Showing posts with label student loans. Show all posts
Showing posts with label student loans. Show all posts

Tuesday, February 14, 2017

Has higher education become a criminal enterprise? "It's a cheating situation"

 I am not a doomsayer or a survivalist, and I try to stay away from apocalyptic bloggers. But James Howard Kunstler, whose blog site goes by the name of Clusterfuck Nation, is making persuasive arguments that our postmodern economy, hopped up on cheap energy and enormous debt levels, is unsustainable. In fact, he predicts an economic  meltdown sometime this spring.

Kunstler's focus is on broader economic issues than student loans, but he made a trenchant observation about higher education in his latest blog essay, which struck a nerve with me.  Pervasive accounting fraud in the national economy, Kunstler writes,"bleeds a criminal ethic into formerly legitimate enterprises like medicine and higher education, which become mere rackets, extracting maximum profits while skimping on delivery of the goods."

And of course Kunstler is right. The Department of Education shovels $150 billion a year in federal student aid to prop up the higher education industry, which is becoming nothing more than a racket. Higher education apologists stress the value of a college education, but 45 percent of recent college graduates are in jobs that do not require a college degree. 

No wonder 8 million college borrowers are in default and millions more are not paying down their student loans.  DOE knows the score but it continues to deceptively downplay the student-loan default rate, stuffing debtors into economic hardship deferments and income-driven repayment plans that hide the fact that a large percentage of student borrowers will never be free of their loans. 

Meanwhile, the for-profit college sector, which might fairly be labeled a criminal culture, rips off poor and minority Americans and gives them educational credentials that are damned near worthless. Now they are beginning to shut down and go bankrupt, leaving their former students with mountains of debt. 

The public universities, bloated and lazy, limp along by raising student tuition as state subsidies dry up.  Public university leaders are motivated solely by politics, terrified by the possibility they might inadvertently do or say something politically incorrect.

State higher education leaders refuse to reorganize public colleges to be more efficient. In my own state of Louisiana, we have regional public colleges with declining enrollment in every corner of the state, but no one has the political courage to close any of them. Many Southern states support historic black colleges at public expense, although there is absolutely no need for university systems that cater to only one race. Louisiana even has a black law school, which operates in a substandard way just a few miles away from the state's flagship school of law. 

As for the nonprofit public institutions, they now fall into two camps. The ultra elite institutions--Harvard, Yale, Stanford, etc.--have brand names so strong they can charge what ever tuition rate they want. They also have fat endowments that insulate them from economic forces. 

On the other hand, small, obscure liberal arts colleges are under severe financial stress, and quite a few will close within the next five years. Parents are refusing to pay $50,000 a year for their offspring to attended a nondescript private school.  The little colleges have been forced to offer huge discounts--approaching 50 percent--to lure new students through the door. 

In short, every sector of higher education has been living in a fools paradise, but the data are now coming in, and they are alarming.

Nearly half the people who took out student loans to attend for-profit colleges default within five years. Millions of college borrowers whose loans are in repayment are seeing their student-loan balances grow larger, not smaller, due to negative amortization. Their token monthly payments keep borrowers out of default but are so small they don't cover accruing interest.

Nationwide, more than half of student borrowers owe more than they borrowed just two years into repayment. And, as the Wall Street Journal reported just a few weeks ago, half the students who took out student loans to attend more than 1000 schools and colleges have not paid down even one dollar on their loans seven years after their repayment obligations kicked in.

Kunstler is right. Evasiveness, almost criminal in its proportions, pervades almost every sector of higher education. As a classic country-and western-song might put it, "there's no use in pretending there'll be  a happy ending." Colleges and universities are in a cheating situation, refusing to recognize that the golden age of American higher education is coming to an end.



References

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall Street Journal, January 18, 2020.

James Howard Kunstler. Made for Each Other. Clusterfuck Nation, February 13, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).

Wednesday, February 8, 2017

Congressional Democrats should pressure DeVos to clean up the student-loan collection business

Democrats are critical of Betsy DeVos, President Trump's new Secretary of Education, but one concern is particularly valid, which is this: DeVos has business ties with a student-loan debt collector.

Those ties, which were explained in a Washington Post article are complicated. Here is what the Post said:
Education Secretary nominee Betsy DeVos and her husband have extensive financial holdings through their private investment and management firm, RDV Corporation. . . .

