Tuesday, June 26, 2018

Maxine Waters wants Americans to hassle Trump cabinet members in restaurants. Perhaps our politicians want to distract Americans from our real problems--like the student-loan crisis

Stephanie Wilkinson, owner of the Red Hen, a trendy eatery in western Virginia, asked Sarah Huckabee Sanders and her family to leave her restaurant. Why? Because Sanders works for the Trump administration.

"I explained that the restaurant has certain standards that I feel it has to uphold, such as honesty, and compassion and cooperation," Wilkinson told the Washington Post.

Good to know! If I ever make a reservation at the Red Hen, I'll keep my surly, callous, and truculent character to myself. I would hate to miss out on a $100 vegetarian dinner just because I failed a background check.

California congresswoman Maxine Waters publicly applauded the Red Hen's seating policy and urged her supporters to hound President Trump's cabinet members wherever they appear.  “If you see anybody from [the Trump] Cabinet in a restaurant, in a department store, at a gasoline station, you get out and you create a crowd and you push back on them and you tell them they’re not welcome anymore, anywhere."

President Trump called Waters "an extraordinarily low IQ person," but I disagree. Congressman Waters and most of the nation's other politicians--Democrats and Republicans--are trying to distract Americans from thinking about the nation's real problems--massive government debt, including the nation's budget deficit, the states' unfunded pension liabilities, and the nation's train wreck of a student loan program.

California alone has $1.3 trillion in government debt, and the state's unfunded pension obligations are staggering. The national deficit is $21 trillion, and the student-loan program has generated $1.5 trillion in outstanding student loans.

Distracting the public from massive public debt will continue working until it doesn't. And when Americans finally confront this crisis, they will find it a whole lot more distressing than Sarah Huckabee Sander's appearance at a snooty restaurant in western Virginia.

The Red Hen: "We reserve the right to refuse service to people we disagree with."

References

Patrick Gleason. California faces a $1 trillion unfunded pension liability and lawmakers focus on foam and plastic straws. Orange County Register, April 6, 2018.

McKenna Moore. Rep. Maxine Waters Tells Supporters to Harass Trump Cabinet Members. Fortune magazine, June 25, 2018.

Avik Selk and Sarah Murray.  The owner of the Red Hen explains why she asked Sarah Huckabee Sanders to leave. Washington Post, June 25, 2018.

Monday, June 25, 2018

Should courts look for bad faith when distressed student-loan debtors ask for bankruptcy relief? Further reflections on Smith v. Department of Education

Distressed debtors cannot discharge student loans unless they can show their loans constitute an "undue hardship" to themselves and their dependents. Congress did not define undue hardship in the Bankruptcy Code, so it was left to the courts to define the term.

Most courts have adopted the Brunner test for determining when a student loan is an undue hardship that can be discharged in bankruptcy. That test has three parts:

1) Can the debtor pay back the loan while maintaining a minimal standard of living?
2) Will the debtor's financial circumstances change during the lifetime of the loan?
3) Did the debtor handle his or her loans in good faith?

In Smith v. Department of Education, decided a few months ago, Judge Frank Bailey, a Massachusetts bankruptcy judge, explicitly criticized the Brunner test's  "good faith" component:
[A]ny test that allows for the court to determine a student debtor's good or bad faith while living at a subsistence level, virtually strait-jacketed by circumstances, displaces the focus from where the statute would have it: the hardship. It also imposes on courts the virtually impossible task of evaluating good or bath faith in debtors whose range of options is exceedingly limited and includes no realistic hope of repaying their loans to any appreciable extent. . .(p. 566)
 Judge Bailey argued for a simpler and fairer standard for determining when a student loan can be discharged in bankruptcy: "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough" (p. 565) (italics supplied).

Eliminating the good faith component of the Brunner test would have a huge impact on student-loan bankruptcy jurisprudence because the Department of Education and its thug debt collectors almost always argue that a debtor filed for bankruptcy in bad faith. And this is ironic because it is the Department of Education, not student-loan debtors, that repeatedly demonstrates bad faith in the bankruptcy courts.

