"Oh what a tangled web we weave": The Department of Education's three-year student-loan default rates are deceptive

Oh, what a tangled web we weave
When first we practice to deceive!

Walter Scott            

Last September, the Department of Education announced three-year default rates for the most recent cohort of student-loan borrowers.  According to DOE, three-year default rates went down dramatically over a two-year period.   The overall student-loan default rate for the FY 2012 cohort of borrowers was 11.8 percent, significantly lower than the FY 2010 cohort default rate, which was 14.7 percent.

Indeed, the for-profit sector saw a spectacular drop in three-year student-loan default rates--from 21.8 percent for the FY 2010 cohort down to 15.8 percent--a 25 percent drop. Amazing!

But of course DOE's three-year default rates are meaningless, particularly for the for-profit schools. The for-profits have kept their three-year student-loan default rates down by aggressively encouraging their former students to obtain economic-hardship deferments, which keep borrowers off the default roles even though they are not making loan payments.

When we look at the 5-year default rate across all sectors, the default rate is twice as high as the three-year rate. Twenty-eight percent of student borrowers defaulted on their loans within five years of beginning repayment, compared to DOE's 11.8 percent three-year rate. In other words, more than one out of four postsecondary students default on their student loans within five years.

In fact, the student-loan default rate and nonpayment rate for the for-profit sector are truly alarming. Forty-seven percent of for-profit students default on their loans within five years.

Although the for-profit sector has the highest default rates, many public colleges also have shocking numbers.  Kevin Carey of the New York Times examined the percentage of students who had paid nothing on the principal of their loans after five years and discovered that the nonpayment rate at several public universities is 20 percent or more: University of Houston, University of Cincinnati, and the University of Louisville among them. At the University of Memphis, Carey reported, 35 percent of former students in a recent cohort had not paid back a dime on their loans five years after entering repayment.

Historically black colleges and universities (HBCUs) have very high student-loan nonrepayment rates. "Of the 25 private colleges with the worst nonrepayment rates, 22 are historically black," Carey wrote. Lane College, a HBCU located in Tennessee, had a five-year student nonrepayment rate of 78.2 percent.

No one who contemplates these numbers can reach any other conclusion other than this: the federal student-loan program is a catastrophe. And, although millions of people have improved their lives by borrowing money to obtain postsecondary education, millions more have been ruined.

Who has been hurt the most by the federal student loan program?

• Students who attended for-profit institutions, where almost half of former students default on their student loans;
• Students who attended HBCUS, which have very high student-loan default rates;
• People who borrowed money to get law degrees or MBA degrees from second- and third-tier institutions;
• People who obtained liberal arts degrees from high-priced private institutions and who acquired no skills that will enable them to get a decent job;
• People who started postsecondary programs and didn't finish them.

The media has reported widely that Americans are carrying $1.3 trillion in outstanding student-loan debt. But this underestimates the reality. This number does not include accumulated interest, loans from private banks, and credit-card debt that students run up while they are in college. Accumulated indebtedness associated with postsecondary education  is at least $1.5 trillion.

That's $1.5 trillion dollars in debt carried by just16 percent of the American adult population--the 16 percent least able to bear the burden. And because the consequences of default are so draconian, this significant percentage of Americans is greatly suffering.

And what is the higher education community's solution to this calamity? Long-term income-based repayment plans that will keep borrowers indebted for the majority of their working lives!

If the federal government had devised a plan to intentionally destroy higher education, shrink the middle class and cripple our economy, it could not have invented a better plan than this.

References

Kevin Carey. Student Debt Is Worse Than You Think. New York Times, October 7, 2015. Accessible at: http://www.nytimes.com/2015/10/08/upshot/student-debt-is-worse-than-you-think.html?_r=1

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
loan defaults. Brookings Institution, September 15, 2015. Accessible at: http://www.brookings.edu/~/media/projects/bpea/fall-2015_embargoed/conferencedraft_looneyyannelis_studentloandefaults.pdf

Senators Elizabeth Warren and Charles Schumer spoke on CNN news program about the student loan crisis and said ABSOLUTELY NOTHING!

