Sunday, November 19, 2017

House of Representatives taxes graduate students' tuition waivers: Kicking 'em while they are down

A tax bill passed the House of Representatives a few days ago, and Republican congresspeople went out of their way to show contempt for America's postsecondary students. The House bill treats tuition waivers as income, which means that American graduate students who receive these waivers will get big tax bills in the years to come if the bill becomes law in its present form.

 A great many graduate students get tuition waivers as compensation for the work they do for the universities where they pursue their studies.Some graduate students work as classroom teachers and researchers; and in return for their services the universities waive tuition. Many Americans would not be able to pursue graduate degrees if it were not for these tax-free waivers. After all, tuition at prestigious private universities is about $50,000 a year.

Under current tax law, tuition waivers are not taxable; and if the law changes, thousands of graduate students will suffer. As Erin Rousseau explained in a New York Times op ed essay, taxing tuition waivers "would make meeting living expenses nearly impossible, barring all but the wealthiest students from pursuing a Ph.D." Undoubtedly, this new tax burden would force graduate students to take out even more student loans, and many may do the math and decide that it doesn't make economic sense to get a graduate degree.

And this is not the only kick in the ribs that House Republicans delivered to American students. The House bill also eliminates the student-loan interest deduction, which allows middle-income student borrowers to get a modest tax break while they are paying off their student loans.

Millions of Americans are already suffering from staggering levels of student-loan debt; and the House bill only adds to their burdens. Instead of making life harder for students, Congress should pass legislation that will relieve some of their distress.  For example:

  • Congress should pass a law barring the government from garnishing the Social Security checks of elderly student-loan defaulters.
  • The tax code needs to be amended so that student borrowers on income-driven repayment plans don't get tax bills for forgiven debt when their long-term repayment plans are complete.
  • Student-loan debt collectors should be brought under control and some limit should be placed on the amount of fees and penalties that can be assessed against debtors who default on their loans.
But Congress isn't doing anything to ease the suffering of student borrowers. Instead, the House of Representatives passed a bill to raise their taxes!

Congress should be careful.  Forty-four million Americans are weighed down by student-loans. That's a big voting block if students ever get together.



References

Rousseau, Erin. The House Just Voted to Bankrupt Graduate Students. New York Times, November 16, 2017.

Thursday, November 16, 2017

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

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

What happens to these people?

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

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

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

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

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

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

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

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

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


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


References

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

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

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

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




Tuesday, November 14, 2017

Department of Education Coming to Jesus Moment With For-Profit Schools. Article by Steve Rhode

By  on November 10, 2017
99 percent of student loan fraud claims come from for-profit colleges and schools.
I’d love to tell you I absolutely think the current Trump administration Department of Education is going to get the message that for-profit colleges are problematic, but I doubt it.
The Century Foundation has obtained data from the U.S. Department of Education through a Freedom of Information Act (FOIA) request which paints a very clear picture of issues surrounding for-profit schools and student loan fraud issues. I can’t wait to see the magic the Department of Education uses to make these facts go away or not be relevant.
Out of the total of 98,868 complaints reviewed by TCF, for-profit colleges generated more than 98.6 percent of them (97,506 complaints). Of these complaints nonprofit colleges generated 0.79 percent (789 complaints) and public colleges generated 0.57 percent (559 complaints).
Approximately three-fourths of all claims (76.2 percent) were against schools owned by one for-profit entity, the now-closed Corinthian Colleges (75,343 claims). Removing Corinthian from the analysis, the vast majority of claims, over 94 percent, were still against for-profit colleges (22,160 of the 23,525 non-Corinthian claims).
Claims are concentrated around fifty-two entities—forty-seven for-profit companies and five nonprofit institutions—that have each generated twenty or more borrower defense claims. Of these five nonprofits, three converted from for-profit ownership.
The backlog of fraud complaints—currently numbering 87,000 not yet reviewed—is increasing, with the number of new claims submitted per month averaging approximately 8,000 since mid-August.”
The data uncovered while for-profit schools account for ten percent of student enrollment the students who attended were 1,100 times more likely to file a fraud claim.