Let's take the Smith case as an example:

1) First of all, the U.S. Department of Education has publicly proclaimed it will not oppose bankruptcy relief for student debtors who are disabled. Mr. Smith is disabled; and Smith and his mother subsist entirely on Smith's monthly disability check, food stamps, and his mother's tiny Social Security income. Thus, DOE was opposing Mr. Smith's plea for bankruptcy relief in direct contradiction to DOE's own policy. In my opinion, that shows DOE's bad faith.

2) In a 2015 letter, a Department of Education official said DOE would not oppose bankruptcy relief when it made no economic sense to do so. Smith's adversary proceeding stretched out over five days, taking up Judge Bailey's time; and both Smith and DOE had lawyers. (In fact, DOE had two lawyers.) Smith only borrowed $29,000; and the litigation expenses almost certainly exceeded that amount. In my view, DOE's decision to chase Smith into bankruptcy court is additional evidence of bad faith.

3) Finally, DOE insisted Smith should be put in a long-term income-based repayment plan, even though it admitted Smith's income was so low that his monthly loan payments would be zero. So what was the point of fighting Smith in bankruptcy court? Again, this is more evidence of DOE's bad faith.

In fact, the Department of Education and the student loan guaranty agencies (ECMC in particular) almost always argue that a distressed student-loan debtor filed for bankruptcy in bad faith. And this is true even when the debtor is hovering on the brink of homelessness.

After all, in the Myhre case, DOE opposed student-loan debt relief for a quadriplegic whose expenses exceeded his income.  In the Abney case, DOE fought Kevin Abney, who was so poor he did not own a car and traveled to work on a bicycle. And in the Stevenson case, ECMC objected when Janice Stevenson, a woman with a record of homelessness and who lived in subsidized housing, tried to discharge almost $100,00 in student loans.

So Judge Bailey is right. The federal courts should stop asking whether down-and-out student-loan debtors handled their student loans in good faith. The only important questions are these: Can the debtor pay back his or her student loans? Will the debtor ever be able to pay back those loans?

And if the courts continue to insist on looking for bad faith, they should look for it by the Department of Education, ECMC, and the entire gang of government-subsidized debt collectors.



References

Jillian Berman. Why Obama is forgiving the student loans of almost 400,000 peopleMarketwatch.com, April 13, 2016.


Myhre v. U.S. Department of Education, 503 B.R. 698 (Bakr. W.D. Wis. 2013).

Michael Stratford. Feds May Forgive Loans of Up to 387,000 BorrowersInside Higher Ed, April 13, 2016. 

Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).

Stevenson v. ECMC, Case No. 08-14084-JNF, Adv. P. No. 08-1245 (Bankr. D. Mass. August 2, 2011).

Some physical or mental impairments can qualify you for a total r permanent disability discharge on your federal student loans and/or TEACH grant service obligation. U.S. Department of Education web site (undated).

Saturday, June 23, 2018

Dear taxpayers: I hope you approve of New York University's lavish compensation policy because you are paying for it

American Enterprise Institute's report on graduate schools with low rates of graduate-student repayment included a list of 20 universities where graduate students had above average non-repayment rates ranked by the amount of student loans graduate students took out. New York University is at the top of the list.

According to AEI's analysis, the 2009 cohort of NYU graduate- and professional-school students had amassed $1.135 billion in student loans. That's right: billion with a B. Five years later, more than a third of those students (34 percent) had not paid down their student loans by one dime.

New York University, you may recall, has been criticized for its lavish compensation packages for senior executives.  NYU won't disclose how much it is paying Andrew Hamilton, its current president. But John Sexton, Hamilton's showy predecessor, made $1.5 million in 2012-2013.  He retired with $800,000 in annual retirement income and a "length-of-service" bonus of $2.5 million.

Surely Hamilton is making as least as much as Sexton did. And NYU graciously updated Hamilton's penthouse apartment in Greenwich Village. How much did that cost? NYU won't say.

How does NYU manage to pay its executives so much? Does it have a large endowment? Not particularly.  NYU's total endowment funds amount to only $4.1 billion, about one ninth the size of Harvard's ($35.6 billion).

