians will do what needs to be done to clean up the calamitous student-loan program.

Reform is not possible without a calamity.

Fair or Not, the Biden Administration Owns the Student Loan Catastrophe

 I grew up in a small Oklahoma town before the era of the big box stores. If my family wanted to buy a small appliance, a birthday present, or a wedding gift, we went to the town's family-owned gift shop.

This little shop sold items that would make good gifts for a wedding shower--glassware, casserole bowls, and kitchen stuff. It also sold toys and sports equipment.

Wandering through the gift shop as I child, I remember seeing mysterious little signs posted in the glassware section that said this: 

Lovely to look at,

Delightful to hold.

If you break it,

We mark it sold.

What did that mean? I asked myself.

One day my six-year-old brother and I were in the little store shopping for Christmas presents.  Without warning, my brother grabbed a football in the sporting goods section and kicked it into the glassware aisle.

That's when I knew what the sign meant because my mother had to pay for the damage.

President Biden is in a situation somewhat like my mother's. Someone kicked a metaphorical football into the federal student-loan program, and he has to pay for the damage.

I feel sorry for the President. He did not break the student-loan program. Other parties bear most of the blame. 

First, Congress revised the Bankruptcy Code several times to make it almost impossible for student borrowers to discharge their loans in bankruptcy. 

Next, President Obama's Department of Education introduced PAYE and REPAYE, extremely generous income-based repayment plans that allowed borrowers to stretch out their payments for as long as a quarter of a century. Borrowers in those plans were allowed to make loan payments so small that they would never pay off their loans.

Then Betsy DeVos, President Trump's Education Secretary, administered the loan program so heartlessly that borrowers who were defrauded by their schools could not get their loans forgiven. In addition, DeVos made it almost impossible for people to avail themselves of the Public Service Loan Forgiveness program.

Thus, when Biden stepped into the presidency, he was confronted with a student-loan scheme that had run amuck. More than 40 million Americans are student-loan debtors, along with several million parents who took out Parent PLUS loans.  Total indebtedness is now around $1,7 trillion, and most of it won't be paid back.

President Biden attempted to provide student borrowers with a bit of relief by forgiving $10,000 in student debt for every borrower making less than $125,000 (and $20,000 in forgiveness to people who got Pell grants while in school).

That's not working out so well. The federal courts have blocked the President from implementing his loan forgiveness scheme.  He has responded by extending the pause on student-loan payments until August 2023 (unless the Supreme Court rules on the plan's legality before the end of June).  

Experts estimate that this loan-payment moratorium could cost taxpayers more than $200 billion. 

So--like my mother, who paid for a lot of broken glass in an Oklahoma gift shop, President Biden now owns this shit show.

So far, Biden's DOE has tinkered a bit with the program. For example, the Department granted generous relief to students who claimed they were defrauded by their college, and it is trying to clean up the Public Service Loan Forgiveness program.

But, there is only one reasonable thing to do to address the student-debt crisis. Biden needs to put the heat on Congress to amend the Bankruptcy Code to allow millions of distressed debtors to discharge their debt in a bankruptcy court.

Tragically, I don't think the President will do that. Instead, he has chosen to preside over the student-debt crisis, which he now owns.

The Student Loan Program Is Designed to Shovel Federal Money to Colleges at Students' Expense

Years ago, I traveled through central Uganda in a Land Rover, accompanied by a native guide. As we came around a curve in the road, we surprised a large troop of baboons.  

All the baboons ran away. Large and small, the whole group fled into the woods. All but one.

The largest baboon was reclining against a tree when we appeared, and he stayed put. He was not afraid of us and wanted us to know it.

My guide stopped our vehicle so that we could observe this human-sized creature. The baboon stood up and slowly walked to my side of the Land Rover. My window was open, and soon he was standing only inches from me.

My guide had bought a bunch of Ugandan bananas (very tasty), and I offered one to the baboon. He stared directly into my eyes for a few seconds, which made me extremely uneasy. Finally, he grabbed the banana from my hand and walked away without the slightest sign of gratitude.

"I just did a stupid thing," I admitted to my guide, and he agreed. "Yes, Mr. Fossey, that was stupid."

Our federal government is doing stupid things with the student-loan program. Today, 45 million Americans hold student debt totaling $1.7 trillion, and millions of borrowers are in income-based repayment plans that last as long as a quarter of a century. The prime beneficiaries of all this largesse are colleges and universities. 

Have the colleges used this money wisely? No, they haven't. They raise tuition rates year after year because they know that students will take out ever-larger loans to pay their tuition bills.  They roll out expensive graduate programs that don't lead to good jobs. They overpay their administrators, who proliferate like feral hogs.

In essence, the feds have been feeding bananas to baboons. 

Although the colleges rake in billions of dollars each year from the student-loan program, they have nothing to say about its flaws. The presidents of the nation's most prestigious universities haven't endorsed bankruptcy relief for distressed student debtors. They haven't spoken out about the rapacious for-profit college industry. They've not criticized the Department of Education for garnishing elderly student debtors' Social Security checks.

Why haven't college leaders called for reforming the student-loan program? Because they don't give a damn. 

They just want their bananas.

Give me that goddamn banana.

Crocodile Tears: Congress Tinkers With Bankruptcy Code But Forgets Student Debtors

 President Biden signed the Bankruptcy Threshold Adjustment and Technical Corrections Act yesterday, and congressional leaders are patting themselves on the back. 

According to Senator Chuck Grassley, one of the Senate bill's sponsors, the new law will remove some hurdles to the bankruptcy process and "assist small businesses and working families to weather financial hardship and emerge stronger."