*******

This article appeared on The Get Out of Debt Guy 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.

Thursday, November 9, 2017

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

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

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

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

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

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

The Brunner test ask three questions:

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

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

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

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

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

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

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

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

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

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

References

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









Millions of Older Americans Are Delinquent On Their Loans: Long-Term Repayment Plans Will Make the Problem Worse

Several decades after obtaining their college degrees, millions of older Americans are still paying on their student loans. According to the Consumer Financial Protection Bureau, the percentage of student borrowers over 60 years of age who carry student-loan debt increased by 20 percent from 2012 to 2017.

Even more alarming is the rising number of older student borrowers who are delinquent on their student loans. In all but five states, delinquency rates among older student debtors went up over the last five years.

In California, for example, more than 300,000 people age 60 or older hold $11 billion in student-loan debt, and 15 percent of these borrowers are delinquent.

Delinquency rates for older borrowers vary substantially from state to state. In Georgia, Mississippi, Oklahoma, South Carolina, and West Virginia, one out of five student-borrowers age 60 or older are delinquent on their loan payments.

As the CFPB noted, these data show that an increasing number of older Americans are still shouldering student-loan debt at an age when most of them are living on fixed incomes.  And these data do not reflect the Department of Education’s recent campaign to recruit more and more college borrowers into income-based repayment plans that can stretch out for as long as 20 and even 25 years.

During Obama’s second term in office, the Department of Education rolled out two relatively generous income-driven repayment plans (IDRs): PAYE and REPAYE.  Both plans call for participants to pay 10 percent of their adjusted gross income on their student loans for a period of 20 years.

Most commentators have viewed these initiatives as a humane way to lower struggling borrowers’ monthly payments. But for many of the people in IDRS, probably most of them, the monthly payments don’t cover accruing interest. For these people, their IDRs cause their loan balances to go up even if they make regular monthly payments.  Thus, IDR participants will enter their retirement years with thousands of dollars in unpaid student-loan debt.

The CFPB report should be alarming to everyone. Already, we are seeing student borrowers enter their sixties with increasing levels of debt; and delinquency rates are climbing.

This is a crisis right now, but as the IDR participants reach retirement age, the crisis will grow worse. Indeed, it will be a calamity as millions of people try to service their student loans while surviving on Social Security checks and small pensions.

References

Older consumers and student loan debt vary by state. Consumer Financial Protection Bureau, August 2017.


Monday, November 6, 2017

Hawaii Supreme Court strikes down a school's arbitration agreement as unconscionable: For-profit colleges take notice

The Hawai'i Supreme Court strikes down a school's arbitration agreement as unconscionable

Arbitration agreements have long been favored by the courts, which traditionally have seen arbitration as an inexpensive alternative to lengthy, costly litigation. For years, courts have routinely upheld the enforceability of arbitration agreements and they have been exceedingly reluctant to overturn an arbitrator's decision.

But in recent years, courts in some states have become increasingly willing to invalidate an arbitration agreement when it is clear that the agreement contains terms that are unfair.  Recently, the Hawai'i Supreme Court, in the case of Gabriel v. Island Pacific Academy, ruled that an arbitration agreement that blocked a teacher from suing her former employer was unconscionable.

Laura Gabriel filed suit in a Hawai'i state court, charging that Island Pacific Academy had retaliated against her for filing a sex discrimination complaint by refusing to hire her for the 2014-2015 school year. Gabriel had signed an arbitration agreement promising to settle disputes with her employer through arbitration, and Island Pacific asked the trial court to dismiss Gabriel's complaint and to force Gabriel to pursue her claims against the school through arbitration.

The trial court ruled that the arbitration agreement was enforceable except for one provision. The agreement required Gabriel to deposit one half of the estimated arbitration costs as a precondition to arbitration. This fee amounted to $10,200, which equaled one-third to one-fourth of Gabriel's annual salary.  The trial judge ruled that this provision was unconscionable and ordered Island Pacific to pay all arbitration costs when Gabriel's claims were arbitrated.

