Showing posts with label 2005 Bankruptcy Reform Act. Show all posts
Showing posts with label 2005 Bankruptcy Reform Act. Show all posts

Friday, December 4, 2020

Steve Rhode: Here is Why Forgiving Student Loans is an Impossible Issue with an Easy Solution

Written by Steve Rhode

 Originally published at Get Out of Debt Guy

When it comes to a rapidly accelerating financial burden on American families, there is no greater concern than student loans.

The debt is burdensome and unfair on many levels that I’ll explore below.

However, there is a straightforward and simple solution for dealing with all of this outside of struggling to develop a fair forgiveness strategy. I’ll talk about that after we look at common opinions on the subject.

Is Student Loan Forgiveness Fair?

The talk of forgiveness is a difficult topic because how do you reach any level of fairness.

And let me be clear when people talk about forgiving student loans, it only applies to federal student loans. Not private student loans.

As Howard Dvorkin, Chairman of Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.”

Dvorkin went on to say, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

Student Loans – Another Financial Mistake for Many

A 2019 student by New York Life of 2,200 adults found the average participant reported taking 18.5 years to pay off their student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

What is shocking is the number of people that have student loan debt but who never graduated. I’ve seen statics as high as 75 percent of people with any student loans never obtained the degree.

And the wave of for-profit schools that have oversold education to people that never should have purchased their product is another national disaster.

“For-profit schools are not worth the money,” said Dvorkin. “As an employer, I hire people with traditional non-profit college degrees before I would hire someone with a for-profit degree.”

The Federal Reserve Bank of New York said, “Students who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The study went on to say, “Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes. This is an important set of findings for several reasons. First, a substantial amount of public funds go to for-profit institutions through the financial aid system. Our estimates indicate the return to such expenditures may be quite low. Second, the results suggest that students who attend local for-profit institutions when there is a negative labor demand shock may be making mistakes: they would be better off attending the local public college or university instead.”

But even non-profit schools are ramping up tuition and selling students into seats that maybe should not have been admitted.

Student loan debt is a life sentence in painful debt for many: The Impossibility of Forgiveness

Opinions on forgiveness range all over the place. Betsy DeVos, the current Secretary of Education said recently, “Policies should never entice students into greater debt. Nor should they put taxpayer dollars at greater risk. There are too many politicians today who support policy that does both.”

 

She also labeled student loan forgiveness as an “insidious notion of government gift giving. We’ve heard shrill calls to “cancel,” to “forgive,” to “make it all free.” Any innocuous label out there can’t obfuscate what it really is: wrong.”

Forgiveness is never going to be fair, and it’s not going to a quick and effective way to stimulate the economy in a difficult time from a pandemic, as some claim.

Today, student loan forgiveness would result in people not making loans they are already in default on or making payments that are too low to pay the debt off. At most, it will result in people not having to make some loan payments monthly.

The economic impact will be felt over a long period of time rather than the boost and support the economy needs now.

While DeVos talks about avoiding policies that entice students into greater debt, her own Department of Education is a big part of the problem, with help from Congress.

As the federal student loan program stands now, there is $1.37 trillion of outstanding debt to students, and the Education Department has determined that borrowers will only pay back $935 billion. That leaves the program in the red and holding for $435 billion of bad loans.

The Wall Street Journal said, “The analysis was based on government accounting standards and didn’t include roughly $150 billion in loans originated by private lenders and backed by the government.”

 

To deal with that shortage, “Congress will have to raise taxes, cut services or increase the deficit to cover the losses.” That solution is also not fair to the many that repaid their loans.

So the Battles and Arguments About Student Loan Forgiveness Are Complicated

We can argue and politically position ourselves around the idea of forgiving student loans is either the best thing or the worst thing ever to happen.

It is actually a moot point since the program is in so much trouble already.

Let’s not forget the 42 million student loan borrowers will become due again in January 2020, as a result of the CARES Act forbearance ending.

People that can’t afford their student loans will suddenly be required to begin payments again. Defaults will explode even more.

As it stands now, the Department of Education’s base position is students should feel lucky they can enroll student loan debt in an Income-Driven Repayment program (IDR) that will give them a loan payment based on income. But, as I wrote before, it’s a trap.