Senator John Cornyn, another sponsor, agreed. "For small businesses and families who fought their way through the pandemic and are now facing economic hardship, our complicated bankruptcy process can be another barrier to survival. I'm glad we could come together on this reprieve from burdensome [Bankruptcy Code] requirements . . . .

That's all bullshit. As the law's title says, this legislation does nothing more than make "some technical correction" to the Bankruptcy Code, and the law expires in two years.

If Congress is so interested in the welfare of working Americans, why doesn't it tackle the student-loan crisis--the $1.7 trillion elephant in the room?

Instead of tinkering with the Bankruptcy Code, why not remove the "undue hardship" language that prevents most distressed student borrowers from discharging their loans in bankruptcy?

If that task is too daunting, why not at least allow Parent Plus borrowers to discharge their student loans in the bankruptcy courts? Why not allow people who are overburdened by private student loans to shed that debt through the bankruptcy process?

President Biden hints that he will forgive student-loan debt to the tune of $10,000, an amount so small that the NAACP calls it a "slap in the face." 

Meanwhile, Congress pretends to care about the little guy, but it has done nothing substantive to address the student loan crisis, which grows bigger by the day. It hasn't even banned the Department of Education from garnishing the Social Security checks of elderly student-loan defaulters.

Our political leaders cry crocodile tears over the student debtor's plight, but they won't do anything significant to bring relief because the higher education industry likes the status quo.

White House Extends Pause on Student-Loan Payments Until the End of August: Will Biden Go the Full Monty?

The White House is extending the pause on student-loan payments until August 31st--an extraordinary development. By the time this pause ends in September, millions of student borrowers will have been relieved from making payments on their student loans for almost two-and-a-half years.

Indeed, as Ron Kline, President Biden's chief of staff, pointed out:

Joe Biden, right now, is the only president in history where no one's paid on their student loans for the entirety of his presidency.  

 What's next? I predict President Biden will announce significant student-debt relief this fall--in time to impact the 2022 midterm elections. 

After all, it would be political madness for the Biden administration to force student borrowers to begin making payments again only weeks before the nation goes to the polls to elect the next Congress.

Sometime in August or September, I think the President will do one of three things:

• He may reduce each student debtor's loan balance by $10,000, which he promised to do on the campaign trail.

• He might wipe out $50,000 of debt for each college borrower, something Senator Elizabeth Warren, Senator Chuck Schumer, and other progressive Democrats have urged him to do.

• President Biden might go the full monty and cancel all student debt, totaling $1.7 trillion.

In my opinion, the President will take the middle course and give college borrowers $50,000 in debt relief. A $10,000 write-off is not big enough to satisfy his base, and wiping out all $1.7 trillion in student debt is too audacious.

But regardless of what President Biden decides to do regarding student-debt relief, here are things the federal government will probably not do:

Congress will not rein in the for-profit colleges. The for-profits' lobbyists and campaign contributions will continue protecting this sleazy racket.  

Congress will not reform or eliminate the Parent PLUS program. Parent PLUS has brought financial ruin to hundreds of thousands of low-income families, but too many colleges depend on Parent PLUS money for Congress to shut down the program.

Congress will not reform the Bankruptcy Code to allow distressed student borrowers to shed their college loans in bankruptcy. 

As I have said for twenty years, the simplest and most equitable way to address the student-loan crisis would be to allow honest but unfortunate college borrowers to discharge their student loans in the bankruptcy courts. But that reform makes too goddamned much sense for Congress to do it.

In short, what we are likely to see in the coming months is massive student-loan debt relief with no reforms whatsoever for the federal student-loan program--the biggest boondoggle in American history.

Will President Biden wipe out all student loan debt?

Why Doesn't the Federal Government Just Cancel All Student Debt? To Find the Answer, Take a Look at Our National Balance Sheet

 When Joe Biden was running for President, he said he would cancel $10,000 of every college borrower's student debt if Congress consented. But Congress hasn't acted.

Senators Elizabeth Warren and Charles Schumer have urged President Biden to cancel $50,000 of every borrower's federal student loans, saying he has the executive power to do so. But that hasn't happened either.

Why not? Given the hardship that student debtors are experiencing--especially since the COVID crisis began--why not just wipe the slate clean and cancel all $1.7 trillion in federal student debt?

In my opinion, President Biden and most members of Congress would like to cancel all student debt. After all, there are about 45 million student borrowers, and canceling their student loans would make them all very happy. 

But Congress can't do that, and neither can President Biden. And here's why.

Student loans are carried on the nation's balance sheet as assets. As of September 30, 2020, the United States held almost $6 trillion in assets, and about a quarter of that amount is listed as outstanding student loans. 

As of September of last year, total national liabilities amounted to roughly $32 trillion, resulting in a national debt of around $26 trillion (give or take a few trillion).

Thus, if Congress simply wiped out all those student loans or President Biden canceled them through executive action, the nation's balance sheet would look significantly worse than it already does.  Instead of holding total assets of $6 trillion, our government would have only a little more than $4 billion.

Simply put, the federal government pretends that all that student-loan debt--closing in on $2 trillion--will be paid back.  And that fiction cannot be maintained if Congress wipes out all student debt or allows large numbers of distressed debtors to discharge their student loans in bankruptcy 

If you are a student-loan debtor, you have benefited from the moratorium on making monthly loan payments--a moratorium that won't be lifted until May 2022.

But just because you haven't made any student-loan payments over the past two years, don't get your hopes up that Congress will simply forgive all federal student debt.  It won't do it because it can't do it. The Federal government's balance sheet simply can't take the hit.

Senator Chuck Schumer Wants to Extend Moratorium on Student-Loan Payments: Is that a Good Idea?

Quite a few country songs are about guys who made a big mistake when they were young and went to prison.

