Memo to Parents: For God's Sake, Don't Borrow Money to Pay For Your Kids' College Education

Are you a parent who is thinking about taking out a loan to pay for your child's college education? Before you do, read Murphy v. Educational Credit Management Corporation, a recent federal court decision.

In 2002, Robert Murphy lived in Duxbury, Massachusetts and was the president of a corporation. Unfortunately, he lost his job after the corporation was sold and its operations were moved overseas. Although he had diligently looked for a new job, he was still unemployed in 2014.

Between 2001 and 2007 Murphy took out 12 loans to finance a college education for each of his three children. This is remarkable, since he was unemployed during most of this six-year period. Apparently, Murphy had no difficulty borrowing money for his children's education even though he was out of a job. By May 2014, when a federal court issued its appellate opinion on his bankruptcy case, Murphy owed more than $240,000 on these loans.

By this time, Murphy was 63 years old, unemployed for almost 12 years, and in dire financial circumstances. He owed $700,000 on a home that was only worth $500,000, and his home was going into foreclosure. Although Murphy had once owned an IRA worth about a quarter of million dollars, he had cashed it out  to cover expenses. The court did not report on Murphy's family income in 2014, but it noted that Murphy and his wife had only earned about $13,000 in both 2010 and 2011, money his wife had earned as a teacher's aide.

Pretty sad story, you might think.  Nevertheless, a federal court upheld a bankruptcy court's decision to deny Murphy's request to have his children's student loans discharged.  Although the court admitted that Murphy had no current ability to pay off the loans, it noted that Murphy was in good health and might still find a high-earning job that would allow him to pay off his enormous debt.

Ending its opinion on a remarkably callous note, the court observed that Murphy had struck a bargain with the government when he borrowed money to pay for his children's college education.  "All bargains contain risks," the court pointed out, and Murphy's bargain was especially risky since he had been unemployed during the time he took out most of the loans. 

In short, the court ruled, Murphy's situation did not present "truly exceptional circumstances" that would permit him to shed his student-loan debt.  Thus, the federal court agreed with the bankruptcy court's  decision to deny Murphy relief in bankruptcy for his children's student loans.

The Murphy decision serves as a warning to all parents who are thinking about borrowing money to help their children get a college education. Whether the parent takes out a federal student loan or borrows money from a private bank, a college loan cannot be discharged in bankruptcy unless the parent can show "undue hardship."

Mr. Murphy was unable to show undue hardship in spite of the fact that he had been unemployed for 12 years, had liquidated his retirement account and was in the process of losing his house in foreclosure.

According to a recent article in the Huffington Post, parents currently owe an accumulated $62 billion in Parent Plus Loans, which are guaranteed by the federal government. And this figure doesn't include loans parents took out with private banks that are not federally guaranteed.  A  2012 Huffington Post article reported that about one million Parent Plus loans were taken out during 2011, totally more than $10 billion in just that one year.

Parents who guarantee their children's college loans or who take out loans to pay for their children's education put their financial futures at grave risk.  Before borrowing to pay for your children to go to college, you should think about Mr. Murphy. Sixty-three years old, unemployed, and living on an income near the poverty level, Mr. Murphy is burdened by almost a quarter million dollars of student-loan debt.  That's a pretty scary story.

References

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

What's a Trillion Dollars Among Friends? Is Student-Loan Debt "Good Debt"?

A couple of days ago, Beckie Supiano wrote an article for Chronicle of Higher Education, entitled “What Does $1-Trillion in Student Debt Really Mean? Maybe Not That Much,” which suggested that the nation's massive student-loan debt is no big deal.  Some of the people cited in Supiano’s article apparently believe that student-loan indebtedness is fundamentally different from the home-mortgage crisis because education, unlike a mortgaged home, has intrinsic value that does not diminish over time.

For example, Anthony P. Carnevale, director of Georgetown University's Center on Education and the Workforce, described student-loan debt as "good debt". In fact, Carnevale maintained, “This is exactly the kind of debt a society wants.” 

Mr. Carnevale’s perspective on student loans would be correct if all students received good value when they borrowed money to obtain a college education. But, as everyone knows, millions of people have borrowed money to pursue post-secondary education and did not see their lives improve in any meaningful way.  A person who borrows $100,000 to obtain a degree in religious studies, winds up working as a waitress, and defaults on her student loans does not have the kind of debt society wants. That kind of debt is not “good debt”.

Furthermore, contrary to some of the views expressed in the Supiano article, the student-loan crisis is very similar to the home-mortgage crisis. In fact, student loans have probably caused more human suffering than the home-mortgage meltdown.  People who own homes worth less than their mortgages are certainly under stress. But at least these people have roofs over their heads, and they own tangible assets. Furthermore, home-mortgage holders who are financially unable to pay their monthly mortgage payments can discharge their mortgages in bankruptcy.

In contrast, people who took out student loans to obtain a college education did not obtain anything tangible except their diplomas, and many did not receive the skills or training from their experience that would enable them to obtain good-paying jobs or otherwise improve their lives.  Many people who borrowed substantial amounts of money to obtain degrees in such fields as art history, religious studies, sociology and anthropology are in real financial trouble because they can’t find employment that compensates them enough to pay off their student loans.

Furthermore, unlike homeowners who have unmanageable mortgages, most overburdened student-loan debtors cannot discharge their loans in bankruptcy.  Although they can obtain deferments on their loan payments if they can show economic hardship, interest on their loans will continue to accrue in most instances, increasing the size of their debt

In short, to suggest that the nation’s $1 trillion in accumulated student-loan debt is not a serious problem shows a profound lack of understanding about the tremendous suffering that millions of student-loan debtors are experiencing. There are lots of things we can do to get the student-loan crisis under control, but we should begin by providing meaningful relief to overburdened student-loan debtors who have no reasonable prospect of ever paying off their student loans.

References

Supiano, B. (2012, May 16). What Does $1-Trillion in Student Debt Really Mean? Maybe Not That Much. Chronicle of Higher Education. http://chronicle.com/article/What-Does-1-Trillion-Mean-/131900/?key=TWwidAI8byUVbHBhYDpAbj4AaH0%2BMUp2YydBPX4rblpXGQ%3D%3D.