As it stands now, while a student loan debtor might enroll in an income-based repayment program, the minimum payment is not enough to cover the interest being charged on the loan, and the balance owed grows. While people say, “certainly Congress will change that.” The reality is they have not, over the many years the programs have been in place.

So the way the “lowest payment” solution works right now is that the government lets you pay less than is due, that grows the balance, and in two decades, when the exploded balance is forgiven, people will owe income tax on that debt unless they are insolvent. It sounds crazy, but it is true.

Here is a case that is a great example of the madness. The student loan debtor could not afford to pay off her $40,000 of student loans over 14 years but is now required to enroll and remain in an IDR that will drive her balance up.

The article by Richard Fossey J.D. says, “How could the judge conclude that Hladly might someday pay off her student loans when the amount she initially borrowed had tripled since the time she graduated from law school? If Hlady could not pay off $40,000 in student loans over 14 years, how will she ever pay $140,000 over the next 25 years, especially since her loan balance grows by $20 a day in accruing interest?

As Judge Scarcella observed, Ms. Hlady is 48 years old. Her 25-year repayment plan will terminate when she is 73. By that time, her loan balance will be more than a quarter of a million dollars. This amount will be forgiven, but the forgiven debt will be taxed as income unless Hlady is insolvent at the time.”

With IDR Plans, the Government Has Already Accepted the Loan Forgiveness Proposition

In my opinion, with federal student loan forgiveness programs already on the books, policymakers have already accepted some form of loan forgiveness. Yet, the current talk of student loan forgiveness ranges from its “socialism” to its “a right.”

As it stands today, the federal government already runs a student loan program that is rapidly increasing in delinquencies, defaults, and repayment plans that will only grow the balance.

The only current winners in the student loan cycle are the schools that can sell students on attending and get easy money from the federal government.

Students enroll, schools get paid and accept almost no responsibility for the outcome. When a student loan debtor was sold education, they could never logically or mathematically afford and later defaults; the school does not have to pay back the loan.

Howard Dvorkin said, “Colleges must start operating as a business and deliver service within income. The days of college expansion paid for from easy government student loan money needs to stop.”

He’s right.

Student Loan Forgiveness is Much-Ado-About-Nothing and Misdirected

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

BAPCPA made private student loans harder to discharge in bankruptcy. And private student loans are growing as well.

The issue is students are drowning in debt. It can be argued that because of student loan debt, they are also having to take out other debt and reduce retirement savings.

When those people are old enough and can no longer work, the lack of retirement savings will create a public safety net drain. No matter how you look at this, the systemic problem of easy money for education has driven up the debt, and we will all pay for it in one way or another.

The Solution Seems So Apparent

Up until 1976, all student loans were dischargeable in bankruptcy. Bankruptcy is a legal right for consumers to get a fresh financial start, and it is even a part of the U.S. Constitution. Those that file for bankruptcy generate an immediate stimulus for the economy and have a second chance to do better, having learned hard lessons from mistakes.

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines.

2.      The debt is forgiven tax-free.

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc.

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy.

5.      Forgiveness will be restricted to only those that qualify.

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody.

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available.

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy.

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

If We Restore Bankruptcy Student Loan Debt Elimination to All Then We Can Focus on Doing Better

There is no argument that education leads to opportunity. I don’t care if that is education at a trade school, some other hands-on education, or a degree in some college subject at the best school in a 200-mile radius.

I heard recently about a “toilet paper” degree program. That’s where plumbers make much more than people to go to college. I do know some very rich electricians and plumbers. I guess that’s a raw subject for me since I’ve spent $3,000 in plumbing bills in the last 30 days.

We have a wonderful system in place to allow people to have affordable access to start their education. The local community college is a fantastic place to start.

It is affordable, and as Dvorkin said, “When thinking of how to get started on the journey of education, community college is a great investment. Think about this: why pay much higher tuition to take classes that use the same books as the community college class uses. Start affordably and then transfer to a more expensive school if you want to continue to finish your college degree.”

The power of community colleges is not new. It is proven. My very own father started his education from a farm in Michigan at the local community college. He then went on to become the very first Ph.D. graduate in Political Science at Michigan State.

