Monday, December 31, 2018

Thanks to student loans, many Americans can't afford homes or children: Nice work, Congress!

Imagine if you will that you are sitting in the chambers of the U.S. House of Representatives in 1965 just before Congress adopts the Higher Education Act, which launched our nation's huge experiment with student loans.

Now imagine that the Ghost of the Future appears before the lawmakers just the way the Ghost of Christmas Future appeared to Ebenezer Scrooge in Dickens' Christmas Carol.

Before the vote, the Ghost issues this chilling warning: "Congress," the ghost whispers,"behold what will happen to this great nation if you launch a massive college loan program."

And this is the ghost's prediction:

First, within a half century, 45 million Americans will be burdened by student loans, which will amount to $1.5 trillion in outstanding indebtedness. Millions will be forced into 25-year repayment plans that are structured such that borrowers will never pay off their student loans--even if they make monthly payments for a quarter of a century.

Others will simply default on their loans--ruining their credit. By 2016, borrowers will be defaulting at the rate of 3,000 a day. Student-loan default rates will be much higher than default rates on mortgages, credit cards, or car loans.

Fueled by massive infusions of federal money, a corrupt and venal for-profit college industry will flourish, scamming millions of people--especially minorities, first-generation colleges students, and the poor.

A higher-education "arms race" will emerge, with colleges raising tuition to build luxury student housing, food courts, and recreational amenities like LSU's "Lazy River" water feature. Small, liberal arts college will shut their doors, unable to lure enough students who are willing to borrow $40,000 a year to attend a college no one has heard of.

Bad as these developments are, worse calamities will arise from an out-of-control student-loan program. As the Federal Reserve Bank of New York reported, home ownership will decline as young people are unable to save enough money to buy a house due to oppressive student-loan burdens.

And finally, the nation's fertility rate will nosedive so that birthrates aren't high enough to sustain the nation's current population. Fewer children means fewer young adults in the labor force, which means fewer working people to support a growing population of the elderly.

"Now," the Ghost from the Future asks Congress, "do you really want to pass the Higher Education Act of 1965?" Of course, the answer would be no. 

If you think my fictional Ghost from the Future is over-sensationalizing the student-loan crisis, then you should read Declining Fertility in America, written by Lyman Stone of the American Enterprise Institute. "Birth rates in America are declining," Stone writes, "leading to one of the lowest rates of population growth on record, soon to become the lowest ever" (p. 3).

This crisis, which has mass economic implications, is not about devaluing children, Stone argues. Rather it is about barriers to childbearing.  Among these barriers, Stone identifies the following (p. 3):
  • Increased young adult debt service costs due to student loans;
  • Decreasing young adult homeownership due to rapidly rising housing costs and student loans;
  • Increasing years spent actively enrolled in education institutions, which tends to reduce birth rates dramatically while enrolled [italics inserted by me].

As Stone documents in his report, Americans are not having enough children to maintain our population--a population that is rapidly aging.

Their are several ramifications to the nation's plunging fertility rates. As Stone points out, a low fertility rate will put pressure on Social Security, Medicare and individual retirement accounts:
Without as many young workers to pay into Social Security and Medicare or buy the hot dogs and iPhone apps that make corporate shares worth holding, the retirement prospects for American workers will dim. Their 401(k)s will not be worth as much, they will have long lines at the hospital, and their Social Security checks will perhaps be smaller than they expected. In other words, in a low-fertility world, Americans may have to work longer and harder before retiring. (p. 6)
And much of this future suffering is due, as Stone asserts, to student loans.

Stone optimistically observes, that some barriers to childbearing, like student loans and housing costs, "may be readily addressed through various policy changes" (p. 3); but I am not so sure. In spite of all the suffering and hardship that student loans have unleashed on America's young people, we're really not talking much about the crisis, much less proposing solutions.

References

Rajashri Chakrabarti, Andrew Haughwout, Donghoon Lee, Joelle Scally, & Wilbert van der Klaauw. At the N.Y. Fed: Press Briefing on Household Borrowing with Close-Up on Student Debt. April 3, 2017.

Lyman Stone. Declining Fertility in America. American Enterprise Institute (December 2018).


A Ghost from the Future could have predicted the catastrophe caused by the student loan program.









Sunday, December 30, 2018

Lord Abbett Affiliated v. Navient Corporation: "We cheat the other guy and pass the savings on to you!"

More than a year ago, Lord Abbett Affiliated Funds sued Navient Corporation for fraud and securities violations, claiming it was deceived by Navient's representations about its student loan portfolio. Navient is a student-loan servicing company that manages about $300 billion in student-loan debt owed by 12 million borrowers.

According to Lord Abbett's second amended complaint (80 pages long), Navient "regularly and indiscriminately" granted forbearances to struggling student-loan borrowers, allowing those borrowers to temporarily stop making monthly loan payments Lord Abbett alleged that Navient did this in order to artificially report high income and to hide the fact that Navient was a riskier investment than it was portraying itself (para. 5).

"By overusing forbearances," Lord Abbett represented, "Navient artificially kept delinquencies, defaults, and charge-offs lower than they should have been, which in turned allowed [Navient] to report artificially low loan loss provisions as well as correspondingly high net incomes and EPS [earnings per share]" (para. 7).

Navient's practice of misusing forbearances, Lord Abbett argued, enabled Navient to list thousands of loans as current (para. 38), even though those loans weren't performing.  Lord Abbett maintains that Navient's fraudulent practices, once disclosed, caused its stock price to fall. Undoubtedly, Lord Abbett and other investors lost a ton of money when Navient stock nosedived.

As I said, Lord Abbett's amended complaint was filed more than a year ago and its lawsuit may no longer be active.  Navient's stock has declined in value from its high and is now worth less than $9 per share. In fact, one investment analyst recently recommended loading up on Navient's stock, which pays a nice dividend.

Personally, I don't give a fig whether Lord Abbett and its investors lost money in Navient stock. After all, Lord Abbett apparently didn't care about Navient's nefarious practices so long as it was making money. It's as if Navient was making that old used-car dealer pitch: "We cheat the other guy and pass the savings on to you!"

Lord Abbott's complaint, however, is strong evidence that Navient's reckless practice of granting forbearances to distressed student borrowers obscures the number of people who are not paying back their student loans.  According to Lord Abbett (para 47), Navient granted four consecutive forbearances to more than half a million student-loan borrowers over a five-year period, allowing borrowers to skip their monthly loan payments while interest accrued and capitalized on their loans.

How many of these half million borrowers will ever pay off their individual student loans? I venture to say none of them will.


References

Lord Abbett Affiliated Fund v. Navient Corporation, Case No. 1-16-cv-112-GMS, Second Amended Complaint filed November 17, 2017 (D. Del.).







Sunday, December 23, 2018

We're checking our list! We're checking it twice! Has Navient been naughty? Chinnock v. Navient Corporation

Julie Anne Chinnock sued Navient Corporation,the U.S. Department of Education, and a Navient student-loan trust a few days ago, seeking two forms of relief. Ms. Chinnock wants compensation for an invasion of her privacy and a declaratory judgment that she does not owe Navient, DOE, or the trust any money.

As Chinnock said in her complaint, the controversy is quite simple and easy to resolve. "Defendants claim that they own certain student loans under which [Chinnock] is indebted to them, and [Chinnock] denies that defendants own such loans."

This case is reminiscent of the old robo-signing scandal during the home-mortgage crisis about ten years ago. Investors bought pools of home mortgages which were on the verge of default; but when the investors tried to foreclose on the homes, they couldn't prove they owned the underlying debt.

Apparently, Navient is in the business of packaging student loans into asset-backed securities and marketing them to investors. A lot of these student loans are going into default, but the buyers of those packaged loans are sometimes unable to show they have an ownership interest in the debt.