RDV is affiliated with LMF Portfolio, a limited liability corporation listed in regulatory filings as one of several firms involved in a $147 million loan to Performant Financial Corp., a debt collection agency in business with the Education Department.

Twenty-three percent of Performant's revenue is directly tied to its dealings with the Education Department, which had 14 contracts worth more than $20 million with the company in fiscal 2016.
According to the Post, Performant lost a recent contract bid with the Department of Education and is protesting DOE's decision with the Government Accountability Office.

DeVos's complicated ties with a student-loan debt college company is a legitimate worry to Democrats because as Secretary of Education, "DeVos would be in a position to influence the award of debt collection, servicing and recovery contracts, in addition to the oversight and monitoring of the contracts." In addition, the Post article points out, DeVos will also "have the authority to revise payments and fees to contractors for rehabilitating past-due debt--all of which has Senate Democrats concerned."

Senator Elizabeth Warren criticized DeVos because DeVos has no experience in higher education. "As Education Secretary," Warren charged, "Betsy DeVos would be in charge of running a $1 trillion student loan bank. She has no experience doing that." In fact, Warren correctly observed, "Betsy DeVos has no experience with student loans, Pell Grants, or public education at all."

Like Senator Warren, most Senate Democrats senators opposed DeVos to be Secretary of Education primarily on the ground that she has no experience in higher education, which is true. But I think a bigger concern is the fear that DeVos won't regulate the for-profit college industry aggressively and that she won't monitor the government's debt collectors, including the student loan guaranty agencies, which have a ruthless record of collection activities against distressed student loan debtors.

I confess I did not take DeVos's ties with a debt collection agency into consideration during the nomination process. I thought, perhaps naively, that DeVos's lack of experience in higher education might be a plus, since she could look at the student loan program with fresh eyes.

And perhaps she will. But the Democrats can smoke her out by moving aggressively for transparency and an accounting in the student-loan collection business and calling for a reduction in the collection fees and penalties the debt collectors are slapping on defaulted student loans.

Senator Warren could lead the charge by holding hearings on the activities of the student loan guaranty agencies: Educational Credit Management Corporation and the others. The Century Foundation reported that four of these agencies, which are nonprofit organizations, each hold $1 billion in assets.

If Secretary DeVos does not move aggressively to rein in the for-profits and clean up the debt collection business, then the Democrats will have a legitimate charge against her. The best way to see how DeVos will handle her new responsibilities is to hold hearings and introduce legislation to clean up the student loan industry.

If DeVos opposes legitimate calls for reforming the federal student loan program, then the Democrats are right about her.

References

Danielle Douglas-Gabriel. Dems raise concern about links between DeVos and debt collection agency. Washington Post, January 17, 2017. 

Eugene Scott. Warren grills DeVos: 'I don't see how she can be the Secretary of Education.' CNN, January 18, 2017.

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

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

Sunday, October 16, 2016

Medieval America: Victor David Hanson correctly diagnoses the collapse of American liberal democracy

It is difficult to convey a brilliant insight in less than 2,000 words, but Victor David Hanson has done it. In a brief essay published last week, Hanson said it is inaccurate to compare our declining American civilization to the fall of the Roman Empire. In truth, Hanson argued, our nations is becoming like medieval Europe.

Like today's America, Hanson points out, medieval Europe could boast some fine universities where the sum of human knowledge increased. But the universities of that day, like our modern American universities, had strict speech codes. The sun revolved around the earth, and woe to any medieval scholar who argued otherwise.  And today of course professors are permitted to express only one point of view on important global issues like climate change.

Humanist scholars of medieval times "wrote esoteric treatises than no one read," Hanson writes. "These works were sort of like the incomprehensible 'theory' articles of university humanities professors who are up for tenure."

Hanson definitely got that right. Not to mention the 10,000 law review articles that law professors and their students publish every year even as the core principles of our legal system disintegrate.

In my view, Hanson's most trenchant comparison between contemporary America and medieval Europe relates to the economy. Today, as Hanson notes, one fifth of Americans own absolutely nothing or have negative worth, much like medieval serfs. In fact, 18 percent of adult Americans have student-loan debt, which they are permitted to work off by donating a percentage of their income to the government over 20 or 25 years--just like peasants.