So let’s all stop trying to reinvent the wheel here. Just restore the bankruptcy provision for all student loans and require some commonsense and responsibility on future lending.

There will never be any universally accepted plan for past forgiveness of student loans that were flawed from the start.

We are a great country and instead of looking back, let’s do better moving forward.

 

Saturday, March 21, 2020

The coronavirus pandemic and broad relief for battered student-loan debtors: Congress needs to go big or go home!

The coronavirus pandemic rolls along like a tropical storm gathering force in the Gulf of Mexico.
Every day, it kills more Americans and further batters the national economy. The airline industry, the travel industry, and the restaurant business are begging for financial assistance to help them survive an economic crisis that no one saw coming.

PresidentTrump and Congress are working on a $2 trillion aid package to assist industries that have been hit hardest by the COVID-19 outbreak and provide cash assistance to individuals who lost their jobs or their businesses due to the pandemic.

Lawmakers also recognize that student-loan debtors need relief. Even before the pandemic, millions of college-loan borrowers were struggling to pay off their loans. Now--as the unemployment rate rises and whole industries collapse, a lot of student-loan debtors have their backs to the wall.

Republicans and Democrats have both proposed some form of assistance for student debtors. The Republicans recommend giving students a three-month break from their student-loan payments with no interest accruing.  The Democrats want the Department of Education to make student-loan payments on borrowers' behalf for as long as the national emergency lasts.

These proposals are a good start, but they do not go far enough. More than 45 million people have outstanding student loans, and less than half of them can pay them back. As President Trump might say, it's time to "go big" when we think about student-loan relief.

First of all, let's take a look at Senator Bernie Sander's proposal for total student-loan forgiveness—a $1.6 trillion-dollar bailout. Let's also examine Senator Elizabeth Warren's plan for loan forgiveness up to $50,000 per debtor. These ideas are not as wacky as some commentators have made them sound.

Regarding Bernie's idea, let's face facts. More than 8 million people are in long-term, income-based repayment plans, and most of these people are not paying down the interest on their loans. In fact, their loan balances grow with each passing month due to accruing interest. Millions more are in default or have their student loans in deferment. They're not paying their loans back either.

What's the point of pretending the student-loan scheme is a solvent federal program? It's not.  Bernie's plan to wipe out all student debt and offer a free college education is a logical proposal.

Senator Warren's plan to help student debtors also makes sense.  She wants to cap debt relief at $50,000, and that would help a great many people. After all, as  Don Trooper and colleagues recently reported in The Chronicle of Higher Education, people with small loan balances are more likely to default on their loans than people who owe $100,000 or more.

Forgiving student debt for individuals who ow relatively small amounts would help a lot of debtors who took out student loans to attend for-profit colleges and trade schools and didn't benefit from their educational experience.  That would be a good thing.

But if we really want to "go big," Congress must do two straightforward things. First, it must strike the"undue hardship." language from the Bankruptcy Code and allow insolvent student-loan borrowers to discharge their college loans in bankruptcy like any other nonsecured consumer debt. Second, it must repeal those provisions of the 2005 Bankruptcy Reform Act that made it more complicated and more expensive for beaten-down debtors to file for bankruptcy.

The very purpose of bankruptcy in American law is to give honest but unfortunate debtors a fresh start. Lawmakers need to remember that now as we enter into this century's Great Depression.

The 2020 Depression will look a lot like the Depression of the 1930s.









Tuesday, March 17, 2020

Joe Biden and the 2005 Bankruptcy Reform Act: "It's not personal. It's strictly business."

The 2020 presidential election is about eight months away, and I'm not going to tell you how to vote. If you hate Trump, you'll vote for Biden. If you think Biden is suffering from dementia, you'll vote for Trump.  And by election day, Biden or Trump will probably be your only choice.

Regardless of their political affiliation, all student-loan borrowers who are drowning in debt will want the next President to do one thing: reform the bankruptcy law. Specifically, they will want the next President to pressure Congress to repeal the Bankruptcy Reform Act of 2005 and to remove the "undue hardship" language from the Bankruptcy Code.

