Wednesday, January 25, 2017
A Kansas bankruptcy court discharged all the accrued interest on a married couple's student loans: Murray v. ECMC
Something similar might be said about the student-loan crisis: "It's the interest, stupid." In fact, for many Americans, it is the interest and penalties on their student loans--not the amount they borrowed--which is causing them so much financial distress.
The Remarkable case of Murray v. Educational Credit Management Corporation
This truth is starkly illustrated in the case of Murray v. Educational Credit Management Corporation, which was decided last December by a Kansas bankruptcy judge. At the time they filed for bankruptcy, Alan and Catherine Murray owed $311,000 in student-loan debt, even though they had only borrowed about $77,000. Thus 75 percent of their total debt represented interest on their loans, which had accrued over almost 20 years at an annual rate of 9 percent.
As Judge Dale Somers explained in his ruling on the case, the Murrays had taken out 31 student loans back in the 1990s to obtain bachelor's degrees and master's degrees. In 1996, when they consolidated their loans, they only owed a total of $77,524.
Over the years, the Murrays made loan payments when they could, which totaled $54,000--more than half the amount they borrowed. Nevertheless, they entered into several forbearance agreements that allowed them to skip payments; and they also signed up for income-driven repayment plans that reduced the amount of their monthly payments. Meanwhile, interest on their debt continued to accrue. By the the time the Murrays filed for bankruptcy in 2014, their $77,000 debt had grown to almost a third of a million dollars.
The Murrays' combined income was substantial--about $95,000. Educational Credit Management Corporation (ECMC), the creditor in the case, argued that the Murrays had enough discretionary income to make significant loan payments in an income-driven repayment plan. In fact, under such a plan, their monthly loan payments would be less than $1,000 a month,
But Judge Somers disagreed. Interest on the Murrays' debt was accruing at the rate of $65 a day, Judge Somers pointed out--about $2,000 a month. Clearly, the couple would never pay off their loan under ECMC's proposed repayment plan. Instead, their debt would grow larger with each passing month.
On the other hand, in Judge Somers' view, the Murrays had sufficient income to pay off the principle of their loan and still maintain a minimal standard of living. Thus, he crafted a remarkably sensible ruling whereby the interest on the Murrays' debt was discharged but not the principle. The Murrays are still obligated to pay the $77,000 they borrowed back in the 1990s plus future interest on this amount, which would begin accruing at the rate of 9 percent commencing on the date of the court's judgment.
Judge Somers Points the Way to Sensible Student-Debt Relief
In my view, Judge Somers' decision in the Murray case is a sensible way to address the student debt crisis. Eight million people have defaulted on their loans, and 5.6 million more are making token payments under income-driven repayment plans that are often not large enough to cover accruing interest. Millions of Americans have obtained loan deferments that allow them to skip their loan payments; but these people--like the Murrays--are seeing their loan balances grow each month as interest accrues.
Judge Somers' decision doesn't solve the student-loan crisis in its entirety, but it is a good solution for millions of people whose loan balances have doubled, tripled and even quadrupled due to accrued interest, penalties, and fees.
Obviously, Judge Somers' solution should only be offered to people who dealt with their loans in good faith. Judge Somers specifically ruled that the Murrays had acted in good faith regarding their loans. In fact, they paid back about 70 percent of the amount they borrowed.
Unfortunately, but not surprisingly, ECMC appealed the Murray decision, hoping to overturn it. Nevertheless, let us take heart from the fact that a Kansas bankruptcy judge reviewed a married couple's financial disaster and crafted a fair and humane solution.
Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).
Friday, December 18, 2015
Deeper into the abyss: Obama introduces REPAYE, yet another income-based student-loan repayment plan designed to turn students into sharecroppers
What is the significance of this new development?
It's complicated. First of all, REPAYE is the federal government's fourth income-based repayment plan. We now have:
- ICR Plan (Income-Contingent Repayment Plan)
- IBR Plan (Income-Based Repayment Plan
- PAYE (Pay As You Earn Repayment Plan
- REPAYE (Revised Pay As You Earn Repayment Plan)
Not all borrowers are eligible for all plans, and some plans are more favorable to debtors than others. DOE issued a 26-page set of guidelines called "Income-Driven Repayment Plans: Questions and Answers," but the guidelines are complicated.