Indeed, America becomes more like medieval society with each passing day. The middle class--once the glory of liberal democracy--gets smaller every year. The nation's elites fly in private jets, work in fortress-like offices, and are protected by private security agencies; they are truly lords and barons surrounded by modern-day moats. Their kids go to the best private schools. And the elites do a good job of protecting their income from taxes.

Meanwhile the rest of us ride the subway or commute to work on crumbling freeways. We pay taxes at a higher rate than either Donald Trump or Hillary Clinton, and we send our kids to mediocre schools.  Defined-benefit retirement plans are fast disappearing, and we put our puny savings into the stock market because the elite have declared that we can earn nothing on our savings if we invest anywhere else.

Everywhere, the non-elites are getting poorer, but the slide into serfdom is most evident in rural America. In my own hometown of Anadarko, Oklahoma, the little family shops and stores of my childhood are all empty and boarded up. If you want to buy something--almost anything at all--you must go to Walmart. Hundreds of houses have been abandoned, including the one I lived in as a kindergarten child. Drug addiction and suicide are up; decent jobs have disappeared.

Americans know in their hearts that our slide into medievalism will accelerate after the national election unless our economy is radically restructured. Let us hope President Trump can do what he promised he would do to restore jobs to middle-class and working-class Americans.


References

Victor David Hanson. Medieval America, Town Hall, October 13, 2016. Available at http://townhall.com/columnists/victordavishanson/2016/10/13/medieval-america-n2231213http://townhall.com/columnists/victordavishanson/2016/10/13/medieval-america-n2231213

Thursday, September 22, 2016

Senator Elizabeth Warren grills Wells Fargo CEO John Stumpf. But hey, Liz: What have you done to help solve the student-loan crisis?

Senator Elizabeth Warren made headlines this week when she grilled Wells Fargo CEO John Stumpf at a Senate Banking Committee hearing. Unless you've been living under a rock, you know Wells Fargo employees were caught scamming customers by creating 2 million fake bank accounts without their customers' knowledge or approval.

In the wake of this scandal, Wells Fargo fired 5,000 low-level employees and refunded some money, but the company did not terminate the senior executive who supervised the unit where the fraud occurred. Wells Fargo's CEO John Stumpf made millions of dollars from these misdeeds because the scheme caused his stock to go up. But Stumpf isn't giving back any of his ill-gained profits.

So Stumpf was a sitting duck when Senator Warren began questioning him at the Senate Banking Committee hearing. "You should resign," Warren told Stumpf. "You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission."

Stumpf, of course, is lawyered up. He went into his flak-catcher crouch, continually repeating his talking points and saying he was sorry for Wells Fargo's misdeeds.

All great theater. Who doesn't enjoy seeing a transnational financial executive publicly humiliated? But what will come of all this drama? Nothing. Stumpf won't face criminal charges, and the Wells Fargo senior executives who profited from the fake-account scheme won't give back a penny of their loot.

Elizabeth Warren enjoys a great reputation as the champion of consumer rights and the friend of the little guy. But what tangible thing has she done to help working-class Americans? And more particularly, what has she done to ease the suffering of millions of student-loan debtors?

I'll tell you what Warren has done--she's done nothing.  She's all blather. In fact, I don't think Warren even understands the student-loan crisis. She charged awhile back that the government is making "obscene" profits from the student-loan program, but that's not true. The government would be making a profit on the loan program if borrowers were paying back their loans, but they are not. As the Wall Street Journal reported recently, 40 percent of student-loan borrowers aren't making payments on their loans.

Here are some things Senator Warren could propose that would help relieve the suffering of distressed student-loan debtors.

Legislation banning the government from garnishing the Social Security checks of elderly student-loan debtors who defaulted on their loans. Around 155,000 Americans are having their Social Security checks dunned right now, causing real hardship for these people.

And how much money does our government collect from this disreputable practice? Probably less than the Secret Service spends guarding President Obama on just one of his Hawaiian vacations. Why doesn't Senator Warren use her bully pulpit to stop the government from going after elderly student-loan debtors who are living off their Social Security checks?

Wholesale relief for student-loan borrowers who were ripped off by the for-profit college industry. Senator Warren joined 22 other Democratic Senators in a letter to Secretary of Education John King asking the Department of Education to grant broader relief to the 35,000 students who were enrolled at one of ITT Tech campuses when ITT closed and filed for bankruptcy. But that letter is almost completely incoherent and doesn't  propose real relief.