Merle Haggard tells a story about a man who “turned 21 in prison, doin’ life without parole.” George Jones eulogizes a wretch who spent eighteen years in the slammer “and still has life to go.” And Porter Wagner sings about a guy rotting in a cell because he stabbed his wife and her lover in a fit of rage.

Heck, even Wanda Jackson, the queen of rockabilly, wails out a song about a riot in cell block number 9.

Student-loan debtors can empathize with these prison songs. Like the people Merle, George, Porter, and Wanda sang about, they made a big mistake when they were young and spent their adult lives dealing with the consequences.

Indeed, that is the great tragedy of the student-loan crisis. Young people borrow tons of money to pay for their college education when they are clueless about what they want to do with their lives.

Then they graduate from college (or drop out) and can’t pay back their loans. Interest and penalties accrue, causing their original loan balances to double or triple, and ultimately, they realize they’re facing a lifetime of debt, which they can’t discharge in bankruptcy.

College debtors got a break when the COVID pandemic hit in the spring of 2020. The Department of Education allowed them to skip their monthly loan payments without penalty and without interest accruing on their loans. But that reprieve comes to an end next month.

Senator Chuck Schumer and other progressive congressional leaders want President Biden to extend the student-debt moratorium yet again.

I think that’s a mistake, which will only prolong the misery.

No, Congress should face the fact that the federal student loan program is a catastrophe. Our national legislators need to amend the Bankruptcy Code to allow distressed student borrowers to discharge their student-loan debt in bankruptcy.

Also, the feds need to put severe pressure on the colleges and universities to lower their tuition prices.

Finally, we need to shut down the for-profit college sector and shut down dodgy graduate programs—the third-rate law degrees and vacuous MBAs.

Otherwise, we are just enlarging an enormous debtors prison that now holds more than 45 million inmates.

Wanda Jackson: "There's a riot goin' on."

 

Private Student-Loan Debt at an All-Time High: TICAS Releases Snoozer Report

 According to a recent report by the Institute for College Access and Success (TICAS), the 2020 class of college graduates has amassed $136 billion in private student debt.  When this amount is added to the total student debt from federal student loans--about $1.8 trillion, Americans are on the hook for almost $2 trillion in student debt.

Interestingly, students in the District of Columbia had the highest average private-debt level: $51,738. Eight states in the Northeast were in the top ten for high private student debt. The average private student debt in Delaware for the class of 2020 was over $50,000.

As Cody Hounanian, Executive Director of the Student Debt Crisis Center, aptly noted, the TICAS report shows that the costs of higher education have "skyrocketed and are out of control."

But are colleges doing anything to control their costs? Not much. Higher Education thinks it should be congratulated because tuition costs rose less than the inflation rate--the first time in decades that tuition increases didn't exceed inflation. I suppose that's good news of a sort, but the critical fact is that tuition costs go up every year.

TICAS's report concluded with a list of policy recommendations, but they're nothing to write home about.

TICAS recommends more federal grant money for low-income students, more oversight of the private student-loan industry, more loan counselors, and better advertising of income-based repayment plans.

Ho, hum!

TICAS did not recommend bankruptcy relief for student-loan debtors who are overwhelmed by the college debt. It said nothing about cracking down on the private-college industry, other than a vague recommendation to "Tighten Institutional Accountability."

I've been writing about the student-loan crisis for 25 years, and I've read dozens of reports and policy papers by think tanks and policy centers.  

Most of them recommend more money, more transparency, and more lenient income-based repayment programs.  TICAS's recommendations added nothing new.

Another snoozer report on the student-loan crisis!

Vista College chain closes its campuses and files for bankruptcy in Delaware: Bankruptcy relief for me but not for thee

 Vista College, a chain of for-profit college campuses, closed and went bankrupt a few days ago.  Most Vista campuses are in Texas, but the chain filed its bankruptcy proceedings in Delaware.

Who owns Vista College?

 Education  Futures Group (EFG), a Chicago-based private equity firm, holds a majority interest.  Jim Tolbert, Vista's CEO, owns 16.7 percent.  

EFG's website describes Vista College as "one of the most popular and recognized institutions of higher education in the south-central United States."  Yup. Right up there with Rice, Tulane, and SMU.

Apparently, however, not everyone agrees with EFG's self puffery.  A Texas law firm filed a class-action suit against Vista seeking damages on behalf of approximately 3,000 former Vista students.

Will students get any money out of Vista? I kinda doubt it. I'm sure EFG's lawyers know how to structure a bankruptcy action so that none of Vista's owners will miss any meals.

Vista College is the latest in a string of for-profit schools to go belly up in recent years. As far as I'm concerned, the more for-profits that close, the better.

America doesn't really need a for-profit college sector. We already have a surplus of public and non-profit institutions. Vista's headquarters is in Richardson, Texas, a suburb of Dallas. The Dallas metropolitan area has 38 colleges. Vista has a campus in Beaumont, Texas, home of Lamar University. It also has a campus in El Paso, home of the University of Texas at El Paso, and a campus in College Station, home of Texas A & M.

The for-profits built a niche based on the pitch that they offered online courses for working adults, but that line of patter doesn't work anymore. Public institutions have invested heavily in online learning. Students can now get a bachelor's degree, a master's degree, and even a doctoral degree from a public university without ever going on campus. So why would anyone want to enroll at a for-profit college, which will likely cost more than a similar public school?

The for-profits also tout the fact they offer vocational training, which the public universities don't provide. But publicly funded community colleges now offer vocational and technical programs, and community colleges are cheaper than for-profit schools.

Delaware is a friendly venue for corporations, and I feel sure Vista and its owners will zip right through bankruptcy.  And I'm OK with that.