NYU gets a lot of its revenue from federal student loans. As just noted, graduate students in the 2009 cohort borrowed over $1 billion. That would be OK with taxpayers if NYU's graduate students paid back what they owe. But a lot of them are not.

AEI's list of universities with below average repayment rates for graduate students reveals that the top 15 schools with high levels of student-loan debt and below average rates of repayment are all private universities. Here's the list, along with the percentage of graduate students in the 2009 cohort who had not reduced the principal of their loans by even a dollar after 5 years.

New York University (34%)
University of Phoenix (36%)
Nova Southeastern University (33%)
Walden University (33%)
Capella University (34%)
Argosy University (37%)
Rosalind Franklin University of Medicine and Science (51%)
Keller Graduate School of Management (DeVry) (34%)
Midwestern University (22%)
Webster University (34%)
Grand Canyon University (28%)
National University--La Jolla (26%)
Strayer University (49%)
Thomas M. Cooley Law School (29%)
Touro College-Main Campus Midtown (22%)

What is the annual compensation for the senior executives at these institutions? Who knows? As private institutions, these universities are not required to disclose their compensation packages. But you can bet it is in the high six figures at all 15 universities.

So, Mr. and Ms. Taxpayer, I hope you approve of the federal government's student-loan program, which is shoveling money to private universities, because you are paying for a lot of lavish spending. Graduate students in particular are borrowing extraordinary amounts of money, and a high percentage of them have not paid any of it back five years into the repayment phase of their loans.


NYU president Andrew Hamilton:
Thanks, America! I love my swell penthouse apartment!

References

Jason Delisle. Graduate Schools with the Lowest Rates of Student Loan Repayment. American Enterprise Institute, June 2018.

Abby Ohlheiser. John Sexton will officially leave NYU in 2016. Atlantic, August 14, 2013.

Friday, June 22, 2018

Researchers say Income-Driven Repayment Plans create moral hazard: Yuh think?

More and more student borrowers are being forced into income-driven repayment plans (IDRPs) because they can't pay back their college loans under a standard 10-year repayment schedule. According to an article in Educational Researcher, the proportion of student borrowers in IDRPs increased from 5 percent in 2012 to 20 percent in 2016.

Three researchers affiliated with a North Carolina research institute analyzed data on IDRPs, and their findings are not surprising. They found people entering IDRPs borrowed more than people who did not enter these plans. IDRP participants also had lower-income backgrounds than people who did not sign up for IDRPs.

They also found that IDRPs create a "moral hazard" because monthly loan payments under these plans are not coupled to the amount of money students borrow. "As IDR plans become more generous," the authors wrote, "students have less incentive to limit their borrowing and less incentive to seek high-paying jobs because upon leaving school their monthly loan payments depend only on discretionary income, not loan amounts." And, as students become more willing to borrow, colleges and universities "face lower incentives to curb tuition increases."

Put another way, if borrowers know their loan payments will stay the same regardless of whether they borrow $50,000 or $100,000, then why not borrow $100,000? And from a university's perspective, if students are willing to borrow enormous amounts of money to pursue their studies, then why not jack up tuition rates?

The researchers also pointed out that a lot of IDRP participants are making payments so low that their loan balances are growing due to accrued interest. In other words, their loans are negatively amortizing. Thus at the end of a 20- or 25-year IDRP, many borrowers will owe more than they borrowed.  People who complete IDRPs will see their remaining loan balances forgiven, but the forgiven amount is considered taxable income by the IRS.

Income-driven repayment plans were touted by the Obama administration as a good way for student borrowers to manage growing levels of debt. But the article in Educational Researcher adds to a growing body of evidence pointing to this stark reality: millions of people in IDRPs have student-debt loads they will never pay off.

So why did the U.S. Department of Education expand its income-driven repayment options? After all, even a child could foresee the moral hazard built into these programs.  These plans are being peddled for one reason and one reason only: They help obscure the fact that millions of Americans--probably 20 million--are not paying off their student loans.