DOE should forgive the loans of all the people who took out student loans to pay for ITT programs. Giving former students longer to file for loan forgiveness under DOE's "closed school" regulations (as the Democratic Senators proposed) does not go nearly far enough.

Amending the Bankruptcy Code to allow distressed student-loan debtors to discharge their federal student loans in bankruptcy like any other nonsecured debt. Senator Warren co-sponsored a bill to make private student loans dischargeable in bankruptcy, but private loans are only a small part of the overall student-debt crisis--only about 10 percent of total outstanding student-loan debt. The bill does nothing about reforming the Bankruptcy Code to allow distressed student-loan debtors to discharge their federal student loans in bankruptcy.

Conclusion; Senator Elizabeth Warren is a phony

Senator Elizabeth Warren is a phony. She hasn't accomplished anything significant to help solve the student-loan crisis. It is true she supports a bill to make private student loans dischargeable in bankruptcy, but such a law--if passed--is small potatoes.

Let's face it. Although Warren portrays herself as a progressive fighting for overburdened student-loan debtors, she will never do anything that would threaten the core interests of the higher education industry. After all, there are 114 colleges and universities in Warren's state of Massachusetts; and most of the professors and administrators who work at those colleges voted for her.

Those colleges and universities have to have federal student-aid money to survive. They are like crack addicts waiting for their next federal fix. Warren can talk all she wants about helping student-loan debtors, but she won't do anything that upsets the status quo. And real reform of the Bankruptcy Code to allow people to discharge their federal loans in bankruptcy would definitely upset the status quo.

Image result for elizabeth warren wells fargo


References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loansWashington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Ashlee Kieler, Senators Introduce Legislation to Make Private Student Loans Dischargeable in Bankruptcy. Consumerist, March 12, 2015.   Accessible at https://consumerist.com/2015/03/12/senators-introduce-legislation-to-make-private-student-loans-dischargeable-in-bankruptcy/

Jena McGregor. 'You should resign': Elizabeth Warren excoriates Wells Fargo CEO John Stumpf. Washington Post, September 20, 2016. Accessible at https://www.washingtonpost.com/news/on-leadership/wp/2016/09/20/you-should-resign-elizabeth-warren-excoriates-wells-fargo-ceo-john-stumpf/

Josh Mitchell. More than 40% of Student Borrowers Aren't Making PaymentsWall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

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/

Sen. Warren Questions lack of Private Student Loan Relief Options. Senator Warren Website, July 31, 2014. Accessible at https://www.warren.senate.gov/?p=press_release&id=591

Letter to the Honorable John King, Secretary of Education, from 23 Democratic Senators, September 15, 2016. Accessible at 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 ShutdownBloomberg, September 16, 2016. Accessible at http://www.bloomberg.com/news/articles/2016-09-16/itt-educational-services-files-for-bankruptcy-after-shutdown-it6byu6t

Jena McGregor. 'You should resign': Elizabeth Warren excoriates Wells Fargo CEO John Stumpf, Washington Post, September 20, 2016. Accessible at

Reuters. ITT Educational Services Files for Bankruptcy After Aid CrackdownInternational 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


Marian Wang. Q & A: Elizabeth Warren on Spiraling Student Debt  and What Should Be Done About ItPro Publica, May 20, 2014. Accessible at https://www.propublica.org/article/qa-elizabeth-warren-on-spiraling-student-debt-and-what-should-be-done-about

Alia Wong. When Loan Forgiveness Isn't EnoughAtlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/

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 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.





Wednesday, August 3, 2016

Federal Reserve Bank Report: Households with "negative wealth" tend to have high levels of student loan debt. Should we be surprised?

Households with more debt than assets are said to have "negative wealth." In other words, they owe more than they own. Or to put it more baldly, they're broke.

Researchers for the Federal Reserve Bank of New York published a report this week on negative wealth households, and some of  their findings are not surprising.

Researchers found that negative-wealth households "are younger, predominantly female, more likely to be minority, own homes at lower rates and have lower average annual incomes than households with nonnegative wealth" (quoting from Inside Higher Education). This is what we would expect.

What I found most interesting were the report's findings about the kind of debt that negative wealth households tend to have. Among households that have $47,000 to $52,000 in negative wealth, almost half of their total debt is student loans. Among households with lower levels of negative wealth--between $12,500 and $46,300--college loans made up 40 percent of total debt.