But many of Vista's former students will find themselves with a mountain of student-loan debt and no credential.  Can they file for bankruptcy in Delaware and get the same cozy treatment that bankrupt corporations get?

No, they cannot. Texas students can file an adversary proceeding in a Texas bankruptcy court in an effort to get their federal student loans discharged.

But lawyers for the Department of Education or one of its debt-collection agencies will show up to fight a bankruptcy discharge of student debt.

In other words, the bankruptcy process works better for for-profit colleges than it does for their students. For a for-profit college, bankruptcy is relatively painless. But a for-profit college student will find it virtually impossible to get free of student loans that were taken out to attend a for-profit college--even one that is owned by a private equity firm and goes bust in mid-semester.

Nystrand v. Kingdom of Sweden: Another underemployed lawyer seeks bankruptcy relief

A common saying when I was young (in the last century) was the old adage that lawyers are people who wish to make a lot of money but are risk-averse. 

That observation certainly rang true when I went to law school in the 1970s. I graduated from the University of Texas School of Law with a class of 500 students, and nearly all of us found decent jobs as lawyers.

Even better, my classmates and I finished law school with little or no debt. Tuition was only $500 a semester. Working part-time as a law clerk for the Texas Attorney General's Office, I avoided student loans. I started my legal career debt-free, and  I quickly found a good job practicing law.

But law school tuition has shot up dramatically since the days I went to law school. Tuition at UT's School of Law is now $36,000 for in-state students--36 times what I paid. 

And the job market for lawyers is terrible. Many people now leave law school with enormous debt and little prospect of finding employment in their field.

And this brings me to the case of Nystrand v. Kingdom of Sweden, filed last spring in a Tallahassee bankruptcy court. 

Anneli Nystrand, a Swedish immigrant, graduated from the University of Miami School of Law in 1995. In my opinion, she did everything right. 

Nystrand attended a respectable law school and paid off her student loans, although it took her 15 years. She passed the Florida bar exam and landed a job with the Florida Department of Banking and Finance, probably a pretty good gig.

Unfortunately, as the years rolled by, Ms. Nystrand's financial situation deteriorated.  In 2013-2014, approximately 18 years after graduating from law school, she was on the job market. Although she applied for more than 200 attorney positions, she did not get a single interview.

In 2016-2017, she found a law job that paid only $39,000 a year. In 2017-2018, she worked for a law firm and made $50,000 a year.

In 2019--more than 20 years after graduating from law school-- Ms. Nystrand began accepting court-assigned cases for a flat fee. If she took a juvenile delinquency client, for example, she only received $377, which is less than the hourly rate of a corporate lawyer in a top-flight firm. 

Her total income for 2019 was only $20,000. In 2020, Nystrand did a little better, earning $46,000 before deducting expenses.

In April of this year, Ms. Nystrand filed an adversary complaint in a Florida bankruptcy court against the Kingdom of Sweden, seeking to discharge student loans owed to that Scandanavian country.

I have no idea what that is about. Nystrand's complaint does not state the amount of the debt or how it was incurred.  

Nevertheless, I am on Ms. Nystrand's side. I hope she is successful in clearing her debt to Sweden.  

Anneli Nystrand is one among hundreds of thousands of underemployed or unemployed attorneys who left law school with enormous debt. Now they are trying to build their careers in a soft job market--particularly for lawyers who attended second- or third-tier law schools. 

Florida has 11 law schools--far too many. Ms. Nystrand is forced to compete in a job market for attorneys saturated with people looking for work. 

All these unemployed or underemployed lawyers deserve reasonable access to bankruptcy courts. Senators Durbin and Cornyn's bill would allow distressed student-loan debtors to get bankruptcy relief ten years after their student loans become due.

If that bill becomes law, people like Anneli Nyastrand would immediately benefit.

But one more thing needs to be done. The American Bar Association, which allegedly regulates legal education, needs to get off its ass and close down some law schools. 

References

Nystrand v. Kingdom of Sweden, Case No. 21-400006-KKS (Bankr. N.D. Fla. Apr. 16, 2021 (adversary complaint).

 

The Feds messed up the federal student loan program: And everything they do to fix it just makes things worse

 Many years ago, when I was a fledgling attorney, my senior partner gave me some advice I never forgot. 

He told me that a competent attorney won't make many errors, but all lawyers will make a mistake at some point in their careers.

When you realize you made an error, he advised me, admit it to yourself and immediately begin trying to repair the damage. 

Why? Because the longer you ignore a blunder, the worse the consequences will be. 

I have tried to follow my senior partner's advice throughout my career--first as a lawyer and then as a professor--and I have learned that this advice is always the right thing to do.

But Congress is not following my law partner's advice. Since it created the student loan program more than 50 years ago, it's made several colossal mistakes, but it muddles on--like a drunk driver who causes a multi-car pileup and then leaves the scene of the accident.

For example, Congress screwed up when it allowed for-profit colleges to participate in the student-loan program.  The evidence of corruption, price gouging, and fraud in that sector is well documented.

But the for-profits are sort of like a deadbeat relative who asks you if he can crash on your couch. Once you let him in and give him a house key, you can't get the sonofabitch out.

Congress also made a mistake when it amended the Bankruptcy Code to make it almost impossible for distressed college borrowers to discharge their student loans in bankruptcy. We now have thousands of people who owe three or four times what they borrowed, but they can't free themselves from that debt in bankruptcy court.

And here's another screwup--the Public Service Loan Forgiveness program (PSLF). PSLF was intended to relieve the student-loan burden for people wanting to take public service jobs:--firefighters, school teachers, nurses, etc.

But that program is so botched up that 98 percent of the people who thought they were in the PSLF program were denied relief. As Steve Rhode said in a recent podcast--PSLF is a "dumpster fire."