The Bankruptcy Reform Act of 2005--named with unintended irony--made it more difficult for Americans to discharge credit card debt in the bankruptcy courts, and it made the bankruptcy process more expensive and more difficult for beaten-down debtors.

 According to Senator Elizabeth Warren:
After the bill passed, bankruptcy filings went down permanently by 50%, and the number of insolvent people went up permanently by 25%. By making it harder for people to discharge their debts and keep current on their house payments, the 2005 bill made the 2008 financial crisis significantly worse: experts found that the bill “caused about 800,000 additional mortgage defaults and 250,000 additional foreclosures.” 
The law also made private student loans almost impossible to discharge in bankruptcy. Before its passage, debtors could not discharge federal student loans in bankruptcy unless they could show "undue hardship." After the bankruptcy reform law was passed, private loans were also nondischargeable unless a debtor could show undue hardship.

The law was a Republican-backed bill, which Senator Ted Kennedy scathingly criticized. “This legislation breaks the bond that unites America, it sacrifices Americans to the rampant greed of the credit card industry,” Kennedy said.

But many Democratic senators crossed party lines and voted with the Republicans.  One of those aisle-crossing Democrats was Joe Biden. Senator Biden claimed the new law would cut down on abuses in the bankruptcy system. In fact, there was little evidence that debtors were scamming the bankruptcy courts.

In my view, Biden disguised his motives for voting in favor of the bankruptcy reform bill. In reality, Biden was doing the bidding of the corporate banks, which have donated millions to his campaign coffers over the years. To borrow a quote from The Godfather, Biden's vote wasn't personal; it was strictly business.

Now, however, Mr. Biden is singing a different tune. As reported by Matthew Yglesias in Vox,  Biden recently changed his position on the 2005 law. He now endorses the views of Senators Elizabeth Warren and Bernie Sanders, who have called for its repeal.

This is good news for student-loan debtors, but I think Mr. Biden needs to express his change of views more forcefully. Student debtors need to hear Biden explicitly call for the repeal of the 2005 Bankruptcy Reform Act and the abolition of the "undue hardship" language in the Bankruptcy Code. If he does that, Biden will win a lot of votes in the November election.



Biden and the 2005 Bankruptcy Reform Act: It wasn't personal. It was strictly business.

Friday, March 6, 2020

Retirees with student-loan debt should ask elderly presidential candidates what they plan to do about the student-loan crisis

Last month, the New York Times ran a story about retirement-age Americans who are struggling to pay off student-loan debt. As reported by Times writer Tammy La Gorce, 2.8 million Americans in their 60s have student-loan obligations, a number that has quadrupled since 2005.

The average debt load for elderly student-loan debtors has nearly doubled between 2012 and 2017--from $12,100 to $23,500. And, according to the Times story, most student-loan debt held by older Americans was taken out to pay for for their children's education.

Many of these elderly student-loan debtors jeopardized their own retirement by borrowing money to get their kids through college. And these debts are virtually impossible to discharge in bankruptcy.

It is now inevitable that the United States will elect an old guy for President in November: Donald Trump, age 73; Joe Biden, age 77; or Bernie Sanders, who is 78.  Will they be sympathetic to senior Americans who are burdened by student debt?

Why don't we inquire? If we get an opportunity to question Bernie, Biden, or Trump, these are the questions we should ask.

First, do you support the bill that Congressman John Katko introduced in Congress to eliminate the "undue hardship" provision in the Bankruptcy Code so that insolvent Americans can discharge student debt in bankruptcy just like any other unsecured consumer debt? Yes or no.

Second, do you support the repeal of the so-called "Bankruptcy Reform Act" that made it more difficult and more expensive for financially distressed Americans to get bankruptcy relief? Yes or no?

Third,  do you support legislation that would prohibit the federal government from garnishing the Social Security checks of retired Americans who defaulted on their student loans? Again, yes or no?

And here are some candidate-specific questions to ask:

President Trump, you indicated that the Department of Education is looking at some options for relieving the suffering of college borrowers who are burdened by student-loan debt? Precisely what do you have in mind?

Senator Sanders, do you have any plan for addressing the student-loan crisis other than forgiving $1.6 trillion in student debt?  If you are elected President, and Congress refuses to approve your loan-forgiveness promise, do you have any other ideas about relieving the student-debt crisis?