And here is the report's money quote:
Given the importance of student debt in explaining negative household wealth . . ., it is likely that the steady growth in student debt and borrowing combined with the slow rate of student loan repayment . . ., has materially contributed and will continue to contribute to negative household wealth and wealth inequality. 
Should we be worried by this report?

At least a couple of experts suggest that we should not be overly concerned. In an interview with Inside Higher Education, Robert Kelchen of Seton Hall University said that student loans are driving income inequality with just one group of students--those who take out student loans but never complete their degree.

Kelchen pointed out that a lot of households with negative wealth include borrowers "who took out student loan debt to pay for graduate school and professional degrees." Although this group may carry a lot of student-loan debt, it will eventually do well financially.

But of course Kelchen's observation is not completely accurate. Law school graduates, on average, leave law schools with $140,000 in debt; and they are entering a terrible job market. Paul Campos, a law professor at the University of Denver, flatly stated that most people who graduate from second- and third-tier law schools at the bottom or their law school class will be financially hurt by their law school experience. They will likely never obtain an income that justifies the debt they incurred to get their J.D. degrees.

Mark Kantrowitz, another expert quoted in Inside Higher Education, suggested that people who borrow money to get a college degree will be better off than people who don't go to college at all. "Would these individuals have been able to obtain a college education had they not borrowed?" Kantrowitz asked. "And where would their net worth be if they hadn't taken on this debt because they hadn't gone to college?"

Basically, Kantrowitz is repeating the mantra of the higher education community's insiders. Sure, they say, people borrow heavily to go to college. But they're still better off than people who don't go to college at all.

But that is not necessarily true. We know that 35 percent of the college-educated workforce is made up of people holding jobs that do not require a college education.  If those people borrowed a significant amount of money to get their degrees, they might very well have been better off had they skipped the college experience altogether.

And we also know that some people pay more for their college degrees than they are worth. Brenda Butler, who filed for bankruptcy recently, borrowed $14,000 to get a bachelor's degree in English from Chapman University in California, which she obtained in 1995. According to the bankruptcy court's opinion in her case, Butler never made much more than $30,000 a year, and she experienced some periods of unemployment when she was unable to make her loan payments. Twenty years after she graduated from college, Butler owed more than twice what she borrowed and was in bankruptcy.  I think we can safely say that Butler does not fit Kantrowitz's model.

In short, we should not dismiss this recent report from the Federal Reserve Bank of New York. The report confirms what we already knew intuitively, which is this: Student-loan indebtedness contributes to rising income inequality in the U.S. and it cripples some families from acquiring wealth.  And as the government shifts millions of college borrowers into 20- year, 25-year, and even 30-year repayment plans, the trend documented by the Federal Reserve Bank researchers is only going to accelerate.

References


Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Andrew Kreighbaum. Federal Reserve analysis finds high student loan debt in housholds with most negative wealth. Inside Higher Education, August 3, 2016. Accessible at https://www.insidehighered.com/news/2016/08/03/federal-reserve-analysis-finds-high-student-loan-debt-households-most-negative?utm_source=Inside+Higher+Ed&utm_campaign=56be543194-DNU20160803&utm_medium=email&utm_term=0_1fcbc04421-56be543194-198564813

Olivier Armantier, Luis Armona, Giacomo De Giorgi, and Wilbert van der Klaauw. Which Households Have Negative Negative Wealth? Liberty Street Economics, August 1, 2016. Accessible at http://libertystreeteconomics.newyorkfed.org/2016/08/which-households-have-negative-wealth.html#.V6IRq3qxUwf







Saturday, July 30, 2016

Consumer Reports' article on student loan debt: A missed opportunity to give students some clear warnings

Consumer Reports' August issue ran a cover story on student loans, which led with this arresting quote: "I Kind of Ruined My Life By Going to College." An inside article profiled several students who were struggling to pay back enormous student loan debt.
  • For example, Jackie Krowen borrowed $128,000 to attend three colleges. She now owes $152,000 and is making loan payments of $1200 a month.  She told Consumer Reports she didn't understand how much interest could accrue when she took out her loans.
  • Jessie Suren borrowed $72,000 to attend a private Catholic school. She now owes $90,000 and makes payments of $900 a month. She works at a sales job that pays $39,000 a year. Here entire income comes from commissions.
  • Saul Newton borrowed $10,000 to attend University of Wisconsin at Stevens Point. He dropped out to join the Army and now owes $23,000. He works as a veterans' activist making $28,800 a year.
 The Consumer Reports article pointed out hat 45 percent of people surveyed said that their college experience was not worth the cost, and 47 percent said if they had it to do over again they would have attended a cheaper school and incurred less student-loan debt.