And then there are the various income-based repayment plans (IBRPs) that the brainy policy wonks said would relieve the debt burden on people who had taken out so many loans that they could not pay off the debt under ta standard 10-year repayment program.

How's that working out? We now have more than 8 million people in IBRPs that can last for a quarter of a century. And how many of these people have had their deads cleared? According to the National Consumer Law Center--only 32!

And the IRBP participants are making monthly payments that are not large enough to cover accruing interest. Virtually all these people will owe much more than they borrowed when they finish their 25-year repayment plans.

Do you want to talk about the Parent PLUS program, which preys on low-income families and has a ten percent default rate?

Let's face it, the federal student loan program and its toxic offshoots is a calamity--the mother of all calamities. Its impact on the economy and individual lives makes the 2009 home-mortgage scandal look like a Sunday school class.

And now, what has our government done? It has extended the pause on student loan payments until the end of January 2022. That's right, millions of student loan debtors are excused from making their monthly payments for almost two years!

Did that move solve anything? No, it did not. By extending the loan-payment pause, the Department of Education merely postponed the day it will have to admit that the student-loan program is a trillion-dollar screwup.

It is always best to admit your mistakes and do your best to repair the damage.

Bipartisan Senate Bill Would Permit Debtors to Cancel Student Loans in Bankruptcy After 10 years: Too Good To Be True?

 Is this the year of Jubilee? Is this the year that distressed student-loan debtors finally get to shake off mountainous debt in the bankruptcy courts? 

Maybe.

This week, Senator Richard Durbin, an Illinois Democrat, and Senator John Cornyn, a Texas Republican,  filed a bill that would allow college-loan debtors to discharge their federal student loans in bankruptcy after a ten-year waiting period.  

This bipartisan bill, titled the Fresh Start Through Bankruptcy Act, would also require colleges with high student-loan default rates to partially repay the government for the cost of discharged loans.

 Will this bill make it through Congress? After all, Senators Elizabeth Warren and Claire McCaskill filed legislation to stop the Department of Education from garnishing the Social Security checks of elderly loan defaulters. That proposal went nowhere. And Representatives John Delaney and John Katko filed a bill to take the "undue hardship" language out of the Bankruptcy Code, and that bill died a quiet death.

I am enthusiastically in favor of the bill filed by Senators Durbin and Cornyn. I hope it passes. 

But if it does, Congress will need to repeal the Grad PLUS Act, which allows students to borrow unlimited amounts of money for graduate school. We can't let someone run up a quarter of a million dollars in student-loan debt getting a doctoral degree in music theory, and then shed all that debt after ten years.

And we will undoubtedly need more bankruptcy judges. Approximately 45 million people are carrying student loans. Several million of them will be immediately eligible for bankruptcy relief if the Durbin-Cornyn bill passes. That's a lot of people showing up at the nation's federal courthouses.

Congress will also have to address the abusive for-profit college industry if overburdened student debtors get access to the bankruptcy courts.  As student debt gets cleared through bankruptcy, it will quickly become evident that many bankrupt student borrowers acquired their debt at for-profit colleges.

But perhaps those are reforms for another day.

I have been arguing for bankruptcy relief for student-loan debtors for more than 20 years. If the Durbin-Cornyn bill passes, what will I write about? 

I may have to say, as the Lone Ranger often observed at the end of his weekly television show, "My work here is done."

On the other hand, who really believes Congress will do the right thing?

The Lone Ranger: "My work here is done."

A little good news: COVID Relief Act includes tax relief for student debtors whose loans are forgiven

 A little good news. The COVID relief bill that Congress passed a few days ago includes modest tax relief for student debtors whose college loans are forgiven.  

Senators Bob Mendez and Elizabeth Warren introduced the Student Loan Tax Relief Act in the U.S. Senate as a provision of the $1.9 trillion COVID relief legislation. 

Thanks to the passage of the Mendez-Warren bill, student debtors who complete income-driven repayment plans (IDRs) and have their college loans forgiven will not get a tax bill.

In most circumstances, the Internal Revenue Service considers a forgiven debt to be taxable income. Until the Mendez-Warren bill became law, this was a problem for student debtors in IDRs.

Indeed, most college-loan debtors in IDRs will have substantial loan balances when they finish making monthly payments under a 25-year IDR because their payments weren't large enough to cover accruing interest.  

The U.S. Department forgives the remaining student-loan debt for individuals who complete IDRs, but the IRS has treated the forgiven debt as taxable income.  Under the terms of the Mendez-Warren bill, that forgiven debt is no longer taxable.

This is a good development, but the Student Loan Tax Relief Act offers is only a modest reform. 

First of all, the IRS does not tax forgiven debt if the debtor is insolvent when the debt is forgiven. Since most student debtors who complete 25-year IDRs will be insolvent, their forgiven debt would not have been taxable even before the Mendez-Warren bill became law.

Second, for reasons I do not understand, the tax-relief measure expires on January 1, 2026.  After that date, forgiven debt will again be treated as income by the IRS.

Third, as the National Consumer Law Center reported earlier this month, only 32 people who completed IDRs have had their loan forgiven. If this low IDR-completion rate continues, the Mendez-Warren measure will impact very few people.

In short, the Mendez-Warren legislation is a welcome development but is no reason for student debtors to start popping the champagne corks. Save the champagne for the day Congress repeals the undue-hardship language in the Bankruptcy Code and allows distressed student debtors to discharge their student loans in bankruptcy.

Don't pop the champagne corks over the Student Loan Tax Relief Act.