President Obama will give his State of the Union address tonight and is expected to address the student loan crisis. In anticipation of that event, Senators Elizabeth Warren and Charles Schumer came on CNN television this morning to speak about student loans, and both said ABSOLUTELY NOTHING!

First of all, both mouthed the old canard that the government is making a profit off the student loan program because it is lending money at a higher interest rate than it pays to obtain the money.  It is true that the interest rate on the 10-year treasury note is about 2. 2 percent, while the federal student-loan program charges approximately 6 percent.

But of course, the government is only making a profit on student loans if students pay back the money--and a high percentage of them do not.

As the Brookings Institution reported recently, 47 percent of the students from a recent cohort who borrowed money to attend for-profit colleges defaulted on their student loans within five years.  That's pretty darn near half. And that number does not include the borrowers who are on economic hardship deferments or long-term repayment plans who are seeing their loan balances grow larger due to accruing interest.

 The same Brookings report noted that over 70 percent of students who attended for-profit institutions were seeing their loan balances go up two years after entering repayment.  In fact, among student borrowers as a whole, more than half (57%) saw their loan balances go up two years after entering the repayment phase of their loans.  People in repayment whose loan balances are growing are either  in default, in deferment, or in long-term repayment plans. For almost all these people, their student-loan debt is growing larger during the repayment phase, not smaller, due to accruing interest.

The government can pretend that all that accrued interest is an asset because someday millions of student loan borrowers will pay back their loans, but that is baloney.  The government is not making a profit on the student-loan program, and Senator Warren and Senator Schumer either know that and are being purposely deceptive or they are fools.

Here's a second point to make about Senator Warren and Senator Schumer's CNN interview. NEITHER SENATOR MADE A SINGLE SUGGESTION ABOUT HOW TO SOLVE THE STUDENT LOAN CRISIS.

My guess is they will support a bill to lower interest rates on student loans.  Senator Warren has ridden that hobby horse before.

But neither senator said anything about the government's practice of garnishing elderly people's Social Security checks. Neither said anything about the insanity of putting millions of borrowers into long-term student-loan repayment plans that will result in massive amounts of student-loan debt being forgiven. Neither said anything about reforming the bankruptcy process for distressed student-loan debtors.

Why? Because Senator Schumer is a lackey of the banking industry, and Senator Warren is a lackey of the higher education industry.

The fact that these idiots stepped forward to talk about the student loan crisis on CNN without saying anything at all is disgraceful. In fact it is frightening.

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

You've got to know when to hold'em, know when to fold'em.

                                 Know when to walk away, know when to run.

The Gambler

Sung by Kenny Rogers

Lyrics by Don Schlitz

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

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

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

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

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

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

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

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

Apparently, the bankruptcy court had concluded that Shaffer's mental health challenges made her unfit for some higher-paying jobs, presumably including a job in the field of chiropractic medicine. As the Eight Circuit observed:

The bankruptcy court determined that [debtor] could endure only work that was essentially ministerial and that she suffered from the stress of increased responsibility due to a lack of self-confidence. While there was no evidence that the debtor was clinically disabled or maladjusted, the bankruptcy court expressly found that [debtor] was not fit for the higher responsibility and higher paying positions she tried and then left. 

Interestingly, Shaffer presented no expert witnesses to buttress her testimony about her mental health challenges. Iowa Student Loan argued that the bankruptcy court had engaged in impermissible speculation when it concluded that Shaffer's mental health issues were an obstacle to getting a high paying job.

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

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

References

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

"Dream Schools Are Just A Dream": Melanie Lockert's Cautionary Advice About Borrowing Money to Attend A PrestigiousGraduate School

Melanie Lockert wrote a very mature and thoughtful essay about her student-loan debt for Student Loan Hero, a web site on student loan indebtedness. Melanie took out $81,000 to get her postsecondary education: $23,00 for her bachelor's degree and $58,000 for her master's degree. 

Melanie took on most of her debt due to her decision to get a master's degree from New York University, one of the most expensive universities on the planet. Remarkably, she was able to pay off all this debt in eight years, but she paid a price for borrowing so much money to get an education.

