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.

Tuesday, October 2, 2018

Department of Education slow rolls the Public Service Loan Forgiveness Program: Like a drunk weaving through traffic

For many years, the Department of Education has managed the federal student-loan program like a drunk creeping through heavy traffic. It has stumbled, reeled, dissembled, weaved and bobbed, but always avoided a head-on collision with reality.

But that time is over. Under Betsy DeVos's colossal mismanagement (and her predecessors), DOE has messed up the Public Service Loan Forgiveness Program (PSLF), thereby telegraphing to 44 million student-loan borrowers that Betsy Devos is either fiendishly devious or spectacularly incompetent.

The PSLF program is not complicated.  Under federal law, student-loan borrowers who work for a qualified employer (governmental agency or non-profit) and make 120 student-loan payments under an approved repayment plan are eligible to have remaining student-loan debt cancelled. (It's a little more complicated than that, but not much.)

Almost 1.2 million borrowers have applied to have their employment certified for PSLF eligibility. More than a quarter million applications were denied. That alone is a startling fact.

But it gets worse. About 28,000 people who are in the PSLF program (or at least believe they are in it) applied to have their student loans forgiven based on their representation that they had made the 120 required student-loan payments. How many people have obtained debt relief so far? Less than 100!

What are we to make of this gigantic snarl?

First, DOE has made the PSLF program needlessly complicated. After all, the government only needs to answer two questions to determine who is eligible for debt relief. Did the applicant work for an approved employer for 10 years? Did the applicant make 120 one-time payments on his or her student loans?

Second, the PSLF program was poorly designed, and DeVos's DOE has reached the startling realization that the program is astonishingly expensive.  In my opinion, DOE is dragging its feet about processing PSLF claims to postpone the reckoning day, when it will have to publicly admit that PSLF is going to cost taxpayers billions of dollars.

The Government Accountability Office (GAO) released a report almost two years ago that concluded DOE had underestimated the cost of various student-loan repayment options. I'm guessing DOE did not figure on the huge debt loads some PSLF applicants were accumulating from going to graduate school: MBA degrees, medical degrees, law degrees, etc.

According to GAO, the average amount of forgiven debt for the first 55 people who received student-loan forgiveness is almost $58,000. If  this average continues to hold, and all 890,000 people whose loans and employment were certified eventually get debt relief, the cost will be $50 billion! Meanwhile, DOE can expect PSLF requests for certification and debt relief to continue being filed into the indefinite future.

No wonder DOE is slow rolling the PSLF loan-forgiveness process.



 References

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