As Ms. Chinnock relates in her complaint, Navient is a bad actor:
Navient has a proven reputation for its predatory lending and collection practices. A 2014 Consumer Finance Protection Bureau Report found Navient's illegal loan servicing practices to include: (1) attempts to collect debts not owned by it; (2) unfounded negative threats (i.e. damage to borrower's credit), and (3) failing to correctly apply payments, among other predatory practices.
Ms. Chinnock also alleges that in 2017, "Navient was the most complained-about student loan company in all 50 states." She says that Navient was named in 530 federal lawsuits over a three-year period and that it was fined $97 million by the U.S. Justice Department for illegally charging students excessive interest rates.

Regarding her own complaint against Navient, Chinnock claims she paid off all her student loans in the amount of about $190,000 and was never delinquent on any of them (page 15 of her complaint). Nevertheless, in August 2018, Navient claimed she owed on eight additional loans totally several hundred thousand dollars.  Chinnock demanded proof that Navient's principals owned the loans, and Navient refused to provide any documentation.

Is this case a big deal? It is a VERY big deal. As Chinnock's lawsuit illustrates, lenders in the real estate industry and the student-loan business have gone to court to collect on debts they can't prove they own. Basically, they relied on a "take-my-word-for-it-loan-ownership ploy." For awhile, the courts played along, allowing so-called lenders to get judgments against people who denied they owed anything.

But it is a principle of basic law that a creditor must prove ownership of a debt in order to get a judgment against a debtor. So far at least, Navient hasn't produced a shred of evidence that Julie Anne Chinnock owes it money.

If Ms. Chinnock wins her lawsuit, Navient should get ready for plenty more.

References

Julie Anne Chinnock v. Navient Corporation, Navient Solutions, Navient Student Loan Trust 2014-3, & the United States Department of Education, Case: 1:18-cv-02935. Verified Complaint (Ohio Ct. Common Pleas, Dec. 20, 2018).








LSU Football Player Kills a Man in Scotlandville: Will He Still Play in the Playstation Fiesta Bowl?

An LSU football player killed Kobe Johnson, an 18-year-old man, yesterday evening in Scotlandville.

This is what we know. Clyde Edwards-Helaire, an LSU running back, and Jared Small, a linebacker, were trying to sell an "electronic item" when Johnson allegedly tried to rob them. One of the players--police haven't said which one--shot Johnson multiple times and he died in the backseat of a late-model Chevrolet Silverado truck.

The LSU athletes called 911 and stayed at the scene until the police arrived. Joe Alleva, LSU's Vice Chancellor and Director of Athletics, called the incident "traumatic." Three lawyers showed up to represent Edwards-Helaire and Small, who claim self-defense.

As the Baton Rouge Advocate succinctly put it, there are "several unknowns about the incident."

First, the newspaper asked, which footballer player killed Johnson?

Second, what types of weapons were recovered and who owns them?

And finally--and most importantly--will Edwards-Helaire and Small suit up for the Playstation Fiesta Bowl on New Year's Day?

And I have a few questions of my own:

Who is paying the three lawyers who miraculously showed up to represent the football players? Perhaps LSU's Mr. Alleva knows the answer to that question.

Who owns the stylish pickup truck where Johnson bled to death?

And finally, was it necessary for the football player (Small or Edwards-Helaire) to shoot Johnson multiple times?

Of course all these questions are trivial when compared to what's at stake: The 2019 Playstation Fiesta Bowl, which is only a week away.  After all, how can we compare the life of an obscure kid from North Baton Rouge to the upcoming epic battle between the LSU Tigers and the University of Central Florida?

Surely football fans all over Louisiana are down on their knees in prayer. Please God, if an LSU football player killed someone on Saturday night, let it be Mr. Small, who is only a walk-on linebacker, and not Edwards-Helaire, who is a star running back who probably has a great career ahead of him if he goes pro.

Death scene (photo credit: Travis Spradling, Baton Rouge Advocate)

Tuesday, December 18, 2018

You should die before you pay off your student loans: Estate planning for elderly student-loan debtors

Steve Rhode posted an essay yesterday titled "Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven." As Mr. Rhode explained, the federal government cancels all unpaid student loans owed by debtors who die before their loans are repaid. The cancelled debt is not a burden on the deceased debtor's estate.

On the other hand, people in 20- and 25-year income-based repayment plans (IBRPs) who receive loan forgiveness when they complete their repayment terms, will owe federal taxes on the amount of their forgiven loans. Why? Because the IRS considers a forgiven loan to be taxable income. If that tax bill comes due and the student-loan borrower can't pay it before dying, the unpaid tax becomes a claim on the decedent's estate.

"So," Mr. Rhode advises, "if you are older it may make more sense and cost less money overall if you extend out the repayment term past when you estimate you will die. When you pass, the student loan can pass with you."

Steve Rhode is absolutely right. You may think this is a technical detail of the student-loan program that only concerns a few people. But you would be wrong.

More than 7 million people are in IBRPs, and the number grows with each passing month. Nearly all these people will not have payed off their student loans before their repayment terms come to an end due to accruing interest. That means nearly all 7 million will receive tax bills when their accumulated student-loan debt is forgiven.

And these tax bills could be enormous. Remember Mike Meru, who borrowed $600,000 to go to dental school and is paying it back in an IBRP? The Wall Street Journal estimated that his debt would grow to $2 million by the time he completes his income-based repayment plan due to accruing, compound interest. That $2 million will be forgiven but it will also be taxable income for Dr. Meru.

It is true the IRS will not assess a forgiven-loan tax on people who are insolvent when their student loans are forgiven. But that's no comfort. How many people want to pay on student loans for 25 years and be insolvent on the day their loans are forgiven?

Of course there is a simple solution to this problem: Congress can pass legislation that would remove the tax liability  of people who complete IBRPs and have their student loans forgiven. In fact, this fix could probably be achieved through a federal regulation without Congressional action.

Alternatively, bankruptcy courts could simply discharge student-loan debt held by overburdened student-loan borrowers.  Some federal bankruptcy courts have concluded that IBRPs are not a feasible alternative to bankruptcy relief. They have countenanced the tax consequences of IBRPs, and some have recognized the enormous mental stress that debtors experience when they are burdened by student loans that can never be repaid. For example, the bankruptcy courts in the Fern case, the Martin case, and the Abney case have taken this sensible and compassionate view.

Perhaps Congress will do the right thing and fix this problem. After all, the Democrats will control the House of Representatives in January. If they were to present a bill to remove the tax consequences of forgiven student loans, what Republican would oppose it?

We shall see. In the Metz case, Judge Robert E. Nugent referred to an IBRP as a "pay-as-she-earns time bomb," and he is certainly correct. What a tragedy if this nasty time bomb goes off for millions of IBRP participants, when it could be so easily defused.

References

Abney v. U.S. Department of Education540 B.R. 681 (Bankr. W.D. Mo. 2015).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Vicky Jo Metz v. Educational Credit Management Corporation, 589 B.R. 750 (D. Kan. 2018).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

Steve Rhode, Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven. Get Out of Debt Guy (blog), December 17, 2018.



Monday, December 17, 2018

Good News out of Kansas: A compassionate bankruptcy judge grants a 59-year-old debtor a partial discharge of her student loans

The Remarkable Case of Vicky Jo Metz

Twenty-seven years ago,Vicky Jo Metz, took out $16,613 in student loans to go to community college. Over time, she paid back 90 percent of what she borrowed--almost $15,000.

But interest accrued at the rate of 9 percent, and by the time Metz came to bankruptcy court in 2018, her debt had quadruped--that's right, quadrupled--to $67,277!