Melanie gave her readers five pieces of advice about borrowing money to get a graduate education, and her column is well worth reading. In particular, she warned people to be cautious about a decision to go to a "dream school." I am quoting her remarks about that here:

Dream Schools Are Just a Dream

It's not uncommon for people like me, who take on a large amount of debt to go to school, to be met with a certain amount of criticism. I was repeatedly asked why I didn't go to a cheaper school.

My answer? I wanted to go to my dream school. My dream obviously came at a cost, but I was willing to pay the price. I was stubborn and no one could tell me not to pursue my dream. However, I realized the reality of attending my dream school wasn't so dreamy after all. I got a lot out of my education at NYU, but it was a lot harder than I imagined.

Our judgement can be clouded by fantasy — we think a certain school can bring us legitimacy, talent, and clout. But in the end, it's just a school. Consider carefully the cost of your dream school and what price you might pay many years down the road.

Melanie's essay struck home with me because I too made a decision to attend a dream school: Harvard Graduate School of Education. Like Melanie, I came to realize that in the end Harvard was just a school, and a degree from Harvard contained no magic properties for improving my life.

If you are thinking about going to graduate school at an expensive university, I urge you to make a copy of Melanie Lockert's essay and tape it to your refrigerator so you won't lose it.  Then read her essay before you drop that graduate-school application in the mail.

References

Melanie Lockert. Student Loan Problems: What I Wish I Knew Before Borrowing $81,000 for School. Student Loan Hero, November 25, 2015. Accessible at: https://studentloanhero.com/featured/student-loan-problems-wish-knew-before-borrowing-81000/?utm_source=outbrain&utm_medium=display&utm_campaign=blach

Dead in the Water: Many students who default on their loans will be sucked into a financial abyss with no means of saving themselves (Reflections on Bible v. United Student Aid Funds, Inc.)

Saving Private Ryan, directed by Steven Spielberg, realistically depicts American soldiers landing in Normandy on D Day, June 6, 1941. As the film accurately represented, many soldiers were killed as they left their landing craft, cut down by machine guns or artillery fire before they ever set foot on the beaches.

Something similar happens to people who default on their student loans. From the moment their student loans go into default, they are dead in the water.

Bible v. United Student Aid Funds, Inc. illustrates my point. Bryana Bible borrowed $18,000 to finance her college studies. She defaulted in 2012, but she promptly agreed to a rehabilitation agreement that allowed her to make reduced monthly payments of only $50 a month. The interest rate on her rehabilitated loan was set at 6.8 percent.

Although Bible faithfully abided by the terms of the rehabilitation agreement, a loan guarantee agency assessed $4,547.44 in "collection costs" against her, increasing her total indebtedness to more than $22,500. When Bible began making $50 monthly loan payments, the guarantee agency applied the payments to the collection costs, not the loan's principal.

In short, Bryana Bible was dead in the water. It would take her more than seven years just to pay off the collection costs on her debt. In the meantime, her loan balance would be accruing interest at the rate of 6.8 percent!

Bible sued the guarantee agency for fraud and racketeering, alleging she had been told that costs against her were zero.  Last August, the Seventh Circuit Court of Appeals ruled that she has a valid cause of action.

The Seventh Circuit's decision is quite long--57 pages including a concurring opinion and a dissent.  But it is not necessary to read the court's lengthy legal analysis to understand what happens to people who default on their student loans, even briefly.

People who default on their loans can get slapped with collection fees amounting to 25 percent of their loan balance, and they can be put in repayment plans that cause their loan balances to go up because the payments aren't being applied to the principal of their loans.

Once student-loan debtors fall into the clutches of the loan guarantee agencies, most of them can never get free.  Collection costs, accrued interest and various fees get added to their loan balances, and their loan balances go up--not down.

That's why we see distressed student-loan debtors stumbling into the bankruptcy courts owing two or three times the amount they borrowed. And who do they meet when they get to bankruptcy court? Attorneys for the loan guarantee agencies, who argue stridently that these poor souls are not entitled to bankruptcy relief.

Bryana Bible's story would be a shocking even if her circumstances were unique. But there are millions of Americans who are unable to pay off their student loans, and most of them are seeing their loan balances go up with each passing month.

