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.