Former VP Joe Biden, do you regret your role in passing the notorious Bankruptcy Reform Act of 2005? Would you work to repeal the law if you are elected President?  Would you at least repeal the provision that makes private student loans almost impossible to discharge in bankruptcy?

Curiously, although the student-loan program is totally out of control and burdens 45 million Americans, the media has not pressed any of the presidential candidates about the student-loan crisis.

College and university leaders have said almost nothing about this catastrophe, and they won't be asking the presidential candidates any awkward questions about the federal student-loan program. Harvard, for example, took in $4 billion in federal money between 2011 and 2015. The student-loan program works just fine for America's wealthiest university.

But ordinary Americans need to know what Bernie, Biden, and Trump plan to do if they are elected President. Ask those questions yourself because the press and the universities aren't interested.


Harvard University President Lawrence Bacow: Student-loan crisis? What student-loan crisis?


Wednesday, July 19, 2017

Missing Paperwork for Private Student Loans May Make Them Uncollectible: Boo Hoo!

Some debt collectors for private student loans are finding it difficult to collect because they can't prove they actually own the debt.  According to the New York Times, "Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing."

A little background. The federal government is the largest student-loan lender; it now holds $1.4 trillion in outstanding federal-loan debt.  But there is also a smaller private student-loan market. About $108 billion is private student loans is held by banks and private financial agencies like Sallie Mae.

National Collegiate Student Loan Trusts, an umbrella name for 15 trusts, holds about $12 billion of the total private student-loan debt. More than 40 percent of that debt--$5 billion--is in default; and National  Collegiate has been aggressively pursuing defaulters in court. According to the Times, the trusts brought 800 collection cases last year--an average of 4 a day.

But National Collegiate has a big problem: when it goes to court it often cannot prove it is legally entitled to collect on the debt. How did that happen?

Many of these student loans were taken out more than 10 years ago by dozens of private banks. These loans were then bundled together into securities and sold to investors. A lot of this debt was sold and resold several times before it wound up in the hands of National Collegiate's trusts.

Somewhere along the way, a lot of important paperwork got lost, and now National Collegiate often can't prove it owns the underlying debt it seeks to collect. As a result hundreds of its debt collection cases have been thrown out of court. Boo hoo!

This is essentially the same problem that arose during the home mortgage crisis of 2008. Home mortgages were packaged into asset-backed securities and then sold and resold to various investors. When the loans went into default, the owners of the repackaged mortgages often could not prove they were entitled to collect the debt.

I have a few comments on National Collegiate's troubles.

First, the federal government doles out $150 billion a year in student aid. No one should be going to private lenders for student-loan money. If the higher education industry had any integrity, it would discourage students from taking out private loans. But our rapacious colleges and universities don't care if their students are taking out private loans to pay tuition.

Second, the private student-loan market grew after Congress passed the so-called Bankruptcy Reform Act of 2005, which made private student loans nondischargeable in bankruptcy unless the borrower could prove undue hardship. The banks know that their student-loan customers will find it almost impossible to discharge their private loans in bankruptcy.

Third, the banks have further protected themselves against losses by requiring student borrowers to find co-signers for their student loans. Millions of parents and grandparents have cosigned private loans for their relatives and are liable to repay them if the student defaults. And bankruptcy isn't an option for grandma or grandpa because they too are subject to the undue hardship rule.

In short, the private student loan industry is a sleazy business and ought to be shut down. Congress could close this industry almost overnight if it repealed the undue hardship standard in the 2005 Bankruptcy Reform Act.  And colleges and universities could help shut the industry down if they would publicly discourage their students from taking out private loans.

Personally, I don't give a damn if National Collegiate and its investors lose a ton of money because they don't have the paperwork proving they own the student loans they purchased.  After all, National Collegiate is a sophisticated party. If it purchased debt without obtaining the necessary documents proving ownership, it deserves to have its collection cases thrown out of court.



References

Stacy Cowley and Jessica Silver-Greenberg. As Paperwork Goes Missing, Private Student Loan Debt May Be Wiped Away. New York Times, July 17, 2017.