Whether it intended to do so or not, Congress created a federal student loan program that benefits the finance industry and pushes millions of student loan debtors into a financial abyss from which there is no escape. The program has destroyed higher education as a moral enterprise and created a modern-day class of sharecroppers who will be indebted to the government for their entire lives.

It will take courage to fix this problem, but we can't look for courage from Congress or from our higher education leaders. I am convinced the only way to bring down this putrid, sleazy flim-flam game is for distressed student-loan debtors to march into bankruptcy court--with or without lawyers--and cry out for justice.

References

Bible v. United Student Aid Funds, Inc., 799 F.3d 633 (7th Cir. 2015).

Tetzlaff v. Educational Credit Management Corporation: The Seventh Circuit made a mistake when it refused to discharge a quarter of a million dollars in student-loan debt owed by an umemployed 56-year old man living on his mother's Social Security check

The Seventh Circuit Court of Appeals got it wrong when it affirmed a lower court ruling against Mark Tetzlaff, an unemployed 56 year-old man who tried to discharge $260,000 of student-loan debt in bankruptcy. Mr. Tetzlaff filed a petition for certiorari in October with the U.S. Supreme Court, seeking to have the Seventh Circuit's decision overturned. I hope the Supreme Court agrees to hear his case.

The Seventh Circuit applied the Brunner test too harshly.

In ruling against Tetzlaff, the Seventh Circuit determined that requiring Tetzlaff to repay more than a quarter of a million dollars in student-loan debt would not cause him "undue hardship." To reach this bizarre conclusion, the court applied the three-part Brunner test, which required Tetzlaff to show:

1) [He could] not maintain, based on current income and expenses, a minimal standard of living . . . if forced to repay [his] loan;

 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period;

3) [he] made good faith efforts to repay the loans. 

 At the time Tetzlaff filed his adversary hearing, he was 56 years old, unemployed, and living with his mother. Both he and his mother subsisted entirely on his mother's Social Security check. Thus, the court admitted that Tetzlaff met the first prong of the Brunner test: he could not pay back his student loans and maintain a minimal standard of living.

But the Seventh Circuit panel ruled that Tetzlaff had not meet the second prong of the Brunner test.  According to the court,Tetzlaff was required to show "the certainty of hopelessness" concerning his financial future.  In essence, the court predicted that Tetzlaff's financial situation will probably improve. After all, the court noted, "he has an MBA, is a good writer, is intelligent, and family issues are largely over" (quoting the lower court's opinion).

Moreover, in the Seventh Circuit's view, Tetzlaff had not made good faith efforts to pay back his loans, a requirement of the Brunner test's third prong.

Although Tetzlaff may not have made sufficient efforts to repay the $260,000 he was trying to discharge in bankruptcy, he had also borrowed money to attend Florida Coastal Law School; and he had paid back his law school loans. Tetzlaff argued in court that his successful effort to pay off his law-school loans showed his good faith,

But the Seventh Circuit did not buy Tetzlaff's argument.  In the court's view, Tetzlaff had not made a good faith effort to repay the $260,000 he owed to Educational Credit Management Corporation, the agency that was fighting Tetzlaff's bankruptcy discharge. Thus he failed the third prong of the Brunner test.

Where the Seventh Circuit went wrong: Low Job Prospects for Law Graduates

In my view, the Seventh Circuit erred when it refused to discharge Tetzlaff's student loan debt. 

First of all, a 56-year old man who is unemployed and has significant mental health issues (as he testified in court) will never pay back more than a quarter of a million in student-loan debt--a debt that is growing larger by the day due to accrued interest. The court would have ruled more realistically and more compassionately if it had applied the principle laid down by the Ninth Circuit's Bankruptcy Appellate Panel in its 2013 Roth decision: "[T]he law does not require a party to engage in futile acts." 

It is true Tetzlaff holds an MBA and a law degree, but these credentials are no guarantee of a good job, particularly given his age, his employment history, and his mental health issues. In fact, Tetzlaff's law degree may be almost worthless.  

As Paul Campos wrote in his 2012 book, Don't Go To Law School (Unless), the job market for lawyers is terrible. Indeed, Campos observed, "[L]aw schools are now producing more than two graduates for every available job."