Educational Credit Management Corporation, the federal government's most ruthless student-loan debt collector, opposed discharging Metz's loans.  Put Ms. Metz in a 25-year income-based repayment plan, ECMC argued.

But Kansas Bankruptcy Judge Robert E. Nugent rejected ECMC's heartless argument.  Ms. Metz is 59 years old, Judge Nugent pointed out. By the time she finishes a 25-year IBRP, she will be 84.

ECMC testified that Metz's monthly payments under a 25-year IBRP would only be $203. But, Judge Nugent observed, such a payment is about $300 a month less than the amount necessary to pay the accruing interest. Thus, after making minimal payments for 25 years, Metz would owe $152,277.88--nine times more than she borrowed.

Under the terms of an IBRP, Ms. Metz's loan balance would be forgiven after 25 years--the entire $152,000.  But the forgiven debt would be taxable to her as income. "That," Judge Nugent remarked with powerful understatement, "could generate considerable tax liability for a retired 84-year-old living on social security."

Judge Nugent sensibly concluded that Metz could not pay back the $67,000 she currently owed while maintaining a minimal standard of living. He also concluded that Metz's financial situation was unlikely to change. In fact, with very little retirement savings, Metz's income would probably go down because she would be living almost solely on Social Security in her retirement years.

Finally, Judge Nugent determined that Metz had made a good faith effort to repay her student loans. "She has paid more than $14,000 toward this loan," he noted, "not a dime of which has gone to principal."

In short, Judge Nugent summarized: "Ms. Metz will simply never be able to afford to make a significant monthly payment on her student loan." Furthermore, requiring Metz to pay the accumulated interest "would result in undue hardship to her now and in the future.

Nevertheless, Judge Nugent stated, Metz could pay back the $16,613 she originally borrowed. So this is what Judge Nugent ordered:
Rather than be yoked to a pay-as-she-earns time bomb, Ms. Metz should instead be required to pay the principal balance of the loan, $16,613.73. Doing that would not impose an undue hardship on her within the meaning of [the undue hardship standard in the Bankruptcy Code]. Therefore, that amount is excepted from her discharge in this case and the rest of her student loan is discharged. Ms. Metz should arrange to make a monthly payment that will amortize that debt over a reasonable 5 to 10-year period.
Why the Metz Case is Important

Vicky Jo Metz's case is important for two reasons. First, Judge Nugent rejected ECMC's argument, which it has made hundreds of times, that  a distressed student-loan debtor should be forced into an income-based repayment plan as an alternative to bankruptcy relief.  As Judge Nugent pointed out, an IBRP makes no sense at all when the debtor is older and the accumulated debt is already many times larger than the original amount borrowed.

Indeed ECMC's argument is either insane or sociopathic. Why put a 59-year old woman in a 25-year repayment plan with payments so low that the debt grows with each passing month?

Second, the Metz case is important because it is the second ruling by a a Kansas bankruptcy judge that has canceled accrued interest on student-loan debt. In Murray v. ECMC, decided in 2016, Alan and Catherine Murray, a married couple in their late forties, filed for bankruptcy in an effort to discharge $311,000 in student loans and accumulated interest.

The Murrays took out a total of $77,000 in student loans back in the 1990s, and they made monthly payments totally 70 percent of what they borrowed. But, much like Vicky Jo Metz, the Murrays saw their student-loan debt grow larger and larger over the years until their debt totaled $311,000--four times what they borrowed.

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

Conclusion

Judge Nugent and Judge Somers have grasped the essence of the student-loan crisis. Millions of Americans are seeing their student-loan indebtedness double, triple and even quadruple as interest accrues and compounds. Vicky Jo Metz, the Murrays, and people in similar positions will never pay back their massive student-loan debt.

Putting these poor souls into 25-year income-based repayment plans denies them the fresh start that the bankruptcy courts were created to provide. Under the government's income-based repayment program, this debt will be forgiven after 25 years, but the Internal Revenue Service considers the amount of the forgiven debt to be taxable income.

This is nuts. Judge Somers and Judge Nugent demonstrated compassion and common sense when they canceled accumulated interest on massive student-loan debt owed by the Murrays and Ms. Metz. Let us hope other bankruptcy judges will begin following their example.

References

In re Murray, 563 B.R. 52, 60 (Bankr. D. Kan. 2016), aff'd sub nom. Educ. Credit Mgmt. Corp. v. Murray, No. 16-2838, 2017 WL 4222980 (D. Kan. Sept. 22, 2017).

Vicky Jo Metz v. Educational Credit Management Corporation, 589 B.R. 750 (D. Kan. 2018).

Thursday, December 6, 2018

Public Service Loan Forgiveness Program is a "disaster" according to DOE official: A hurricane is coming to PSLF

In a recent speech, Secretary of Education Betsy DeVos called the federal student loan program "a thunderstorm loom[ing] on the horizon." Only 20 percent of borrowers are paying down the principal and interest on their loans, DeVos said, even as students borrow more and more money to finance their higher education.

Comparing the student loan program to a thunderstorm may be an understatement. It might be more accurate to compare the program to a hurricane bearing down on the Gulf Coast at 150 miles an hour. And--extending my hurricane analogy a bit further, we might say the Public Service Loan Forgiveness Program (PSLF) is the "dirty side of the storm."  In fact, Diane Jones, a senior DOE official, called PSLF a "disaster" earlier this week. Jones said the Department of Education does not support PSLF, although it will meet its legal obligations to administer the program.

But DOE is not administering the PSLF program, or--to be more accurate--DOE is not administering the program competently.  As has been widely reported, DOE had processed 28,000 PSLF loan forgiveness applications by late September and only approved 96! What's going on?

Personally, I think DOE number crunchers looked at PSLF and realized that the program will be extremely expensive if it is administered correctly--shockingly expensive. DeVos and her senior minions know the program will cost taxpayers billions of dollars if DOE processes loan-forgiveness applications in accordance with PSLF participants' reasonable expectations.

As Jason Delisle said in a 2016 paper for the Brookings Institute, by at least one interpretation, PSLF's definition of eligible participants is quite broad. Delisle estimates that one quarter of the entire American workplace is a public service worker and all these people are eligble to participate in PSLF if they have student loans.

Delisle cited a 2015 General Accountability Office report in support of  his conclusion. On page 10, footnote 19, GAO said borrowers are eligible for loan forgiveness under PSLF if they are "employed full time by a public service organization or serving in a full-time Americorps or Peace Corps position."

What is a "public service organization? This is what GAO said:
Qualified public service organizations include those in federal, state, local government; 501(C) nonprofits; and other nonprofit organizations providing a variety of public services. 
That definition is a lot broader than the common perception that PSLF is open primarily to nurses, police officers, and first responders. I know for a fact that many student borrowers who work at public universities and community colleges believe they are eligible for loan forgiveness through PSLF.

We will get some guidance about who is eligible for PSLF when the American Bar Association's lawsuit against DOE is decided. ABA sued DOE in 2016 when it denied PSLF eligibility to public-service lawyers working under ABA's auspices. ABA wants a federal court to rule that its employees are eligible for PSLF; and ABA and DOE have both filed motions for summary judgment.

If a federal court declares ABA to be a public service organization whose employees are eligible for PSLF student-loan forgiveness that will be an indication that DOE's narrow interpretation of a public service organization is far too narrow and legally incorrect.

In the meantime, almost a million people have applied to have their student loans certified as eligible for PSLF.  Of the 28,000 people who filed for loan forgiveness  since last September, DOE granted forgiveness to less than 1 percent. DOE declared that seventy percent of the applicants were ineligible.

Millions of people working in the public sector took out student loans in the reasonable belief they are eligible for loan forgiveness after ten years of public service.