Gabriel appealed, and the Hawai'i Supreme Court reversed. The supreme court agreed with the lower court that the arbitration agreement's fee-splitting provision was unconscionable but concluded that
unconscionable terms pervaded the whole agreement and thus the agreement should be invalidated in its entirety.

In addition to the fee-splitting provision, the Hawai'i Supreme Court identified another uunfair provision. The agreement required Gabriel to pay Island Pacific's total "damages, costs, expenses and attorney's fees" if she challenged the arbitration agreement in court even if she won her lawsuit. "This provision is plainly substantively unconscionable," Hawai'i's highest court ruled, "and must be stricken as well."

After the fee-splitting provision and the cost-shifting provision were struck from the agreement, the court pointed, the agreement only contained one sentence. Therefore, it was appropriate to invalidate the whole agreement and allow Gabriel to sue the school in court.

For-profit colleges force their students to agree not to sue them as a condition of enrollment

Although the Island Pacific lawsuit did not involve a postsecondary student, it may be relevant to college students who attend for-profit colleges. Many of these students signed arbitration agreements as a condition of enrollment and then discovered that they had been defrauded.

These students might be able to get those arbitration agreements invalidated in a state court on the grounds that the agreements are unconscionable. No doubt many of these agreements have cost-shifting and fee-splitting provisions like the Island Pacific agreement.

Last year, a California appellate court invalidated an arbitration agreement forced on students attending a for-profit program on the grounds of basic unfairness. Among other things, the agreement required California students to arbitrate their claims in Indiana.

Likewise, the New Jersey Supreme Court struck down an arbitration provision in a for-profit school's student-enrollment agreement simply because the clause was printed in very small type and was phrased in such murky language that students might not know they were giving up legal rights by signing the agreement.

Congress and the Department of Education are shielding fraudulent for-profit colleges from being sued

Although state courts seem increasingly inclined to strike down arbitration agreements that disfavor vulnerable parties, Congress and the Department of Education have acted counter to this judicial impulse.

For example, the Consumer Financial Protection Bureau recently tried to stop corporate entities from using arbitration agreements to block lawsuits against them. The CFPB adopted a rule that would have barred financial services institutions from requiring their customers to sign arbitration agreements.

But Congress--acting in the interest of corporations and not consumers--passed a law overturning the CFPB rule.  In the Senate, the vote was tied at 50 to 50. Not a single Democratic senator voted for the bill and two Republican senators (Lindsay Graham of South Carolina and Louisiana's John Kennedy) voted against it. Vice President Mike Pence broke the tie by joining with Republican colleagues to trash the CFPB rule.

Likewise, the Obama administration's Department of Education drafted regulations that would have prevented for-profit colleges from forcing students to sign arbitration agreements. Obama's DOE was motivated by the conviction that arbitration agreements disfavored students in favor of for-profit colleges and prevented them from banding together to file class action suits.

Unfortunately, Betsy DeVos blocked those regulations, allowing sleazy for-profits to continue forcing students to sign arbitration agreements.

In the current political climate, it does not seem likely that Congress or the Department of Education will come to the aid of students who are being ripped off by for-profit colleges.  It could be that state courts  are more sympathetic to students who were forced to waive their right to sue. Students can challenge unfair arbitration agreements in court. Unfortunately, to do so, students will need good lawyers.



References

Donna Borak and Ted Barrett.Senate kills rule that made it easier to sue banks. CNN.com, October 25, 2017.

Richard Fossey. Why students need better protection from loan fraud. Chicago Tribune, August 25, 2017.

Gabriel v. Island Pacific Academy, Inc., 400 P.3d 526 (Hawai'i 2017).

Andrew Kreighbaum. Few Solutions for Defrauded Borrowers. Inside Higher Ed, June 26, 2017.

Magno v. The College Network, Inc.. (Cal. Ct. App. 2016). Accessible at http://caselaw.findlaw.com/ca-court-of-appeal/1741812.html

Morgan v. Sanford Brown Institute, 137 A.3d 1168 (N.J. 2016).

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?