And Tetzlaff's prospects for a legal job are especially dire since he failed the bar exam twice. In addition, he graduated from Florida Coastal Law School, one of the nation's bottom-tier law schools with very low admissions standard. According to Law School Transparency, a public interest group, 50 percent of Florida Coastal's 2014 entering class were at extreme risk of failing the bar exam based on their LSAT scores.

Law School Transparency pointed out that graduates of law schools with low admission standards have a much harder time obtaining employment than graduates from more prestigious law schools. "Legal job rates are considerably worse at the serious risk schools," Law School Transparency's report stated. "A serious risk school is 4 times as likely to have a below average legal job rate. Nearly three-quarters of schools with employment rates below 50% were serious risk schools."

Law School Transparency's recent report shows that borrowing money to attend a law school with low admissions standards is not a good bet. "Based on available salary data from serious risk schools, graduates from these programs cannot service their debts without generous federal hardship programs."

Nevertheless, Tetzlaff was wise to pay off his law-school debt first, since the law school would not release his diploma to him unless he paid that debt. And without a diploma, he would be unable to take the bar exam. In fact, Tetzlaff had no real choice in prioritizing his law school debt over his other student loan debt.

It is truly unfortunate that the Seventh Circuit showed both lack of compassion and lack of understanding by penalizing Mr. Tetzlaff for making the only sensible financial decision he could make.  He simply had to make paying his law-school debt a priority in order to have any hope of ever practicing law.

The Court Should Not Have Allowed ECMC to accuse Tetzlaff of being a malingerer

Educational Credit Management Corporation, perhaps the nation's most heartless and ruthless student-loan debt collector, opposed the discharge of Tetzlaff's student-loan debt, and it hired Dr. Marc Ackerman, a forensic psychologist, to bolster its case. Ackerman performed tests on Tetzlaff and testified that Tetzlaff "'scored very high on several malingering scales,' indicting that Tetzlaff was perhaps feigning his psychological symptoms."

I find it outrageous that Educational Credit Management Corporation's hired a forensic psychologist as a means of suggesting Tetzlaff is a malingerer. ECMC has fought bankruptcy relief for distressed student-loan debtors all over the United States, and its chief executives have grown rich in the debt collection business. For ECMC to force an unemployed man in his mid-50s to take a psychological exam in a bankruptcy proceeding to determine whether he is a malinger is detestable.

It is true that Tetzlaff introduced testimony about his mental health issues, but I don't think that gives ECMC license to use an expert witness to essentially attack his character. In my opinion, the bankruptcy court should have excluded the forensic psychologist's opinion on the grounds of common decency.

And if we are going to be looking into people's mental health, let's check the mental health status of the ECMC officials who opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living solely on the income of a $774 Social Security check. Anyone who would persecute Jane Roth must have serious mental health problems--let's call it chronic undifferentiated greed.

Conclusion: The  Seventh Circuit committed a grave error in deciding the Tetzlaff case

The Tetzlaff decision was a bad decision. Mr. Tetzlaff should be commended for trying to improve his economic prospects by obtaining graduate education, and he should not be penalized because some of his educational choices may have been misguided.

Mr. Tetzlaff probably made a mistake when he borrowed money to attend Florida Coastal Law School.  But he should not suffer a lifetime penalty for mistakes he made in his good faith efforts to obtain an education. And people in bankruptcy should not be required to take psychological tests to determine whether they are malingers.

The Department of Education needs to rein in Educational Credit Management Corporation by insisting that it not oppose bankruptcy relief for people like Mark Tetzlaff. Unless it does that, DOE simply cannot continue to say with any credibility that it is trying to relieve the distress of millions of people who are unable to pay back their student loans.

References

Paul Campos. Don't Go To Law School (Unless). Self-published, 2012.
Roth v Educational Credit Management Corp, 490 B.R. 908, 920 (9th Cir. BAP 2013).