DOE has taken the position that most of these student-loan borrowers are wrong. No wonder DOE Undersecretary Diane Jones calls PSLF a "disaster."

PSLF is a "disaster" according to DOE official


References

American Bar Association v. U.S. Department of Education, Complaint for Declaratory and Injunctive Relief, Case No. 1:16-cv-02476-RDM (D.D.C. Dec. 20, 2016).

Stacy Cowley. 28,000 Public Servants Sought Student Loan Forgiveness. 96 Got ItNew York Times, September 27, 2018.

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be InvalidNew York Times, March 30, 2017. 

 Jason Delisle. The coming Public Service Loan Forgiveness bonanzaBrookings Institution Report, Vol 2(2), September 22, 2016.

Betsy DeVos. Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid's Training Conference. November 27, 2018.

Casey Quinlan. Education Department official slams Public Service Loan Forgiveness program as 'disaster.' thinkprogress.org, December 4, 2018.

Jordan Weissmann. Betsy DeVos Wants to Kill a Major Student Loan Forgiveness ProgramSlate, May 17, 2017.

U.S. Government Accountability Office. Federal Student Loans: Education Could Do More to Help Ensure Borrowers are Aware of Repayment and Forgiveness Options. GAO-15-663 (August 2016). 


Wednesday, December 5, 2018

"Education Corporation of America, Virginia College, and Brightwood College Turn Out the Lights": Important Advice to ECA students from Steve Rhode

By  (originally posted on December 5, 2018)
I just received a comment from an awesome reader that said, “Just got reports (from several campuses) that ECA has decided to close down all schools (teach out and go forward) effective immediately. Apparently, ACICS pulled their accreditation. Current employees are being let go immediately with no severance or insurance after Friday, 12/7. Don’t know all details yet as its only been a few hours and the media and news outlets have not picked up the story. I wanted to let you know since you have reported the most accurate coverage on ECA’s unraveling. It’s very sad to see ECA end like this. Many people that worked for the colleges truly cared about the students and making a difference in their life. There will be many students that will not be able to finish their education and many remaining employees that will be without a job right before Christmas. This is all so very sad.”
It does appear that ECA and Virginia College are turning out the lights. WRDW 12 in Georgia said yesterday, “A news photographer on the scene spoke with at least two people who say employees were called into a meeting this morning and told the College was being closed. Workers were reportedly told to go home and that they will not be receiving further paychecks. People we spoke to also say they were told this is occurring at locations in other states.” – Source
WTVC in Tennessee has reported similar closures in Chattanooga. – Source
Virginia College in Birmingham Alabama is reported to have closed as well. Officials at this campus are reported to have said they don’t know why this is happening. – Source
Another ECA school, Brightwood College in Texas have announced its closure as well. – Source
Inside Higher Ed is reporting, “In an email to campus employees Wednesday morning, ECA president Stu Reed said that the Department of Education had added new restrictions on its access to Title IV student aid. And on Tuesday night, the Accrediting Council for Independent Colleges and Schools suspended the colleges’ accreditation. Those steps meant the company couldn’t secure the additional capital needed to operate its campuses, he said.
The company also told employees that it would complete current course modules, which will finish in the next two weeks. A skeleton crew of employees will remain on campuses to assist students with obtaining documentation on their programs.”
The schools said they will work with students to access transcripts.
Students who owe federal student loans should immediately talk to their loan servicer regarding the process for a full discharge of their federal student loans if there is no available teach-out program offered by ECA.
By receiving a closed school loan discharge,
  • you have no further obligation to repay the loan,
  • you will receive reimbursement of payments made voluntarily or through forced collection, and
  • the record of the loan and all repayment history associated with the loan, including any adverse history, will be deleted from your credit report.
To be eligible for a full discharge of your student loans, your loans must have been “William D. Ford Federal Direct Loan (Direct Loan) Program loans, Federal Family Education Loan (FFEL) Program loans, or Federal Perkins Loans.”
Loans most easily eligible for forgiveness are ones if:
  • you were enrolled when your school closed;
  • you were on an approved leave of absence when your school closed; or
  • your school closed within 120 days after you withdrew.
For more information on obtaining a closed school discharge, click here.

*********

This article first appeared on Get Out of Debt Guy blog 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. 

Friday, November 30, 2018

Betsy DeVos compares the student-loan program to a thunderstorm looming on the horizon

Betsy DeVos, President Trump's Secretary of Education, gave a speech a few days ago in which she candidly acknowledged that the federal student-loan program is in crisis. In fact, she compared the student loan program to a "thunderstorm loom[ing] on the horizon."

Here is what Secretary DeVos said in her speech:
  • The federal government holds $1.5 trillion in outstanding student loans, one third of all federal assets.
  • Only one in four federal student-loan borrowers are paying down the principal and interest on their debt.
  • Twenty percent of all federal student loans are delinquent or in default. That's seven times the delinquency rate on credit card debt.
  • The debt level of individual borrowers has ballooned since 2010. Most of this growth is due to the fact that postsecondary students are borrowing substantially more money than they did just eight years ago.
  • The federal government's portfolio of outstanding student loans now constitutes 10 percent of our nation's total national debt.
DeVos basically admitted that a lot of federal student loans will never be paid back. In the commercial world, she said, no bank regulator would value the government's massive portfolio of student loans at full value. And she also admitted that the Department of Education, by itself, could only make "a few, small tactical measures" to address this enormous problem.

 In my view, DeVos's speech is the most useful statement about the student-loan program coming from a federal official since  the publication of A Closer Look at the Trillion, released more than five years ago by the Consumer Financial Protection Bureau's Student Loan Ombudsman, Rohit Chopra.

As I have said repeatedly, the student-loan crisis will not be resolved until the for-profit college industry is shut down and struggling debtors have access to the bankruptcy courts to discharge their student loans.

But those reforms are not politically possible right now. In the meantime, Congress should join DeVos in adopting some "small tactical measures" to ease massive suffering. Here are some suggestions:
  • Congress should adopt legislation banning the federal government from garnishing the Social Security checks of elderly student-loan defaulters. As the Government Accountability Office pointed out two years ago, most of the money collected from garnishing Social Security checks goes to paying off interest and penalties  and not paying down the principal on the debt.
  • Disabled veterans should have their student loans forgiven automatically by the government without the necessity of making a formal application.
  • The Department of Education should streamline the loan-forgiveness process for borrowers who signed up for the Public Service Loan Forgiveness Program (PSLF).  As of a few months ago, DOE had approved less than 100 of 28,000 PSLF applicants.
  • Insolvent tudents who took out private student loans and financially distressed parents who co-signed student loans for their children or who took out  Parent PLUS loans should have free access to the bankruptcy courts.
These measures, if adopted, would do little to relieve the massive suffering caused by mountains of student loan debt. But they would be a token of good faith by our government and a sign that our political leaders finally understand that the federal student loan program is out of control and has ruined the lives of millions of Americans who took out student loans in the naive hope that a college education would lead to a better life.

References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/.

Betsy DeVos. Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid's Training Conference. November 27, 2018.

United States Government Accountability Office. Social Security Offsets: Improvement to Program Design Could Better Assist Older Student Borrowers with Obtaining Permitted Relief. Washington DC: Author, December 2016).

Thursday, November 29, 2018

Fewer new international students are enrolling in U.S. colleges: Have foreign families figured out that American higher education is a scam?

Earlier this week, Chronicle of Higher Education reported a drop in new enrollments by foreign students in U.S. colleges. Over a two-year period, new foreign enrollments dropped nearly 10 percent. According to the Chronicle, foreign students contributed $42 billion to the U.S. economy in 2017, so a drop of this magnitude is a significant revenue loss for American higher education.

Why are foreign students staying away from American colleges and universities? Some people blame the "Trump effect." As the Chronicle explained, "The combination of policies and rhetoric from [President Trump], the thinking goes, are making international students reconsider coming to the United States amid a political climate hostile to globalism."

To my knowledge, no one has produced any empirical evidence to support that theory; and Chronicle of Higher Education went on to give some alternate explanations. For example, higher tuition prices and the strong U.S. dollar may have priced some foreign families out of the American higher education market. In addition, some countries are scaling back their financial support for foreign study. Finally, as one expert explained, American colleges are facing stiffer competition for foreign students. "The biggest new development is there are real competitor countries out there that we've never had before," said Allan E. Goodman, president of the Institute of International Education.

But I offer yet another possible explanation for the decline in new college enrollments from foreign students. Maybe foreign families have figured out that American universities are wildly overpriced and aren't worth the tuition they are charging.

As Peter Morici pointed out in an article for MarketWatch, U.S. colleges have lowered admission standards to keep their enrollments up and have watered down their curriculum to teach students who aren't qualified for postsecondary study.

This phenomenon has led to a poorer overall college experience for many students. Moroci notes that "s]tandardized tests indicate four years of college often adds little to students' analytical abilities and four in 10 graduates lack the critical thinking skills necessary for entry-level professional work."

And Morici also points out that 40 percent of young college graduates are stuck in jobs that don't require a college degree and 3.6 million American college graduates live below the poverty line.

In short, for millions of Americans, their college experiences have been a scam. After four years of largely meaningless study, college graduates are stumbling into a tight job market with little to show for their educational investment other than massive amounts of student-loan debt.

Foreign families may not understand all the dynamics of the big scam called American higher education, but many of them have figured out that it is not worth what U.S. universities are charging.  Little wonder that new foreign student enrollment has dropped nearly 10 percent in two years.

Photo credit: North Idaho College


References

Peter Morici. Opinion: A sensible way to fix the student-loan problem. Marketwatch.com, November 26, 2018.

Vimal Patel. Is the 'Trump Effect' Scaring Away Prospective International Students? Chronicle of Higher Education, November 13, 2018.


Wednesday, November 21, 2018

Hopson v. Illinois Student Assistance Commission: A clueless bankruptcy judge sentences a 63-year-old student-loan borrower to a lifetime of indebtedness

Janice Faye Hopson, 63 years old, went to trial in an Illinois bankruptcy court last spring, hoping to discharge more than $100,000 in student loans. The Illinois Student Assistance Commission and the U.S. Department of Education opposed her plea for relief; and Judge Jacqueline Cox, the bankruptcy judge who heard Hopson's case, ruled against her.

At the time of Judge Cox's ruling, Hopson was in a 25-year income-based repayment plan (IBRP) that required her to make monthly payments of zero due to her low income. Indeed, Judge Cox ruled that Hopson could maintain "a substantial standard of living" while making student-loan payments of zero dollars a month (588 B.R. 518).

Hopson argued that she would never pay back $100,000 in student loans under a 25-year IBRP and that the principal on the loan will continue to grow in the coming years due to accruing interest. When the 25-year plan ends, Hopson will likely be in her 80s. Moreover, although DOE will write off the amount of her unpaid debt when the 25-year repayment plan is completed, that amount will be taxable to her as income.

Judge Cox was unsympathetic. If Hopson is insolvent when her 25-year plan ends, Judge Cox pointed out, she can file for bankruptcy a third time and discharge her tax bill on the grounds that she is broke (588 B.R. at 515).

Will Ms. Hopson be insolvent when her IBRP ends two decades from now? Of course she will. At age 63, she has virtually no retirement savings (as Judge Cox acknowledged). Twenty years from now, she undoubtedly will be living entirely off her Social Security checks, estimated to be only $1430 a month.

Although Judge Cox probably did not realize it, she essentially ruled that no student debtor who is eligible for a long-term income-based repayment plan is entitled to bankruptcy relief. Of course it is true in one sense that a person allowed to make student-loan payments of zero dollars a month cannot claim her student loans constitute an "undue hardship" in the present moment. But people making token monthly payments or even monthly payments of zero are burdened by student-loan debt that grows with each passing month due to accruing interest and which will never be repaid.

They are also burdened by the specter of a huge tax bill when DOE eventually writes off their loans two decades or more into the future. Like Ms. Hopson, many people will be long past retirement age when their IBRP payment obligations come to an end. And like Ms. Hopson most people in IBRPs won't have sufficient retirement savings to live their last years in comfort and dignity.

*****

A few notes in closing. First, Judge Cox ruled that Ms. Hopson could maintain a "substantial standard of living" while making student-loan payments of zero dollars a month. Apparently, the judge concluded Hopson was living above a minimal lifestyle because she rented a two-bedroom apartment. Judge Cox pointed out Hopson could save $225 a month if she moved into a one-bedroom apartment.

Second, Adam Merrill, a Chicago lawyer, represented Ms. Hopson pro bono. I want to especially commend him for taking on Ms. Hopson's case without a fee.

Finally, Judge Cox did not state in her opinion when Ms. Hopson's 25-year repayment plan will end. Perhaps the date was not important to the judge.  In this essay I presumed that Hopson signed up for a 25-year repayment plan fairly recently and that it won't conclude until she is in her 80s.

Judge Jacqueline Cox: No mercy for a 63-year-old student-loan debtor


References

Hopson v. Illinois Student Assistance Commission, 588 B.R. 509 (Bankr. N.D. Ill. 2018).

Friday, November 9, 2018

Roosevelt Institute researcher says student-loan program is "a failed social experiment." But you already knew that.

Julie Margetta Morgan and Marshall Steinbaum wrote a blockbuster of a report for the Roosevelt Institute on the student-loan crisis. Unfortunately, the bland title and multiple graphs obscured the authors' key finding, which is this: Contrary to what student-loan advocates proclaim, a great many people who took out student loans for postsecondary education have not seen a rise in wages.

As author Julie Margetta Morgan summarized, "We've essentially engaged in a failed social experiment where the government thought that it would be fine to give people student debt because it would pay off in the long run and we're seeing that's not the case."

On the contrary, this is what Morgan and Steinbaum found:
  • "More education has not led to higher earnings over time." Although the higher education community trumpets the myth that rising student debt and more education leads to higher income, that is not true. Instead, "the distribution of earnings in the labor market has remained relatively unchanged over time. And to the extent that individuals see an income boost based on college attainment, it is only relative to falling wages for high school graduates."
  •  "Student debt is a burden for a growing share of young adults." Traditional ways of measuring student debt "fail to consider the changing distribution of  debtors over time or the changes in the ways that borrowers repay their loans." When these factors are accounted for, "the data show that many more Americans have debt, and the burden of that debt is more significant now than for previous generations."
  •  "Credentialization better explain these dynamics than the 'skills gap.'" Although the nation's population is becoming better educated, "each educational group is becoming less well paid." In the authors' view, this phenomenon "is a result of declining worker power, which allows employers to demand a higher level of educational attainment for any given job, not a broken link between workforce skills and labor market demands."
  • "These trends have had particularly negative impacts on Black and brown Americans." Minorities already have to obtain more education than their peers in order to get the same or similar jobs. In general, people of color have less wealth than nonminorities, which means students of color take on disproportionate amounts of debt, which exacerbates disparities in student-loan debt between minority and nonminority students.
 Morgan and Steinbaum fortify their arguments with statistical analysis, but this is the essence of what they found. A higher percentage of Americans have student-loan debt than previous generations, and they have more debt than in the past.  And this trend has developed at the same time that wages have remained stagnant.

As worker power in the job market declines, employers have been able to demand more credentials from job  applicants. In essence, employers have been"upskilling" the labor market.

 I see evidence of this everywhere. Lawyers, for example, need just one professional degree to practice their trade: a J.D.  Yet as the job market for attorneys tightens, I see more and more lawyers get additional education: an MBA, for example,or a master's degree in law.  But these additional credentials often do not lead to higher salaries--and generally are not necessary for the jobs they are seeking.

I give myself as an example of a person who took out student loans to get a credential that did not enhance my job skills. I had a law degree before I became a professor, and my legal skills and experience are all I needed to be a competent education-law professor, a job I have done for 25 years.

But to get my first professor's job, I had to have a doctorate, and so I took out loans to get an Ed.D. degree from Harvard. It was a complete waste of time and money.

Morgan and Steinbaum question the enormous public investment in postsecondary education our government is making through the student-loan program. Midway through their policy report, they make this trenchant observation:
If the only function of that public investment is to increase the credentialization of the labor market and enrich academic institutions that are best able to provide those credentials to students looking to differentiate themselves (at great expense) in a rat race, it's hard to conclude that the public investment s paying off . . . .
Indeed, the investment is not paying off.  For millions of Americans, the student-loan program is doing nothing more than sentencing them to become members of a permanent debtor class.

Cleveland State University says you will be richer if you get an advanced degree. Is that true?

References

Jillian Berman. America’s $1.5 trillion student-loan industry is a ‘failed social experiment.’Marketwatch.com,October 18, 2018.

Julie Margetta Morgan and Marshall Steinbaum. The Student Debt Crisis, Labor Market Credentialization, and Racial InequalityRoosevelt Institute, October 2018.

Wednesday, November 7, 2018

Iowa Wesleyan and Valparaiso Law School make brave decisions: “It is a far, far better thing that I do, than I have ever done"

“It is a far, far better thing that I do, than I have ever done." Who said that? I think it was some dead guy from the 19th century. Charles Dickens maybe?

Iowa Wesleyan University and Valparaiso Law School both made brave decisions this week, and I salute them for it. Valparaiso Law announced it is closing after negotiations to transfer the school to Middle Tennessee State University broke down. And the President of Iowa Wesleyan University, Steven E. Titus, posted a statement on the university web site candidly telling the campus community that the university faces a serious financial crisis and that the governing board is pondering the university's future.

These decisions must have been very hard for both institutions. President Titus acknowledged that publicizing Iowa Wesleyan's financial situation might hurt enrollment, which could hasten its demise. "But we decided it was the right thing to let people know what was going on," Titus said. "There is risk no matter what we do."

As for Valparaiso, the loss of its law school diminishes the reputation of the university as a whole, as a law school is generally seen as a prestige-enhancing program.

In my view, both institutions are facing the stark financial reality that many private colleges are facing, and they are facing it with courage. Let's first look at Valparaiso. 

There are far too many law schools in this country, and enrollments have been declining. As reported in Inside Higher Ed, law-school enrollments have sunk from a high of 52,000 to 37,000. 

The quality of students being admitted to law schools is also declining. As tracked by Law School Transparency, a nonprofit group that reports on law -school admissions, some law schools have admitted students with LSAT scores so low that half the entering class faces a very high risk of failing the bar.

Valparaiso is closing its law school,  which is certainly in the public interest. It is far better for Valparaiso to close than for it to lower its admissions standards just to enroll more students.

As for Iowa Wesleyan, the school has been discounting tuition to attract students; according to one report, it has discounted tuition by more than half.  At some point that practice raises ethical issues.  How can a college justify charging its least attractive students full price when the average price is less than half that amount?

And how does a college explain the discounts to the students who receive them? Some colleges have been showering first-year students with scholarships--athletic scholarships in particular.  But is it honest to give an incoming student a volleyball scholarship when the school doesn't even field a decent volleyball team?

No, Valparaiso and Iowa Western should be commended for their courage and their honesty. It was a far, far better thing they did than perhaps anything they've ever done.

References

Scott Jaschik. Iowa  Wesleyan could become the latest small college to close. Insider Higher Ed, November , 2018.

Emma Whitford. Valparaiso Law School will close following unsuccessful attempt to transfer to Middle Tennessee University. Inside Higher Ed, October 31, 2018.

Sunday, November 4, 2018

Alabama trashes the LSU Tigers and tailgaters trash the LSU campus: How about bloody marys for brunch?

Number 1 ranked University of Alabama trashed Number 3 ranked LSU on LSU's home field last night.  About 200,000 people were on hand for the debacle: 102,000 in the stadium and another 100,000 tailgaters. The score was 29 to 0. LSU's star field-goal kicker made one attempt for 3 points, but he missed.

In the hours leading up to the game, tailgaters were packed shoulder to shoulder around the stadium, making the campus look something like a Civil War army camp. Portapotties and trash cans were overwhelmed, and picnickers squatted on the sidewalks because there was no room for them on the lawns.

On the morning after game day, the crowds were gone, save for a few dozen recreational vehicles (each costing about a quarter of million). Shades were drawn in the RVs, but the generators were running, so the owners must have been inside, sleeping off their hangovers.

And shortly after dawn, the cleanup crews were out early picking up thousands of discarded beer cans, plastic cups, and styrofoam fast-food containers. LSU used to hire prison trustees to do this work, but the optics were bad. This morning, young people are picking up the trash, perhaps LSU student volunteers.

Big disappointment. If only LSU could have knocked off Alabama and its satanic football coach, Nick Saban. If LSU coach Ed Ogeron had pulled it off, the fans would certainly have erected a statue in his honor, a statue even larger and gaudier than the one Alabama installed for Saban. But it was not to be.

No matter. Lots of Baton Rouge restaurants offer Bloody Mary brunches on Sunday, and it least one restaurant includes all-you-can drink mimosas for folks nursing hangovers.  And then the Saints play the Rams on Sunday afternoon--an opportunity to drink Bud Lites and eat chicken fingers--chicken fingers that Coach Ogeron personally endorses.

Fall is the season of bacchanal in South Louisiana. Let's get drunk for every LSU game, every Saints game, and every playoff game.  Let's get drunk at the fraternity hazing exercises. After all, hardly anyone dies from alcohol poisoning.

And then spring comes--another season of bacchanal. Mardis Gras parades start at least two weeks before Fat Tuesday, and the St. Patrick's Day parade is another occasion for a huge town drunk. The garbage trucks follow closely behind the St. Patrick's Day floats, sweeping up the discarded beads and beer bottles.

A friend told me he attended a Mardis Gras parade in New Orleans a few years ago. A drunk driver, driving a beer truck as it happened, plowed into a crowd of spectators, killing a woman who was pinned under the vehicle. My friend said he saw revelers crawl under the truck and loot the woman's Mardis Gras beads. The corpse was still warm.

Fox Business Report assures us daily that the economy is booming with record-low unemployment and a robust growth in wages. In Baton Rouge, people drive around in late-model luxury cars and pack the restaurants every night.

Cheaply built apartment complexes are being thrown up willy nilly for LSU students in the flood plain next to the Mississippi River levees. They feature swimming pools, and enormous television screens in the common areas. Meanwhile LSU passed a rule requiring most first-year students to live on campus, and it built its own faux-luxury residence halls to accommodate them.

But in North Baton Rouge, weekend killings are routine. A six-year-old was shot dead a couple of days ago, and thirteen-year-old was arrested.  Baton Rouge schools are a mess, and almost no one of means will put their children in a public school.

The rich go to private schools, and the less well-to-do buy inexpensive homes in adjoining parishes where the schools are better. They drive to work every morning on Interstate 10, which is a parking lot from 7:30 AM until about 10 AM on workdays.

But the commute is not so bad. You can check your cell phone when the traffic grinds to a halt or listen to Stuart Varney on Fox Business Report tell you how much money we're all making in the stock market.


Nick Saban's statue at University of Alabama
Photo credit: David Mercer, USA Today




Thursday, November 1, 2018

Education Corporation of America brazenly uses an Alabama court to delay lawsuits against it. Is this a great country or what?

Education Corporation of America (ECA), a for-profit college chain, brazenly filed a federal lawsuit in Alabama last month, asking Judge Abdul Kallon to put it into receivership and enjoin all litigation against it. ECA hopes to delay its creditors and other litigants while continuing to receive federal student-loan money.

What a cocky, shameless and impudent strategy!

Judge Kallon initially obliged ECA, ordering a halt to all litigation against ECA until October 29. Then, on October 29, the judge  extended the injunction until November 5. Parties opposing ECA's Alabama litigation must find lawyers to represent them in Alabama, which will be costly.

For example, Gleneagles Office, LLC, a Maryland corporation, filed a lawsuit in Maryland last month, seeking to collect almost $100,000 in back rent and late fees from Virginia College, which ECA owns. Judge Kallon's injunction, issued seven days after Gleneagles filed its lawsuit for back rent, halted that litigation.

Gleneagles hired an Alabama law firm to oppose ECA's attempt to enjoin lawsuits against it. Gleneagles pointed out that ECA guaranteed the Virginia College lease and agreed that any dispute about the lease would be litigated in Maryland. Gleneagles also argued that Judge Kallon does not have jurisdiction over it.

A Texas company also joined the Alabama lawsuit to oppose ECA's request for an injunction. The Texas company is landlord to a Brightwood College campus in Arlington, Texas. Brightwood is another college owned by ECA.

Perhaps ECA's various landlords and creditors have the financial resources to fight ECA in Alabama, but ECA's former students do not. ECA's list of litigation against it (or its subsidiary affiliates) include several suits by former students. ECA managed to force many of these suits into arbitration, probably because ECA required students to sign arbitration agreements as a condition of enrollment.

So what's going on?

ECA is in financial trouble. Enrollments have dropped, and it is in danger of losing its accreditation. Meanwhile it has been sued by landlords, former students, and former employees on a variety of grounds.  ECA managed--temporarily at least--to halt all the litigation against it based on the signature of one Alabama federal judge, who may not have jurisdiction over any of this litigation. Some creditors have joined the Alabama lawsuit to stop this charade, but most of ECA's former students and employees don't have the financial wherewithal to do that.

Essentially, ECA's Alabama lawsuit has given ECA  all the benefits of bankruptcy without the downside of losing federal student loan money.  And when it becomes advantageous to do so, ECA can stroll into bankruptcy court any time it likes.

Isn't it ironic that ECA can use the courts to its advantage while its students are barred from suing it based on arbitration agreements ECA or its subsidiaries required them to sign as a condition of enrollment?

And isn't ironic that ECA can file for bankruptcy whenever it chooses (which it will probably do eventually), while ECA's students face enormous obstacles to discharging their student loans in bankruptcy?

Is this a great country or what?



References

Joinder of  Pioneer Industrial LLC and Pioneer Parking Lot, LLC to National Retail Properties LP's Memorandum in Opposition to Emergency Motion for The Appointment of a Receiver and Entry of a Temporary Restraining Order and Injunctive Relief, filed October 29 2018 in Education Corporation of America v. U.S. Department of Education, Case No. 2:18-CV-01698-AKK.

Non-party Gleneagles Office, LCC's Opposition to Plaintiff's Motion for Preliminary Injunction, filed October 29, 2018 in Education Corporation of America v. U.S. Department of Education, Case No. 2:18-CV-01698-AKK.

Order Extending Temporary Injunctive Relief, signed on Octobe 29, 2018 in Education Corporation of America, et al. v. United States Department of Education, 2:18-CV-01698-AKK.




Friday, October 26, 2018

Augustin v. U.S. Department of Education: Adventures in Fantasy Land

In  April 2016, Pierre Augustin filed an adversary complaint in a Maryland bankruptcy court, seeking to discharge $210,000 in student loan debt. He told the court he had been burdened by this debt for 24 years, and that his financial circumstances did not permit him to pay it back. Augustin's wife also had student-loan debt: $120,000. Together the couple had accumulated a third of a million dollars in student debt.

Augustin had three postsecondary degrees: a bachelor's degree in political science from Salem State University in Massachusetts, a master's degree in public administration from Suffolk University in Boston, and an MBA from University of Massachusetts Lowell. Seventeen years after receiving his MBA degree, he was working  as a security guard.

Augustin claimed he was unable to find a job in the field of his degrees, but together he and his wife earned a net income of more than $6,000 a month. The Department of Education (DOE) offered Augustin a 25-year income-based repayment plan that would allow him to pay $331 a month toward his student loans or a 15-year plan with payments of $1,138 a month.

Augustin did not accept DOE's offers. Under the 25-year plan, he argued, he would face a lifetime of indebtedness. Moreover, when the payment term ended, he would face massive tax liability for the amount of forgiven debt. The 15-year plan was also unacceptable, he maintained, because it would not allow him to save money for his retirement.

Bankruptcy Judge Thomas Catliota was not sympathetic. The judge applied the three-pronged Brunner test to determine whether Augustin's student debt constituted an undue hardship.  Under Judge Catliota's analysis, Augustin failed all three prongs.

First, Judge Catliota noted, Augustin could make monthly loan payments of $331 under the 25-year repayment plan while maintaining a minimal standard of living. Second, Augustin could not show additional circumstances that would make it impossible to make monthly payments in that amount.

Finally, Judge Catliota ruled, Augustin had not demonstrated good faith. Augustin had not made a single payment on his student loans for more than a quarter of a century. "By his own  admission,"the judge pointed out, "Mr. Agustin deferred his loans for approximately 26 years."

Moreover, Mr. Augustin was not willing to accept DOE's offer of a  manageable repayment plan. In Judge Catliota's view, "This shows lack of good faith on [Augustin's] part."

Not surprisingly then, Judge Catliota refused to discharge Mr. Augustin's student debt. Applying the three-part Brunner test, Augustine was not entitled to relief.

Perhaps Judge Catliota reached a just outcome in the Augustin case. But let's look at the case in a larger context. Why does the Department of Education loan people money for multiple college degrees and then permit borrowers to make no payments on those loans for 25 years?

Why does the government push people into 25-year repayment plans that allow debtors to make monthly payments so low that they don't cover accruing interest? Even if Mr. Augustin agrees to make income-based payments of $331 a month for 25 years, he will never pay back the $210,000 he owes.

Finally, why apply the Brunner test to people like Mr. Augustin? Why not simply ask whether Mr. Augustin and his wife will ever pay back $330,000 in student-loan debt? The answer is clearly no.

In short, Augustin v. Department of Education is another adventure in Fantasy Land, which is what the federal student-loan program has become. Our government has rigged an insane student-loan program that is trapping millions of people to a lifetime of indebtedness from which there is no relief.

References

Augustin v. U.S. Department of Education, 588 B.R. 141 (Bankr. D. Md. 2018).

Wednesday, October 24, 2018

Education Corporation of America files for receivership: Using lawyers' tricks to suck up more federal student-loan money

Education Corporation of America (ECA), a for-profit college chain, filed a lawsuit a few days ago in an Alabama federal court. The lawsuit seeks to put ECA into receivership, and it asks the court to halt all litigation against it. ECA also wants Betsy DeVos and the Department of Education to keep showering it with student-loan money while it straights out its financial affairs.