Anyone making college plans should read the Consumers Reports story. Nevertheless, the article missed an opportunity to give potential students several dire warnings:

1) First, do not attend a for-profit college. The research shows that for-profit colleges charge more for their programs than public institutions, that their student-loan default rates are shockingly high, and that a high percentage of their students don't complete their programs. Students should find a public-college alternative to a for-profit college education. I don't think there are any exceptions to this rule.

2) Never allow a parent or loved one to co-sign a loan. Parents who co-sign student loans for their children are on the hook to pay those loans back, and it is as difficult for a co-signer to discharge a student loan in bankruptcy as it is for the primary borrower. If your college plans depends on getting a loved one to co-sign your student loans, then you need a different plan.

3) Don't take out a student loan from a private lender. Private loans generally have higher interest rates than federal loans, and private loans don't have alternative payment plans if a borrower gets in financial trouble and can't make monthly loan payments. Again, if your college plan requires you to take out a private loan, you need to make another plan.

4) Don't borrow a lot of money to obtain a liberal arts degree from a high-priced elite college. People foolishly think a degree from a prestigious university will pay off, no matter what major they choose. That is not true. A person who borrows $100,000 to get a religious studies degree from NYU will regret it.

5) Don't borrow money to get an MBA or law degree from a mediocre school, particularly if you know you are not going to graduate in the top of your class. Anyone contemplating law school should read Paul Campos' book titled Don't Go to Law School(Unless). Campos strongly warns against borrowing money to attend a second- or third-tier law school. It just doesn't make economic sense given the dismal job market for lawyers, particularly if you don't graduate in the top of your class. In my opinion, the same advice holds for MBA programs. Borrowing a lot of money to get an MBA from a nondescript university is unlikely to pay off financially.

In his book, Paul Campos also warned against the "Special Snowflake Syndrome"--the irrational belief that you can beat the odds. For example, you may think you will study especially hard and graduate in the top 10 percent of your class. But Campos points out that 90 percent of law students don't graduate in the top 10 percent of their class.

Alternatively, you may think you are a special person with great interpersonal skills and that you will do well in a law career even if you graduate at the bottom of your class from a mediocre law school. But statistics don't lie; most  people who borrow $150,000 to attend Nowhereville School of Law aren't going to earn a salary that will make that investment pay off.

Campos' advice for prospective law students applies to everyone going to college. Do your research and make an informed decision about where to go to school and what to study. Don't assume the world will be your oyster simply because you have a bachelor's degree in multiculturalism from a hot-shot Eastern college.

In summary, you should read the recent Consumer Reports story if you are making plans to go to college. But you should also heed the warnings in this blog. Millions of people made bad decisions about financing their college educations. Five million are now in long-term income-based repayment plans that stretch their monthly loan payments out for 20 and even 25 years.

You want to improve your life by going to college; you don't want to wind up as a sharecropper--paying a percentage of your income to the government for the majority of your working life just because you made some bad financial decisions when you were a college freshman.

References

Paul Campos. (2012). Don't Go to College (Unless). Lexington, KY). 

Lives on Hold. Consumer Reports, August 2016, 29-39. Accessible at http://www.consumerreports.org/student-loan-debt-crisis/lives-on-hold/




Wednesday, July 6, 2016

Hillary Clinton proposes a three-month moratorium on student-loan payments and massive loan refinancing: A good idea, but difficult to implement

According to the Washington Post, Hillary Clinton has proposed a three-month moratorium on student-loan payments to allow borrowers time to restructure their student loans at lower interest rates.

Let me say flat out that this is a good idea. As the press has widely reported, about 40 percent of college-loan borrowers who are in the repayment phase of their loans aren't making payments. These people are seeing their loan balances go up as interest accrues on unpaid debt, and they desperately need repayment options they can afford.