Law School Transparency. 2015 State of Legal Education. Accessible at: http://lawschooltransparency.com/reform/projects/investigations/2015/
John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html
Tetzlaff v. Educational Credit Management Corporation, 794 F.3d 756 (7th Cir. 2015). Accesible at: http://scholar.google.com/scholar_case?case=900247726541956067&hl=en&as_sdt=6&as_vis=1&oi=scholarr

Old and in the Way: Hundreds of thousands of elderly student-loan debtors are experiencing real financial hardship, and the federal government doesn't care

Old and in the way, that's what I heard them say

They used to heed the words he said, but that was yesterday

Gold will turn to gray and youth will fade away

They'll never care about you, call you old and in the way

Old and In the Way

Lyrics and music by David Grisman

Many Americans think student-loan defaulters are young scofflaws who obtained valuable university degrees and simply refuse to pay back their loans.

But that stereotype could not be further from the truth.

In fact, most of the people who defaulted on their student loans simply fell on hard times. Many acquired their degrees from for-profit universities that charged far too much for substandard educational experiences. Millions of people who attended for-profit colleges found themselves worse off financially after finishing their studies than they were before they enrolled in these sleazy institutions.

Some people borrowed money to obtain undergraduate degrees and were unable to find jobs that paid well enough for them to service their loans. Some of these unfortunate souls doubled down and borrowed more money to go to graduate school.  Those who borrowed to go to law school found a collapsing job market for lawyers.

Other  student-loan borrowers became ill, got divorced or were laid off from their jobs. For a thousand different reasons, millions of student-loan debtors fell off the ladder in their climb toward economic security and never recovered. In short, most people who defaulted on their student loans simply did not have the financial resources to make their loan payments.

And many student-loan defaulters are elderly.

As Natalie Kitroeff reported recently in Bloomburg Business Week, about one out of four student-loan debtors age 65 and older are in default. Half the student loans held by people who are 75 years old or older are in default.  And 155,000 elderly Americans are having their Social Security checks garnished due to defaulted student loans, an enormous increase from 2002, when only 31,000 Americans were having their Social Security checks garnished.

Surely all humane people can agree that the federal government should not be garnishing elderly people's Social Security checks to collect on defaulted student loans. Or perhaps we can't. In the Lockhart decision, the U.S. Supreme Court upheld the government's authority to garnish the Social Security checks of student-loan defaulters. And get this: The decision was unanimous. There were no liberals on the Supreme Court on the day the Lockhart case was decided.

But perhaps humane people can at least agree that the government should not oppose bankruptcy relief for student-loan defaulters who are living on Social Security income of less than $800 a month. But again, perhaps we can't. Educational Credit Management Corporation actually opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living on a monthly Social Security check of only$774.

Fortunately, the Ninth Circuit Bankruptcy Appellate Panel was considerably more compassionate than ECMC, and it discharged Roth's student loan debt.

I once thought the Roth decision might bring the federal government to its senses and that it would issue strict orders against opposing bankruptcy relief for student-loan defaulters living entirely off their Social Security checks. But I was wrong.

In fact the Obama administration is ignoring the Roth decision. The Department of Education issued a guidance letter in July 2015 (the Mahaffie letter) outlining when student-loan creditors should not oppose bankruptcy relief for insolvent college-loan borrowers; and it did not even mention the Roth decision.  And the Department of Education's lawyers filed a pleading in a California bankruptcy court last month arguing that the Roth decision is not binding on any bankruptcy court.

For all its blah-blah-blah about providing relief for distressed student-loan debtors, the Obama administration's Department of Education is doing little more than pitching long-term repayment plans whereby student-loan borrowers are forced to make loan payments for 20 or 25 years.

And DOE's lawyers run like hounds to the bankruptcy courts to oppose bankruptcy discharge for insolvent student loan debtors, regardless of their age.

In short, if you are an elderly person who defaulted on your student loans you have no friends in the Obama administration. As far as the President Obama's Department of Education is concerned, you are just old and in the way.


References

Natalie Kitroeff. Student Debt May Be the Next Crisis Facing Elderly Americans. Bloomberg Businessweek, December 18, 2015.  Accessible at:  http://www.bloomberg.com/news/articles/2015-12-18/student-debt-may-be-the-next-crisis-facing-elderly-americans

Lockhart v. United States, 546 U.S. 142 (2005).

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015. Accessible at: https://ifap.ed.gov/dpcletters/attachments/GEN1513.pdf

U.S. General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers.  Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf