Saturday, January 19, 2019

Income-Based Repayment Plans for Student Debtors: Is Betsy DeVos a Slave Trafficker?

To my astonishment, Betsy DeVos, President Trump's Secretary of Education, publicly admitted that the federal student-loan program is a disaster. In a speech she gave last November, DeVos acknowledged that only 1 out of 4 student debtors (24 percent) is making loan payments that cover both principal and interest and that 43 percent of all student loans are in "distress."

Unfortunately, DeVos's Department of Education and its contracted debt collectors are making this crisis worse.  Probably 20 million Americans would be eligible to discharge their student loans in bankruptcy if these loans were treated like any other consumer debt (credit cards, auto loans, etc.) But the Bankruptcy Code's "undue hardship" rule, interpreted harshly by many bankruptcy judges, has pushed millions of distressed student-loan debtors into lifetimes of servitude.

Every few months, however, a bankruptcy judge rules compassionately and sensibly and discharges some student loan debt. There is now a good-sized body of cases that have ruled in student debtors' favor.

You would think the Department of Education would encourage this trend, which would hasten relief to millions of destitute student borrowers. If DOE would endorse the Seventh Circuit's ruling in Krieger, the Eighth Circuit Bankruptcy Appellate Panel's decision in Fern, the Sixth Circuit's ruling in Barrett, the Tenth Circuit's ruling in Polleys, and the Ninth Circuit Bankruptcy Appellate Court's ruling in Roth, we would be moving a big step forward toward granting debt relief to millions of honest but unfortunate student borrowers.

But that has not been what Betsy's DOE has done. DOE and its student-loan servicing companies (primarily Educational Credit Management Corporation) have fought bankruptcy relief in bankruptcy courts all over the United States.(The Roth, Myhre and Abney cases are particularly shocking).

And here's one current example. Vicky Jo Metz, a 59-year old woman, attempted to discharge her student loans in bankruptcy, and a sympathetic Kansas bankruptcy judge granted her a partial discharge. Metz had borrowed  $16,663  back in the early 1990s to attend community college but she was never able to pay off her student loans. In fact, she filed for bankruptcy relief more than once.

By the time she was in her late 50s, Metz's student -loan debt had grown to $67,000, because her loan balance continued to grow due to negative amortization.  Judge Robert Nugent concluded Metz could never pay back what she borrowed plus the accumulated interest, and he crafted a sensible and compassionate ruling. Judge Nugent forgave the accumulated interest on Metz's debt and ordered her to pay back the principal--$16,663.

That's a fair solution, and in my opinion, Judge Nugent's ruling was consistent with guidance from the Tenth Circuit Court of Appeals in the Polleys decision. (Metz's Kansas bankruptcy court is in the Tenth Circuit.) The Polleys ruling had instructed lower courts not to interpret the Bankruptcy Code's "undue hardship" provision in a way that would nullify the central purpose of bankruptcy, which is to give an honest debtor a "fresh start."

ECMC, DOE's chief pugilist in the bankruptcy courts, appealed Judge Nugent's decision. Metz should be placed in a long-term income-based repayment plan, ECMC argued, a plan that would require Metz to make monthly payments on her debt for as long as 25 years.

Judge Nugent had rejected ECMC's arguments in his court, pointing out that Metz would be 84 years old when her payment obligations ended. Moreover, Judge Nugent noted, Metz's debt would continue to grow because Metz's payments would not be large enough to cover accumulating interest. Judge Nugent calculated that Metz would owe $157,000 when her payment obligations ended--9 times what she borrowed back in the 1990s!

ECMC's arguments in Vicky Jo Metz's case are either deeply cynical or insane. Basically, ECMC, DOE's hired gun in this dispute, is asking a federal court to sentence Vicky Jo Metz to a lifetime of servitude--paying on a student-loan debt, which will grow bigger with each passing month.

In effect then, the Department of Education and ECMC are slave traffickers, condemning millions of Americans to repayment programs which can stretch over their entire lives.

In my view, the federal courts are poised to craft more compassionate standards for discharging student loans in bankruptcy, which would allow decent people like Ms. Metz to clear away debt they will never repay.  Unfortunately Betsy DeVos's Department of Education and ECMC are doing every thing they can to persuade the federal judiciary not to rule compassionately.

After all, there's a lot of money in the slave trade.