Saturday, November 4, 2017

Matt Taibbi's Rolling Stone article on student debt crisis: You should read it

If you believe in social justice and basic human decency, you must read Matt Taibbi's article on the student-loan crisis that appeared this month in Rolling Stone.

Writing in the tradition of great American investigative journalism, Taibbi deconstructs "the great college loan swindle" that is destroying the lives of millions. Taibbi illustrates his theme by telling the story of two swindled student debtors: Scott Nailor and Veronica Martish.

Scott Nailor, a thirty-seven year-old school teacher, has contemplated suicide because he is chained to college loans he will never pay off. Nailor borrowed $35,000 to get a degree from the University of Southern Maine, which qualified him for a job as a school teacher.

This debt, which might seem modest to some people, was barely manageable on Nailor's salary as a school teacher, which initially paid just $18,000. He and his wife consolidated their student debt, which had grown to $50,000. Then the couple declared bankruptcy, but they did not discharge their student loans.

Today, Taibbi wrote, Nailor makes monthly payments of $471 a month on student-loan debt that has grown to $100,000.  None of his payments go to paying down principle. "I will never be able to pay it off," Nailor told Taibbi. "My only escape from this is to die."

And Taibbi also tells the story of Veronica Martish, a 68-year-old veteran from the Vietnam War. In 1989, she borrowed $8,000 to take courses at Quinebaug Valley Community College. Due to family problems, Martish fell behind on her loan payments and entered a loan rehabilitation program. By this time, her $8,000 had grown to $27,000 due to fees and interest tacked on by one of the federal government's debt collectors.

Martish told Taibbi that she had paid a total of $63,000 on her $8,000 student loan, but has yet to pay off the principle. By the time she dies, Martish estimates her loan balance will have grown to $200,000. "Nothing ever comes off the loan," she explained. "It's all interest and fees."

These stories may seem incredible to you, but in fact they are all too common. In fact, the bankruptcy courts have chronicled similar experiences when student-loan debtors stagger into bankruptcy court. Remember Brenda Butler, who paid $15,000 on $14,000 in student loans? Twenty years after graduating from college, she owed $32,000--twice what she borrowed. A bankruptcy judge refused to wipe out her student loans. She should stay in a long-term repayment plan, the judge advised--a plan that will not end until 42 years after Butler graduated from college.

And how about Alan and Catherine Murray, the Kansas couple who borrowed $77,000 to pay for undergraduate and graduate degrees? They made $54,000 in loan payments--about 70 percent of the principle.  Yet 20 years after finishing their studies, their accumulated student-loan debt had ballooned to $311,000--more than four times what they borrowed.

Millions of people have seen their student loans grow exponentially due to fees and unpaid interest. When that happens, a debtor's only option is to sign up for an income-driven repayment plan (IDR) that can last from 20 to 25 years. But these plans generally set monthly payments so low that the payments don't reduce the principal on the debt.  College debtors on IDRs see their loan balances grow larger and larger with each passing month even when they faithfully make their loan payments.

This was the situation Scott Nailor found himself in. No wonder he contemplated suicide.

And it gets worse. When all those millions of people in IDRs make their last monthly payment, the remaining balance on their loans will be forgiven; but the IRS considers the forgiven amount to be taxable income.

Does anyone in Congress give a damn? I don't think so. And Secretary of Education Betsy DeVos, whose family has profited from the debt-collection industry, certainly doesn't give a damn.

And so America descends into an era of shocking exploitation perpetrated by colleges, the federal government, and the debt-collection industry.

I will end this reflection by quoting a paragraph from Taibbi's searing essay:
It's a multiparty affair, what shakedown artists call a "big store scheme," like in the movie The Sting: a complex deception requiring a big cast to string the mark along every step of the way. In higher education, every party you meet, from the moment you first set foot on campus, is in on the game.
Donald Trump and Betsy DeVos: the "big store" scheme


References

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

Murray v. Educational Credit Management Corporation, CASE NO. 14-22253, CHAPTER 7, ADV. NO. 15-6099 (Bankr. D. Kan. Dec. 8, 2016), aff'd, No. 16-2838 (D. Kan. Sept. 22, 2017).

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