References

Lacy, T. Austin, Conzelmann, Johnathan G.,  & Smith, Nicole D. (2018). Federal Income-Driven Repayment Plans and Short-Term Student Loan Outcomes. Educational Researcher, 47, 255-258.


Thursday, June 21, 2018

Smith v. U.S. Department of Education: A severely stressed student-loan debtor gets bankruptcy relief and the judge questions harsh interpretation of "undue hardship"

Kirt Francisco Smith, a 39-year-old unemployed man with severe health problems, won a bankruptcy discharge of his student-loan debt--almost $50,000.

 Every student-loan debtor's victory in bankruptcy court is something to celebrate; we don't see enough of them. Smith's victory, however, is especially cheering because the judge explicitly challenged the harsh standards the federal courts are using when determining whether student-loan debt is an "undue hardship" eligible for bankruptcy discharge.

Here's Mr. Smith's story as as chronicled by Bankruptcy Judge Frank Bailey. Smith took out $29,000 in student loans to enroll in a computer drafting program at ITT Tech. He completed the program in 2008  but was unable to find a job in the computer drafting field. By the time he filed for bankruptcy his debt had grown to $50,000 due to accumulated interest and fees.

Smith suffers from major health problems. He is afflicted with intractable epilepsy, which prevents him from having a driver's license. In addition, Smith has been diagnosed with affective disorders, including anxiety and depression leading to suicidal ideation. In 2006, he was hospitalized at McLean Psychiatric Hospital; and he has not been employed since that hospitalization. He began receiving Social Security Disability payments in 2007.

During the trial, which stretched out over five days, Smith argued that he could not pay back his student loans and maintain a minimal standard of living for himself and his dependent mother.  And indeed, Smith and his mother lived on the brink of utter poverty.

Smith received $1369 a month in Social Security income and his mother received $792.26 in Social Security. The two also receive food stamps, which the judge included as income. Altogether then, Smith and his mother lived on $2265.26 a month, which is about $80 less than their expenses.

The U.S. Department of Education opposed a discharge of Smith's student loans, dragging out its usual objections. Smith never made a single payment on his loans, DOE argued, and therefor did not handle his loans in good faith. Smith did not renew his paperwork to stay in an income-based repayment plan--another sign of bad faith.  Finally, DOE objected to the modest sums Smith spent on travel and entertainment.

Fortunately for Smith, Judge Bailey rejected all DOE's arguments and discharged Smith's student loans. The judge utilized the "totality-of-circumstances" test for determining whether Smith's student loans constituted an undue hardship rather then the harsher Brunner test.

Remarkably, Judge Bailey criticized both the Brunner test and the totality-of-circumstances tests. "I pause to observe that both tests for 'undue hardship' are flawed," he wrote (p. 565). In the judge's view, "[t]hese hard-hearted tests have no place in our bankruptcy system."

Judge Bailey then went on to articulate a more reasonable standard for determining when a debtor's student loans can be discharged in bankruptcy.  "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough" (p. 565).

In particular, Judge Bailey criticized other courts' focus on the debtor's good faith.
[A]ny test that allows for the court to determine a student debtor's good or bad faith while living at a subsistence level, virtually strait-jacketed by circumstances, displaces the focus from where the statute would have it: the hardship. It also imposes on courts the virtually impossible task of evaluating good or bath faith in debtors whose range of options is exceedingly limited and includes no realistic hope of repaying their loans to any appreciable extent.. (p. 566)
What an astonishing decision! To my knowledge, Judge Bailey is the first bankruptcy judge to explicitly attack both the Brunner test and the totality-of-circumstances test. (Judge Jim Pappas criticized the Brunner test in Roth v. ECMC.) Just think how many suffering student-loan debtors would qualify for bankruptcy relief if every judge reasoned like Judge Bailey.

Brenda Butler,  for example, who handled her student loans in good faith only to see her loan balance double over a 20 year period, would have obtained relief if Judge Bailey had been her judge. Ronald Joe Johnson, a bankrupt student-loan debtor who made $24,000 a year by working two jobs, would be free of his student loans if he had appeared in Judge Bailey's court instead of a bankrkuptcy court in Alabama. Janice Stevenson, a woman in her mid-fifties who had a record of homelessness and who lived in rent-subsidized housing and had an income of less than $1,000 a month, would have won a bankruptcy discharge of more than $100,000 in student debt if only Judge Bailey's standard had been applied rather than the harsh rule applied by Judge Joan Feeney.

Today, Judge Bailey's decision in the Smith case is just a straw in the wind, but the day will come when bankruptcy courts will apply his standard universally. After all, as some wise person observed, if a debt cannot be paid back, it won't be.  Right now, about 20 million people are unable to pay back their student loans.  Almost all of them are entitled to bankruptcy relief under the rule articulated by Judge Frankk Bailey.

References

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

Johnson v. U.S. Department of Education, 541 B.R. 750 (N.D. Ala. 2015).

Roth v. Educational Credit Management Corporation490 B.R. 908 (9th Cir. B.A.P. 2013). 

Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).

Stevenson v. ECMC, Case No. 08-14084-JNF, Adv. P. No. 08-1245 (Bankr. D. Mass. August 2, 2011)

Monday, June 18, 2018

American Enterprise Institute: A ton of graduate students who attended HBCUs are not paying down their student loans

Jason Delisle, writing for the American Enterprise Institute, reported that a great many Americans who took out loans to attend graduate school are not paying them back.  Most are not defaulting; they simply are putting their loans in a holding pattern that doesn't require them to pay down their loan balances.

What's going on? As Delisle explained, student borrowers have three options for managing their graduate-school loans to keep those loans from going in to default.

Income-Based Repay Plans. First, graduate-student borrowers can enter income-based repayment plans (IBRPs), which set monthly loan payments based on income, not the amount borrowed. IBRPs allow borrowers to lower their monthly loan payments, but often (perhaps almost always), the payments aren't large enough to cover accruing interest. When this happens, loan balances grow even when borrowers are making regularly monthly payments.

Forbearance. A student-loan debtor can ask for multiple types of forbearance on their loans. As Delisle explained, "the most common forbearance effectively has no eligibility criteria."  Borrowers simply request a forbearance. Usually, interest continues to accrue during the forbearance period, which can last for no more than 36 consecutive months.

Deferment. Student borrowers can also apply for an economic hardship deferment that allows them to skip making loan payments due to economic hardship such as unemployment or severely reduced income. Borrowers automatically get a deferment while they continue to be enrolled in school. Again, interest accrues on their student loans while they are in deferment.

Graduate students typically accumulate the most student-loan debt because graduate education is expensive and there is no monetary cap on the amount of student loans that can be taken out to fund graduate education. Nevertheless, graduate students typical have low default rates. According to Delisle, only 4 percent of the 2009 cohort of graduate students were in default five years into repayment.

But a low default rate does not mean graduate-student borrowers are paying down their loans. In fact, a high percentage of graduate-student debtors are seeing their loans negatively amortize five years into repayment--meaning their loan balances are going up even though their loans are in good standing.

Why? Because thousands of graduate-student borrowers are not financially able to pay down their loans under a standard 10-year repayment plan. In order to avoid default, these borrowers select one of the three options listed above: IBRPs, loan forbearance, or deferment.

Here's where Delisle's report becomes especially interesting. Delisle lists the 20 graduate and professional schools with the highest share of graduate-student borrowers who had not reduced the principal on their loans five years into repayment.Twelve of these 20 schools are historically black colleges or universities (HBCUs); and their nonpayment rates ranged from 44 to 65 percent.

Here's the list of the 12 HBCUs with high nonpayment rates for their graduate students, along with the percentage of borrowers who had not reduced their loan principal. Of these 12 institutions, 11 are public universities.


  1. Mississippi Valley State University       65%
  2. Southern University New Orleans         62%
  3. Grambling State University                   59%
  4. Virginia State University                       53%
  5. Prairie View A & M University             51%
  6. Delaware State University                     51%
  7. Alabama A & M University                  50%
  8. Alabama State University                      49%
  9. Southern University at Baton Rouge     48%
  10. Clark Atlanta University                        47%
  11. Jackson State University                        46%
  12. Lincoln University of Pennsylvania       44%

The AEI report is additional data showing that African Americans are particularly affected by the federal student loan program. At 12 HBCUs, from 44 to 65 percent of their graduate students entering repayment had not reduced the principal on their student loans by one dime five years later.

Perhaps the AEI report will prompt legislators to examine more closely whether HBCUs funded with public monies are providing their students with useful graduate education. Something is wrong when a high percentage of graduate students who attended a HBCU are not able to pay down their student-loan debt five years after ending their studies.



References

Jason Delisle. Graduate Schools with the Lowest Rates of Student Loan Repayment. American Enterprise Institute, June 2018.





Sunday, June 17, 2018

Barbara Erkson v. U.S. Department of Education: A 64-year-old woman, struggling to make ends meet, discharges $107,000 in student loans in bankruptcy

Barbara Erkson, an unmarried 64-year-old woman, filed an adversary proceeding in a Maine bankruptcy court  in an attempt to discharge $107,000 in student loans in bankruptcy. The U.S. Department of Education and Educational Credit Management Corporation (ECMC) vigorously objected, but Judge Peter Carey rejected their heartless arguments and granted Ms. Erkson a full discharge.

This is Ms. Erkson's story as told by Judge Carey. In 1998, when she was in her forties, Erkson enrolled at Vermont College of Norwich University to pursue a Bachelor of Arts in Interdisciplinary Studies. She took out student loans to finance her studies and graduated in 2002 with considerable debt.

After graduating, Erkson worked at various community agencies in order to obtain the conditional licenses necessary to work as a licensed counselor. From 2002 through 2008, she worked at a private counseling service, but her job was terminated due to funding constraints. At some point she defaulted on her undergraduate loans.

Erkson then entered graduate school at Salve Regina University, and she obtained a master of arts degree in Holistic Counseling in 2011. Thereafter she held a series of counseling jobs and maintained a private practice, but she did not make enough money to sustain herself and pay back her student loans.

The U.S. Department of Education and ECMC objected furiously to releasing Erkson from her student debt. She had not shown good faith, they said, because she had not agreed to enter a long-term income-based repayment plan.  They also objected to some of Erkson's expenses. She should not have hired a dog walker, they contended. Nor should she be leasing an automobile. They even criticized her for going to graduate school since her master's degree did not improve her income level.

Fortunately for Barbara Erkson, Judge Carey is a compassionate man; and he waved aside all her creditors' cold-hearted objections.
Plaintiff impresses the Court as a hard-working woman who chose an area of study which, due to changes in federal laws and regulations, proved less profitable than she anticipated. If the Court applied such stringent standards to all student loan challenges, anyone who failed to correctly read the tea leaves of the future and incurred student debt in an area that technology, societal preferences, or legislation later made obsolete would be ineligible for a discharge. The [Bankruptcy] Code simply does not go so far. 
Judge Carey rejected the creditors' argument that Erkson handled her loans in bad faith. They pointed out that her loans were almost always in deferment, forbearance or in default and thus she had made relatively few loan payments. Nevertheless, Judge Carey wrote, "neither DOE nor ECMC challenged [Erkson's] testimony that she struggled to find full time work until 2002 or that, from 2002 until 2008, she did not generate sufficient income to maintain a minimal standard of living and repay her student loans." In Judge Carey's opinion, Erkson's failure to make any meaningful loan payments was "the result of her meager income and not evidence of bad faith."

Interestingly, Erkson argued that she suffered from a hearing impairment that hindered her efforts to find and keep a good job. Judge Carey accepted Erkson's testimony on that point, but he made clear his decision did not turn on Erkson's health situation. Her current financial condition and future economic prospects entitled Erkson to a bankruptcy discharge of her student loans, the judge ruled, without considering her hearing impairment.

What are we to make of the Erkson decision?

First, DOE and ECMC are bullies. Both agencies almost always oppose undue-hardship discharges for distressed student-loan debtors, regardless of individual circumstances.  They always argue that debtors handled their student loans in bad faith and that they should be denied a discharge if they fail to sign up for a 25-year repayment plan. They always quibble about a debtor's routine expenses and pore over a debtor's every expenditure in humiliating detail.

Second, the Erkson decision is a good one for millions of people who took out student loans to pursue careers that did not work out like they planned. How many people have enrolled in chicken-shit for-profit colleges, third-tier law schools, or overpriced professional programs only to learn their educational investments would never pay off?

In the eyes of the U.S. Department of Education and ECMC, DOE's corporate hit man, such people are losers; and their inability to pay back their student loans is prima facie evidence of bad faith.

But Judge Carey disagreed. People who make a sincere effort to find a good job and wind up unable to pay back their student loans while maintaining a minimal standard of living are entitled to bankruptcy relief: period. It's time DOE and ECMC get that message.

The Department of Education and ECMC are bullies.


References

Erkson v. U.S. Department of Education, 582 B.R. 542 (Bankr. D. Me. 2018).



Saturday, June 16, 2018

Are bankruptcy judges becoming more sympathetic toward student-loan debtors? Maybe but maybe not

Katy Stech Ferek published an article in Wall Street Journal a few days ago in which she reported that bankruptcy judges are becoming more sympathetic to debtors seeking to discharge their student loans in bankruptcy. Is Ferek correct?

I once would have thought so. Until recently, I believed the bankruptcy courts were becoming more compassionate toward bankrupt student debtors. But now I am not so sure.

Without question there have been some heartening developments in the federal bankruptcy courts over the past few years. At the appellate level, the Ninth Circuit Bankruptcy Appellate Panel discharged student loans owed by Janet Roth, an elderly student-loan debtor who was living on a monthly Social Security check of less than $800. Judge Jim Pappas, in a concurring opinion, argued sensibly that the courts should abandon the harsh Brunner test for determining when a debtor can discharge student loans under the Bankruptcy Code's "undue hardship" standard.

The Seventh Circuit, in its Krieger decision, discharged student debt of a woman in her fifties on undue hardship grounds, in spite of the fact that she had not enrolled in an income-based repayment plan. The court agreed with the bankruptcy court that Krieger's situation was hopeless. This too was a heartening decision for distressed student debtors.

Fern v. Fedloan Servicing, decided in 2017 is another good decision. In that case, the Eighth Circuit Bankruptcy Appellate Panel affirmed bankruptcy relief for a single mother, specifically noting the psychological stress experienced by debtors who know they will never pay off their student loans.

And there have been several good decisions in the lower courts. The Abney case out of Missouri, the Lamento case out of Ohio, the Myhre decision, and a handful of other recent decisions were compassionate rulings in favor of down-on-their-luck student debtors.

But a few warm days do not a summer make. Thus far, no federal appellate court has explicitly overruled the draconian Brunner test for determining when a student loan constitutes an undue hardship.

And there have been some shockingly harsh rulings against student debtors. In Butler v. Educational Credit Management Corporation, decided in 2016, a bankruptcy judge refused to discharge Brenda Butler's student debt, which had doubled in the twenty years since she had graduated from college, in spite of the fact she was unemployed and the judge had explicitly stated that she had handled her student loans in good faith. The judge ruled Butler should stay in a 25-year repayment plan that would end in 2037, more than forty years after she graduated from college!

Moreover, there simply have not been enough recently published bankruptcy-court rulings to constitute a trend. As Ferek reported in her article, federal judges in student-loan bankruptcy cases ruled only 16 times in 2017, and student loans were canceled in only three of those cases.

Even favorable rulings do not look quite so encouraging when examined closely.  Ferek mentioned the Murray case out of Kansas, in which a bankruptcy judge granted a partial discharge of a married couple's student-loan debts. This was a favorable ruling, but Educational Credit Management Corporation, the federal government's most ruthless debt collector, appealed. Fortunately for the Murrays, they were represented by an able Kansas lawyer; and the National Association of Consumer Bankruptcy Attorneys, joined by the National Consumer Law Center, filed an amicus brief on the Murrays' behalf. The Murrays prevailed on appeal, but most student-loan debtors do not have the legal resources the Murrays had.

Ferek wrote a useful article, and I hope distressed student-loan debtors read it and are encouraged. Nevertheless, the fact remains that very few insolvent college-loan borrowers get bankruptcy relief from their crushing student loans.  And those who have the courage to seek bankruptcy relief often have a long road to travel. Michael Hedlund, a law school graduate who won partial relief from his student debt in a Ninth Circuit ruling, litigated with his creditor for 10 years!


References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

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

Katy Stech Ferek. Judges Wouldn't consider Forgiving Crippling Student Loans--Until Now. Wall Street Journal, June 14, 2018.

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

Hedlund v   Educational Resources Institute, Inc., 718 F.3d 848 (9th Cir. 2013).

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (7th Cir. 2013).

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

Murray v. Educational Credit Management Corporation563 B.R. 52 (Bankr. D. Kan. 2016), aff'd, Case No. 16-2838 (D. Kan. Sept. 22, 2017).

Myhre v. U.S. Department of Education, 503 B.R. 698; 2013 (Bankr. W.D. Wis. 2013). 

Roth v. Educational Credit Management Corporation490 B.R. 908 (9th Cir. B.A.P. 2013). 


The New York Times lambasts Republicans and Betsy DeVos for catering to for-profit colleges: The Gray Lady overlooks culpable Democrats

In an editorial last month, The New York Times lambasted Secretary of Education Betsy DeVos, the Trump administration and congressional Republicans for protecting the greasy for-profit college industry. "Try as they might," the Times observed, "the Trump administration and Republicans in Congress cannot disguise that they continue to do the bidding of the for-profit industry, which has saddled working-class students--including veterans--with crushing debt while providing useless degrees, or no degrees at all."

Indeed, the Times grumbled, the Department of Education, under DeVos, "has undermined investigations of the [for-profit college] industry by marginalizing or reassigning lawyers and investigators . . ." Major investigations, the Times reported, have been abandoned, including investigations into the activities of DeVry Education Group, Bridgepoint Education and Career Education Corporation.

The Times is right of course. Betsy DeVos is the shameless lapdog of the for-profit college crowd, which continues to prey on unsophisticated Americans seeking to get a worthwhile education.  The Times predicts that DeVos' behavior may come back to bite the Republicans in the upcoming midterm elections, and perhaps there will be repercussions at the ballot box.

But to be fair, servile obsequiousness to the for-profit colleges is bipartisan. Both Democrats and Republicans have taken campaign contributions from these bandits and both parties have succumbed to the blandishments of the for-profit lobbyists.

In fact, The Nation reported nearly five years ago that two Democratic congressmen were leading an effort to protect for-profit colleges from meaningful regulation.  According to The Nation's reporter Lee Fang, Representative Rob Andrews from New Jersey and Florida congressman Alcee Hastings had taken thousands of dollars from for-profit college executives and for-profit backed political committees.

Andrews is no longer in Congress, but Alcee Hastings is still in office. This is the same Hastings, by the way, who, while sitting as a federal district judge, was charged with bribery, perjury and falsifying documents.  The U.S. Senate impeached him and removed him from his judicial post in 1989.

If the Democrats want to distinguish themselves from their Republican colleagues, they need to speak out forthrightly about the for-profit-college scandal. In my view, the for-profit racketeers cannot be tamed through tougher regulations. The only way to stop these predators from stalking unsuspecting and naive young Americans is to shut the industry down. But the Democrats don't have the courage to speak out against the for-profit mobsters. They seem to hope Americans will overlook their silence about the the for-profit college industry and pin all the blame on the Republicans.

Rep. Alcee Hastings (D-Florida): Friend of the for-profit college industry


References

Editorial. Predatory Colleges, Freed to Fleece Students. New York Times, May 22, 2018.

Lee Fang. Two House Democrats Lead Effort to Protect For-Profit Colleges, Betraying Students and Vets. The Nation, December 13, 2013.

United States Senate.  The Impeachment Trial of Alcee L. Hastings (1989) U.S. District Judge, Florida.