Laurina Bukovics v. ECMC: An Illinois woman took out $20,000 in student loans, paid back $29,000 and still owed $80,000

Laurina Kim Bukovics enrolled as a freshman at the University of Wisconsin in 1985 and graduated five years later. She took out about $20,000 in student loans to finance her studies. Over the years, she paid back $29,000--almost 140 percent of the principle. 

Nevertheless, 25 years after she graduated, Bukovics owed $80,000 on her student loans--four times what she borrowed.  Even though she had made 99 loan payments between 1999 and 2015—equivalent to more than eight years of twelve monthly payments-- her college-loan debt had quadrupled due to accumulating interest.

In 2015, Bukovics sought bankruptcy relief. Two years later, she filed an adversary proceeding to discharge her student loans. In 2018, while her adversary proceeding was pending, Bukovics lost her job.

Educational Credit Management Corporation, the federal government's ever-diligent debt collector, opposed a discharge of Bukovics's student-loan debt. ECMC argued that Bukovics could not meet the "undue hardship" test because she had not tried to maximize her income and not lived frugally.

In particular, ECMC accused Bukovics of spending too much money on food and not being diligent enough in looking for work.  Her job search was too narrow, ECMC claimed. 

In deciding Ms. Bukovics's case, Bankruptcy Judge Jack Schmetterer applied the three-part Brunner test to determine whether Bukovics could repay her student loans while still maintaining a minimal standard of living.  After conducting an extensive analysis of Bukovics's financial history, Judge Schmetterer ruled in her favor.

Clearly, Judge Schmetterer concluded, Bukovics could not maintain a minimal standard of living if she were forced to repay her student loans. After all, Bukovics was unemployed, temporarily living rent-free with a friend, receiving government nutritional assistance (food stamps), and getting her health care through Medicaid.

"Put simply, Judge Schmetterer wrote, given Bukovics's "frugal lifestyle and overall significant budget shortfalls, including the lack of money to provide for even basic needs, she would be unable to maintain a minimal standard of living if required to repay her student loan" (Bukovics v. ECMC, p. 189).

Judge Schmetterer rejected ECMC's arguments that Bukovics had spent too much money on food. On the contrary, he commented, spending $360 for sustenance over two to three months was not excessive.

In any event, Judge Schmetterer observed, ECMC's position "misses the point" (p.188). In the judge's opinion, ECMC was inappropriately looking for pennies that Bukovics might save when it was evident that her income was inadequate to meet her basic human needs.

Judge Schmetterer also rejected ECMC's claim that Bukovics had not looked hard enough for a job.  The judge pointed out that she had applied for over 200 positions over sixteen months and that several applications had led to job interviews (p. 187). Although the judge acknowledged that Bukovics voluntarily gave up her last job, she had testified that she had been pressured to quit and that her position had been eliminated after she terminated her employment.

Implications of the Bukovics decision

The Bukovics opinion is remarkable not so much because Laurina Bukovics won her case but for the fact that ECMC, the Department of Education's designated representative, would oppose her.

Ms. Bukovics borrowed $20,000 to obtain a bachelor's degree from a well-respected public university. She repaid $29,000 by making almost 100 monthly payments. Although financial circumstances forced her to skip monthly payments from time to time, the Department of Education acknowledged her hardship by granting her 10 deferments or forbearances.

Thirty years after graduating, Bukovics had reduced her debt by one dime. In fact, she owed four times what she borrowed. She was in her early fifties and out of a job.

What reasonable person would argue that Laurina Bukovics should not be freed of debt she can never repay?  And yet ECMC, representing the United States government, made that argument.

Today, the American economy is crippled by the coronavirus pandemic, and the nation's unemployment rate is 15 percent. Millions of people are living in circumstances similar to those of Ms. Bukovics.  Surely we need a more compassionate and efficient way of freeing destitute Americans from unmanageable debt than applying the outdated and callous Brunner test that examines how much an unemployed person spends on food.

References

Bukovics v. Educational Credit Management Corporation, 612 B.R. 174 (Bankr. N.D. 2020).

Judge Jack Schmetterer: ECMC missed the point

Shenk v. U.S. Department of Education: A bankruptcy judge denies student-loan discharge to 59-year-old army veteran

As John Lennon famously observed, "Life is what happens to you while you are busy making other plans." Certainly, Mr. Shenk, a military veteran, had other plans for his life other than filing for bankruptcy at the age of 59 in an effort to discharge $110,000 in student loans.

Timothy Shenk served 13 years in the U.S. Army (infantryman in the 82nd Airborne Division).  He then enlisted in the National Guard in order to obtain the 20 years of military service that would make him eligible for full retirement. That was a good plan.

Shenk also planned to become a teacher and he obtained a bachelor's degree from SUNY Cortland in 1999.  He then worked on a master's degree program in Adolescent Education, and he completed all the course work to obtain his degree.  That also was a good plan.

Unfortunately, Shenk had unpaid student loans, and SUNY Cortland refused to award him his diploma. In addition, the university had a five-year time frame to meet program requirements and that time period elapsed years ago.  Consequently, Mr. Shenk will never receive the degree he worked for, even though he met all program requirements.

Shenk married when he was a young man and he and his wife had four children. But the marriage ended in divorce, and he became liable for public assistance payments made to his ex-wife. By the time he filed for bankruptcy, he had paid off most of that obligation, which is commendable.

Bankruptcy Judge Margaret Cangilos-Ruiz expressed some sympathy for Mr. Shenk. She pointed out that his graduate studies were interrupted because the State of New York called him back for active military service after the terrorist attack on the World Trade Center in 2001. "The bitter irony is that when ordered by the Governor, [Shenk] assisted New York State at a time of dire need only later to have the State refuse to confer the degree that may have put him on a financial path to pay what he owed."

Nevertheless, Judge Cangilos-Ruiz denied Shenk's request for a student-loan discharge on the grounds that he did not meet the stringent standards of the three-part Brunner test.  He was unemployed at the time of the bankruptcy proceedings and he could not pay back his student loans and maintain a minimal standard of living. Thus he met Brunner's first requirement.  But the judge believed Shenk's financial circumstances would likely improve. He was employable, the judge pointed out, and he would soon be eligible for a small military pension and Social Security benefits.  The judge also said that Shenk failed Brunner's good-faith test because he had made no payments on his student loans over a number of years.

I think Judge Cangilos-Ruiz erred when she refused to discharge Mr. Shenk's student loans. First of all, universities should not be allowed to withhold a diploma simply because the would-be graduate has unpaid student loans. Such a policy amounts to putting student borrowers in debtor's prison--they cannot pay back their debts because their credentials are being withheld.

Moreover, Judge Cangilos-Ruiz denied Mr. Shenk a discharge partly due to the fact that he would eventually receive Social Security benefits and a modest military pension. In my view, no one who is nearing retirement age should be required to devote one penny of meager retirement income to paying back student loans.

In short, the equities of this case favored Mr. Shenk. Perhaps he made some mistakes in planning his finances but he served his country for 20 years in the U.S. military and he worked to obtain a graduate degree that his university refused to give him.

In any event, Mr. Shenk will probably never be able to repay $110,000 in student-loan debt. His only recourse now is to sign up for a long-term income-based repayment plan that could stretch out for as long as 25 years--when he will be 85 years old!

Isn't it ironic that presidential candidates are calling for a college education to be free to everyone while a man who served his country for 20 years is burdened by enormous student-loan debt? Thanks for your service, Mr. Shenk.

References

Shenk v. U.S. Department of Education, 603 B.R. 671 (Bankr. N.D.N.Y. 2019).

Rep. Maxine Waters didn't ask mega-bank executives a stupid question at a congressional hearing; She asked them the wrong question

Congresswoman Maxine Waters, Chair of the House Financial Services Committee, asked seven big-bank executives an ignorant question when she had them appear before her committee earlier this week.

“What are you guys doing to help us with this student loan debt?" Waters asked the bankers.  Three of them  separately informed Waters that their banks have been out of the federal student-loan business since 2010, when the federal government began dispersing student loans directly. 

Ms. Waters apparently didn't know that, which must have been embarrassing to her. Nevertheless, Waters did not ask a stupid question. She asked the wrong question. In fact, several banks are involved in the private student-loan market: Wells Fargo, Citizens Bank, Suntrust, and Sallie Mae--to name a few. 

And it is a dirty business. Several banks are bundling their private student loans and selling them to investors as student-loan backed securities called SLABS, very much like the mortgage-backed securities that went south during the 2008 home-mortgage crisis. 

Moreover, most banks require student borrowers to find co-signers for their private student loans, which usually means Mom and Dad.  If a student defaults on a private student loans, the co-signer is on the hook to pay back the debt.  Can a co-signer discharge a child's student loan in bankruptcy? Probably not.  When Congress passed the so-called Bankruptcy Reform Act in 2005, it inserted a clause in the Bankruptcy Code making private student loans nondischargeable in the absence of "undue hardship."

So this is the question Congresswoman Maxine Waters should have asked the bankers who were arrayed before her at the Financial Services Committee hearing yesterday. "Do you support a change in the Bankruptcy Code that would make student loans dischargeable in bankruptcy like any other consumer debt?"

Put another way, she might have asked the bankers if they support Representative John Katko's bill to remove the "undue hardship" language from the Bankruptcy Code, which would allow destitute debtors to shed burdensome student-loan debts in the bankruptcy courts. How would the bankers have answered if Maxine Waters had asked them the right question? 

And here are a two questions for Congressman Waters:

Do you support Congressman Katko bill, which calls for taking the "undue hardship" language out of the Bankruptcy Code? 

Will you agree to be a co-sponsor of Representative Katko's bill, even though Mr. Katko is a Republican?

Megabank CEOs: "We don't know nothin' bout no student loan program."

I know more about farting cows than Alexandria Ocasio-Cortez. What does AOC know about the student-loan crisis?

Let me begin by saying I recognized global warning a long time ago--before Congresswoman Alexandria Ocasio-Cortez was born. I lived in Alaska in the early 1980s, and we all saw the glaciers retreating.

The planet is heating up, we observed--not a political statement, just an acknowledgement of fact. Some of us naively believed global warming might even be a good thing. Alaska is such a great place to live, we told ourselves, but it would be so much nicer if the winters were just a wee bit warmer.

I also know a whole lot more about farting cows than AOC. My father was a cattle raiser, and I saw a lot of flatulent bovines in the stock pens. In fact, I admit that my father's Angus herd is at least partly responsible for a rise in global temperatures. Mea friggin' culpa.

But will AOC reverse global warming with her Green New Deal? No she won't.  Everybody knows that--even the wax-museum Democrats in Congress.

Better questions to ask are these: What does AOC know about the student-loan crisis, and what will she do about it?

I think the answer to both questions is "Not much." Our national politicians--with AOC in the forefront--bray on and on about problems they know they will not fix. Meanwhile millions of Americans--more than 20 million--have had their lives ruined by student loans that enriched the venal and corrupt higher education industry.

The student-loan crisis is complicated; I acknowledge that. But there are some small things Congress can do that would alleviate the suffering. For example:

Congress could pass Representative Katko's bill to allow distressed debtors to discharge their student loans in bankruptcy. Or if that lift is too heavy, Congress could at least allow parents who cosigned their children's student loans  to shed those debts in bankruptcy if they are insolvent.

Congress could also pass legislation barring the Department of Education from garnishing elderly student-loan defaulters' Social Security checks, which Senator Elizabeth Warren proposed in a bill that got nowhere in the U.S. Senate. AOC could endorse that bill, and it would probably be passed in the House of Representatives.

And here is another thing Congress could do. It could pass legislation requiring Betsy DeVos' Department of Education to streamline the process for forgiving student loans owed by people in the Public Service Loan Forgiveness program.

I suspect AOC has never thought about the student-loan crisis, even though a lot of the sufferers reside in her congressional district. And I will close by saying again that politicians who won't do something tangible toward solving the student-loan crisis don't deserve our votes.

It's farting cows, stupid!

Wells Fargo Facing Penalties Over Ignoring Student Loan Included in Bankruptcy. Essay by Steve Rhode

By Steve Rhode.  November 27, 2017

One of our very own student loan attorneys, Austin Smith, recently scored an important victory on a Wells Fargo student loan.

Austin said, “I confess when we filed this case, I was hoping Wells Fargo would quickly see that we were right, acknowledge the mistake, and fix it. And naively, I thought they might be willing to sit down and fix the problem for all their customers. Everybody makes mistakes, and this could have been a real opportunity for Wells to prove that they’ve changed their business culture. But now I fear that Wells Fargo has no intention of changing its culture or business practices despite their public protestations to the contrary over the last year. They have dug in their heels on this issue, and seem intent to keep doing what they’re doing, which is plainly a violation of the bankruptcy laws.”

In 2007 Ryan, the consumer, filed for bankruptcy. Following the bankruptcy Wells Fargo Bank sued Ryan and obtained a state court judgment to collect on the debt. Ryan had attended Capella University, a for-profit school.

Attorney Austin Smith jumped into the fray as part of a team and last year he reopened the case and sued that the debt had in fact been discharged and sought punitive damages for discharge violations.

At issue here are points raised previously in this article about private student loans are not all protected in bankruptcy.

In this case, Educational Financial Services, a division of Wells Fargo Bank, tried to make the argument the loan was not actually discharged in the 2007 bankruptcy.

When Wells Fargo sued Ryan in State Court to collect on the student loan debt included in Ryan’s bankruptcy they made no mention of Ryan’s previous bankruptcy and discharge. The consumer felt subsequently pressured into entering a consent judgment over the debt in 2008 and made monthly payments of $150 on the loan for the next seven years.

Finally fed up Ryan found legal help to reopen his previous bankruptcy case to commence an adversary proceeding and have this matter dealt with once and for all.

The valid point raised by Ryan, the Plaintiff, was “that the loans from Wells Fargo were discharged by operation of law on November 29, 2007, because the loans were not a student debt protected by any subsection of Section 523(a)(8).” More on this technical issue can be found here.

The Judge ruled that even though Ryan had previously repaid the debt through the State Court judgment he was not prevented from reopening his bankruptcy and filing an adversary proceeding to rule on the discharge of his non-protected private student loan debt. The issue at hand was if Ryan’s discharge had been violated because the loans were not student loans under Section 523(a)(8).

And while the Court said “Section 523(a)(8) is self-executing, a student loan debt is non-dischargeable absent a determination.” The Court also said, “However, the self-executing nature of Section 523(a)(8) is premised on the debt actually being one for a student loan, a determination that was not previously made by this Court or the State Court which had concurrent jurisdiction to do so.” – Source

This is why it is so important for anyone who includes student loans in a bankruptcy to pursue an adversary proceeding to get a ruling on the dischargeability of the loans. This key step is one that often gets overlooked.

Judge John Gregg ruled Wells Fargo could not easily have the Plaintiff’s complaint dismissed and the issue would have to proceed. As you can imagine, Wells Fargo has appealed the Judge’s ruling and hopes to get a different answer on appeal. – Source

In the appeal Wells Fargo raises the point Ryan’s loans should not be discharged because “he obtained funds from Wells Fargo and the government in excess of the cost of attendance.” But shouldn’t that be the job of Wells Fargo to determine? Because if private student loans are extended for more than the cost of attendance, all or part of the loans can be discharged thru bankruptcy.

Wells Fargo is most likely in a hurry to get this matter resolved in their favor because if they are found to have pursued the alleged discharged private student loan debt they could be facing a precedent and financial consequences.

Ryan’s amended complaint they are trying to get tossed out summarizes the issue at the heart of this case. It says, “Not all student loans are presumptively non-dischargeable in bankruptcy. In fact, the term “student loan” appears nowhere in section 523(a)(8). Instead, section 523(a)(8) makes certain educational debts presumptively non-dischargeable, including government issued educational loans, defaulted conditional government grants and scholarships, certain loans from non-profit institutions, and private education loans that are qualified education loans under the tax code. Section 523(a)(8) does not except from discharge a host of other types of traditional private, credit-based loans couched as “student loans” by for-profit lenders, including loans for K-12 programs, loans made to students at unaccredited trade schools, loans made for alcohol and drug rehab, and loans made in excess of the “cost of attendance.” This is reinforced by the plain language of the discharge order, which states that debts for “most student loans” are non-dischargeable. If debts for “all student loans” are presumptively non-dischargeable, then more than 10 million discharge orders have been issued with an erroneous legal conclusion since 2005.” – Source

The complaint also states, “Given Wells Fargo’s actual and constructive knowledge of the timing of the Plaintiff’s loans, the “cost of attendance” at Capella University, and the nature of the Loans it extended to the Plaintiff, Wells Fargo knew or should have known that the Loans were discharged in the Plaintiff’s bankruptcy.”

This is an interesting case and I can’t wait to get the final ruling after a lot more expensive court time. We’ll have to keep our eye on this one.

*****

Steve's essay was originally posted on The Get Out of Debt Guy web site.

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.