In addition, millions of people who are making their loan payments would benefit from repayment plans that would lower monthly payments and take advantage of lower interest rates.

Hillary's proposal underscores this stark fact: The federal student-loan program is in chaos. There are currently eight income-based repayment plans, and even experts are confused about how the different options work and which students are eligible for the various repayment plans. Giving students a three-month hiatus to sort all this out is an excellent idea.

But why is Hillary making this proposal now? Was she prompted by pure politics--making a play for young people's votes? Is her proposal an attempt to win over Bernie Sanders' supporters?

Obviously, Hillary's proposal was driven by political consideration. But I think there is something more going on--namely panic. I think Hillary and the Democratic establishment finally realize that millions of Americans are overwhelmed by unmanageable student-loan debt. These distressed debtors are frustrated, demoralized and angry; and they won't vote for Hillary unless they think she will provide them with tangible relief if she is elected President.

In short, the Democrats see blood in the water; they know they must do something substantive to keep young voters in the Democratic column in the November election.   And even Hillary's fiercest critics must admit that her massive student-loan refinancing proposal is substantive and significant.

Nevertheless, I don't see how Hillary's plan can be effectively implemented. The federal student loan program is like a massive battleship plunging across a raging ocean at full speed--it can't be turned around quickly.  Here are some of the problems:

First, simply determining who is eligible for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have outstanding student loans, and most of them are in the repayment phase.  Just figuring out who is eligible to stop making loan payments and who is not will be an enormous headache.

For example, a lot of borrowers took out private student loans that aren't part of the federal student loan program.  Of course, private loans won't be covered by Hillary's moratorium. But research has shown that many borrowers don't know whether their loans are federal or private, and some have both kinds of loans. If Hillary implements a moratorium, a good many borrowers will stop making payments on their private loans, which will get them in trouble with their lenders.

And 5 million borrowers are already in income-based repayment plans under very favorable terms. Can these people stop making payments for three months? If not, who is going to notify them that they are not eligible to participate in the moratorium?

Second, the Department of Education may not have the capacity to meet the bureaucratic challenge of refinancing millions of loans over a three-month period. There are 43 million people with outstanding student loans, but many borrowers signed multiple promissory notes--perhaps a dozen or more. And some of these documents date back 20, 25, and even 30 years.  

Refinancing all these loans will be a gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I seriously doubt whether DOE or the various creditors have the resources to refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy. 

Third, once college borrowers are given license to stop making payments for a brief period, it will be very difficult to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's decision to accept refugees from the Middle East. Once the stream of migrants began moving, the Europeans found themselves unable to handle the volume of refugees that crossed into the EU. And there was no effective way to regulate the flow.

Likewise, Hillary's proposal to allow millions of college borrowers to stop making loan payments while they refinance their student loans will create a massive upheaval in the federal student loan program. If her plan goes forward, I think we will see millions of people stop making loan payments, whether or not they are eligible for Hillary's moratorium. 

Finally, Hillary's student-loan refinancing plan may be nothing more than a way to shove borrowers into 20- and 25-year repayment plans.  The Obama administration has been aggressively pushing college borrowers into long-term income-based repayment plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of 2017.

Hillary's pan will accelerate the movement of student borrowers into long-term repayment plans.  If it is implemented, we will surely see 10 million people or more in IBRPs, which will effectively make them indentured servants to Uncle Sam, paying a percentage of their income to the government for a majority of their working lives just for the privilege of going to college.

As I have said repeatedly, IBRPs are a bad idea and nothing more than a way to keep a lid on the student-loan crisis. It would be very disappointing if Hillary implemented a student-loan refinancing plan that has the primary effect of lengthening the loan repayment period for millions of Americans.

Conclusion: In spite of its drawbacks, Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to Hillary's refinancing idea, I hope she goes forward with it if she becomes President. Almost anything is better than the present state of affairs.  Lowering interest rates will give millions of borrowers some relief from their debt. And even if her plan forces more borrowers into IBRPs, that option is better than having them continue to shoulder monthly payments that are so large as to be unmanageable.

Besides, Hillary's scheme, if implemented, will expose the utter chaos of the federal student loan program, which the federal government has hidden from the American people. Once the public realizes how many millions of people are suffering from their participation in the federal student loan program, maybe we will see real reform--which is nothing more and nothing less than reasonable access to the bankruptcy courts. 

References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/