ECA is closing more than two dozen of its campuses; and it needs to keep getting federal student-loan money, it argues, so it can do a "teach out" at campuses it intends to close. If it allows current students to finish their academic programs (through a teach-out), those students won't be eligible to have their student loans forgiven under the "closed school" rule. That will save the Department of Education a lot of money, ECA says.

This line of bull reminds me of the story about a man who murdered his parents and then begged the court for leniency on the grounds he was an orphan.

ECA operates  under numerous brand names, including Virginia College, New England College of Business, Brightwood College, and Golf Academy of America; and it is in big financial trouble. It submitted a list of legal claims against it to the Alabama court, which is 15 pages long. Landlords are suing for back rent and other litigants have sued for breach of contract, fraud, failure to pay wages,  race discrimination, age discrimination, false advertising and some other stuff. 

Why doesn't ECA just file for bankruptcy? One reason: Under federal law, ECA would immediately lose access to all federal money if it filed for bankruptcy. It is hoping to keep federal money flowing as a long as possible.

I hope Judge Abdul Kallon sees through ECA's dodgy litigation ploy and refuses its plea for a receiver and an injunction against its creditors. (Judge Kallon granted ECA a temporary restraining order on October 19, but he will have to extend it to keep ECA's creditors at bay.)

  ECA needs to close, and it needs to close NOW. Every day it continues operating is another day uninformed students will be taking out student loans to pay for an ECA education that probably won't get them a good job. In fact, ECA's own accrediting agency scored ECA's campus-level job placement rate at only 16 percent.


References

David Halperin. For-Profit College Chain Claims Financial Distress, Sues DeVos. Republic Report, October 18, 2018.

Steve Rhode. Education Corporation of America Whines Over Failure. Get Out of Debt Guy (blog), October 22, 2018.

Alan White. For-profit college chain files (for receivership). Credit Slips, October 22, 2018.

Thursday, October 18, 2018

Thomas Jefferson Law School won't admit new students next spring: Ask not for whom the bell tolls; it tolls for the legal profession

Thomas Jefferson School of Law (TJ) announced it will not admit new students to enroll this spring. Why?

Linda Keller, Thomas Jefferson's new dean, gave this explanation (which was probably drafted by a public relations person):
The Law School is committed to providing the best environment for our students. We've decided to forego the revenue that a spring entering class would provide because a proportionally smaller spring entering class might not provide the vibrant, collaborative atmosphere for our new students that is an essential part of the first-year law student experience.
My cynical interpretation of this cheery blather is that Thomas Jefferson didn't recruit enough students to make up a decent cohort for spring 2019. Indeed, TJ's student enrollment dropped from more than 400 in 2010 to less than 300 in 2017.

Thomas Jefferson School of Law should close--period. By almost any measure, the school is not producing lawyers who can find decent jobs in the legal profession. According to Law School Transparency, which reports important metrics for law schools, TJ's 2017 graduating class had an employment rate of only 21.3 percent. Graduates' under-employment rate was 42.3 percent.

Not a single 2017 graduate got a judicial clerkship, jobs that go to the most able law graduates. And none went to work for large law firms,  which generally pay the highest salaries.

And most shocking of all, TJ's 2014 entering class had a 2017 bar passage rate of only 26.5 percent! That's right, only a little more than one in four of TJ's 2017 graduates passed the bar.

Why do students enroll at a law school with such a dismal record? Is it cheaper than more prestigious schools? No, it is not. The non-discounted cost to get a law degree from Thomas Jefferson is $280,000! That's right, it costs more than a quarter of a million dollars to get a law degree from Thomas Jefferson, and only one out of four 2017 graduates passed the bar.

This country has too many law schools. There simply are not enough jobs for the newly minted attorneys coming out of the nation's lawyer factories. The American Bar Association, which accredits law schools, has done a poor job and allowed too many schools to operate. Based on their bar passage rates and poor job-placement rates, at least 20 schools should be shut down immediately.

Some of Thomas Jefferson's graduates sued the school awhile back for fraud, but TJ beat the wrap. But enrollment is dropping, bar pass rates are awful, and the time has come for TJ to close its doors.

Thomas Jefferson School of Law


References

Scott Jaschik. Thomas Jefferson Law Won't Admit Students for Spring. Inside Higher Ed, October 18, 2018.

Staci Zaretsky. Struggling Law School Will Not Accept New Students This Spring. Above the Law, October 17, 2018.

Staci Zaretsky. Verdict Reached in the Alaburda v. Thomas Jefferson Landmark Case Over Fraudulent Employment Statistics. Abovethelaw.com, March 24, 2016.




Thursday, October 11, 2018

FedLoan Servicing is accused of fraud. What did the Department of Education know about how FedLoan treated student debtors in the PSLF program?

As Alan White reported in Credit Slip yesterday, the U.S. Department of Education assigned the complex task of monitoring the Public Service Loan Forgiveness (PSLF) program to its worst-performing student-loan servicer--FedLoan Servicing (Fedloan).  In 2017, DOE ranked FedLoan last among 9 student-loan servicers "based on delinquency rates and customer satisfaction survey results."

PSLF, created by Congress in 2007, is a federal program designed to make it easier for student-loan borrowers in public service jobs to pay off their loans. And it is a very big program. Almost 1.2 million people have applied to have their student loans certified for PSLF participation; and 890,000 borrowers have been approved so far.

PSLF borrowers are entitled to have their student loans forgiven after 120 on-time loan payments. The first PSLF participants became eligible for debt relief in September of last year. As of last month, 28,000 borrowers had applied for debt relief, but DOE had approved less than 100.

What's going on?

According to a federal lawsuit filed in Pennsylvania earlier this year, FedLoan has fraudulently administered the PSLF program to enrich itself at the expense of student borrowers (paragraphs 80-91). Plaintiffs in the suit claim FedLoan penalized borrowers who made extra payments by posting all subsequent payments as being paid late. Since late payments don't qualify toward the 120 on-time payments, student debtors who made extra payments in good faith actually increased the number of months they would have to make loan payments. Since FedLoan gets a service fee for managing student loans, the longer a borrower makes payments, the more money FedLoan earns in fees.

In addition, FedLoan reputedly made bookkeeping errors while administering the PSLF program; and when borrowers tried to straighten out these mistakes, FedLoan put their loans into forbearance. Student debtors whose loans are in forbearance do not get credit for loan payments they make, and this practice also extended the time borrowers are obligated to make student-loan payments.

Plaintiffs in the federal lawsuit allege FedLoan engaged in these activities to increase its revenues. And indeed, FedLoan is making a bundle of money in the debt collection business. According to the plaintiffs' complaint (paragraph 33), FedLoan earned net revenues of more than $220 million in 2014 and owns assets worth $700 million!

But here is a question the Pennsylvania plaintiffs did not ask: Why did DOE permit FedLoan to allegedly defraud student debtors?

After all, DOE must have known something was wrong based on the sheer volume of complaints that student borrowers were filing against FedLoan. All DOE would had to have done to bring FedLoan into line was write a letter telling it not to interpret the PSLF program in a way that harms PSLF participants.

I think DOE intentionally allowed FedLoan to operate the PSLF program so unfairly because DOE knows the PSLF program will cost the government billions if every PSLF applicant gets the debt relief the program promises. In other words, DOE knew exactly how FedLoan would behave if it got the PSLF servicing project, and that's why DOE chose FedLoan.

I hope a federal court ultimately finds FedLoan liable for defrauding PSLF participants. And if it does, then DOE should be named as a co-conspirator in a scandalous fraud.

References

Danielle Douglas-Gabriel. Watchdog agency blasts government contractor for mishandling student loan forgiveness program. Washington Post, June 27, 2017.