Cases

Abney v. U.S. Dept. of Educ. Corp.  (In re Abney), 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Barrett v. Educ. Credit Mgmt. Corp., (In re Barrett), 487 F.3d 353 (6th Cir. 2007).

Educ. Credit Mgmt. Corp. v. Polleys (In re Polleys), 356 F.3d 1302 (10th Cir. 2004).

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

 Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882 (6th Cir. 2013).
Metz v. Educ. Credit Mgmt. Corp., 589 B.R. 750 (Bankr. D. Kan. 2018), on appeal

Murray v. Educ. Credit Mgmt. Corp. (In re Murray), 563 B.R. 52 (Bankr. Kan. 2016), aff’d, No. 16-2838, 2017 WL 4222980 (D. Kan. Sept. 9, 2017).

Myhre v. U.S. Dep’t of Educ. (In re Myhre), 503 B.R. 698; 2013 (Bankr. W.D. Wis. 2013).

Roth v. Educ. Educ. Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir. 2013).

References

DeVos, Betsy, Secretary of Educ., Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid’s Training Conferences (Nov. 27, 2018). Available at https://www.ed.gov/news/speeches/prepared-remarks-us-secretary-education-betsy-devos-federal-student-aids-training-conferencet.



Tuesday, January 8, 2019

Department of Education's Heightened Cash Monitoring List: Students should check to see if their college is in financial trouble

Steve Rhode performed a valuable public service last month when he published the U.S. Department of Education's most recent Heightened Cash Monitoring List.  This is DOE's list of schools that have various financial concerns, including accreditation problems or missing audits, as well as schools that are on financially shaky ground.

DOE does not make the list easy to review. I could discern no organizational pattern. Public schools, private nonprofits, proprietary schools, and foreign schools are all listed together. In total, there are more than 500 schools on the list.

Not surprisingly, more than half the schools with financial concerns are proprietary schools--a total of 275 for-profit institutions.  A good share of these schools are devoted to hairstyling or beauty. Forty-six schools on DOE's HCM list have the word Beauty or Cosmetology in their names; and there are three massage schools on the list.

The list also includes a large number of private, nonprofit colleges or universities: 128 schools in all. A fair number have religious affiliations. Seven schools on the list have the word Baptist in their name, and three school names include the word Wesleyan, indicating a Methodist affiliation.  Twelve colleges have the word Christian in their titles, and there were several other schools with names suggesting a religious connection: Bethel, Bethany, Bible, Seminary, etc.

DOE listed 35 foreign colleges and universities on its Heightened Cash Monitoring List. You might find it surprising that the federal government is funding foreign study at the same time the national parks are closed, but it does. Among the 35 foreign schools with various financial concerns are Hebrew University of Jerusalem, Universiteit Van Amsterdam in the Netherlands, University of Aukland in New Zealand, Centro De Estudios Universitarios Xochicalco in Mexico; and Poznan University of Medical Sciences in Poland.

DOE's list includes a category of schools with high student-loan default rates. Schools with a three-year default rate of 40 percent and schools that have a three-year default rate of at least 30 percent for three years are ineligible for federal student-aid money. 

Remarkably, none of the 500 plus schools on DOE's HCM list were flagged for having a high student-loan default rate. How could that be when Secretary of Education Betsy DeVos herself said that only 24 percent of student borrowers were paying down the principal and interest on their loans?

In my view, DOE's HCM list under reports the number of American colleges and schools that are in financial trouble. Nevertheless, the list is useful. 

First, the list confirms that a large number of small, private nonprofit colleges are in trouble, including many with religious ties. 

Second, we can see from the list that the largest share of financially troubled schools are for-profit institutions.

Finally, the list is a reminder that the U.S. Department of Education is loaning money for Americans to go to school overseas, which seems insane given the excess capacity in American higher education.

Of course not all schools on DOE's HCM list are experiencing serious financial problems. Some are on the list due to accrediting issues, inadequate administrative support, or audit irregularities. Nevertheless, all  postsecondary students should check the list to see if their school is on it. And parents who are helping their children decide where to go to college should also check the list. No one wants to enroll in a college that may close before the student graduates.

References

Rhode, Steve. Schools on the Warning List by the Department of Education--December 2018. Get Out of Debt Guy (blog), December 26, 2018.