Here is a sample passage:
The REPAYE, PAYE, and IBR plans offer an interest benefit if your monthly payment doesn't cover the full amount of interest that accrues on your loans each month. Under the three plans, the government will pay the difference between your monthly payment amount and the remaining interest that accrues on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under the plan. Under the REPAYE Plan, the government will pay half the difference on your subsidized loans after this three-year period, and will pay half the difference on your unsubsidized loans during all periods.Millions of people are already confused by their student loans. Some don't know if they have private loans or federal loans, some don't know how many loans they have, some don't know how much they borrowed or what they now owe, and some people don't even know that they took out a student loan.
For the 20 million people who aren't able to make loan payments under a standard 10-year repayment plan, REPAYE is not going to offer much relief. It's just another level of bureaucracy and administrative regulations.
REPAYE is a new sign of desperation. Second, REPAYE is just another sign of the federal government's desperation about the federal student loan program. As the New York Times noted a few weeks ago, 10 million people have either defaulted on their student loans or are delinquent in their payments. About 4 million are making payments under the government's first three income-based repayment plans; and most are not making payments large enough to cover accruing interest. And a bunch more have gotten some kind of deferment from making loan payments based on economic hardship.
The government's response to all this chaos and misery is to roll out ever more generous long-term repayment plans. But this strategy hides the fact that millions of people on these plans will never pay back the principle on their loans and for all practical purposes are in default.
REPAYE is really just a program for turning college students into sharecroppers for the federal government. But the real problem with REPAYE, with PAYE and with IBR and ICR are that these plans force millions of people to make payments to the federal government for a majority of their working lives in return for the privilege of attending college. In effect, the government is turning our nation's young people into a generation of sharecroppers.
And remember, for most people, these 20- and 25-year repayment plans don't begin when students graduate from college. Often former students struggle for five years or more with their student loans before they finally sign up for a long-term repayment plan. And that's when the long-term repayment plan starts. Thus a person who graduated in 2010 and joins an income-based repayment plan this year, will not be free of student loan debt until 25 or 30 years after first enrolling in college.
President Obama, Arne Duncan, the Brookings Institution, and higher education leaders like Vassar's Catharine Hill hail long-term repayment plans as a solution to the growing student-loan crisis. But of course, these plans are not a solution at all. They're a strategy for turning Americans into indentured servants.
|Go to college and become a sharcropper!|
|Vassar's Catharine Hill: What the kiddies need is a nice long-term repayment plan!|
Friday, October 30, 2015
Income-Based Repayment Plans are a fraud on college students: Reflections on Paul Campos' analysis of IBRs
Even people who don't plan to go to law school should read Campos' book, because his indictment of legal education also applies to higher education in general. All over the United States, colleges have jacked up their tuition, forcing their students to borrow more and more money. It is now apparent that millions of students are saddled with unmanageable student-loan debt.
To keep the gravy train rolling, higher education's insiders now back long-term income-based repayment plans (IBRs) that lower borrowers' monthly loan payments but extend the repayment time to as long as 25 years. Policy think tanks like the Brookings Institution, the Obama administration, and the New York Times have all backed IBRs.
Let's look at what Paul Campos had to say about IBRs in Don't Go To Law School (Unless). (Campos also criticizes public service loan forgiveness plans (PSLFs), but I will not comment on PSLFs in this essay).
"The truth is," Campos wrote, "that people who are likely to end up in IBR . . . if they go to law school should not go at all" (48). People who participate in these long-term repayment plans will generally be making payments so low that they don't cover accumulated interest, which means that many debtors will never pay off their loans. Moreover, Campos notes, under current IRS regulations, any debt that is forgiven at the end of a long-term repayment plan is considered taxable income.
Campos trenchantly pointed out that IBRs are simply a way to prop up the law schools' broken business model:
When law schools push the supposed benefits of IBR . . . to prospective students, what they're really doing is advertising that they're operating under a business model that doesn't work unless it is subsidized heavily at both ends by the American taxpayer. Law school is subsidized on the front end by federal educational loans, which allow students to borrow money they won't be able to pay back, and by IBR . . on the back end, which allows graduates to have the "privilege" of being in debt servitude to the U.S. government for ten or, more likely, twenty-five years, with the added bonus of being hit by a huge tax bill at the end of it all. (51)Indeed, Camps suggests that law schools that push the benefits of IBRs are engaging in unethical behavior. "Given that the American taxpayer will be left holding the bag for all the unpaid debt accrued by law graduates in these programs, there's a good argument to be made that law schools who promote IBR are participating in a fraud on the public" (50) (my emphasis).
Every criticism Campos raised about IBRs as a means of financing legal education applies to higher education in general. Twenty-five year repayment plans (or even the less onerous 20-year repayment plan developed by the Obama administration) force students to pay a percentage of their income to the federal government for the majority of their working lives.
These long-term repayment plans demonstrate the intellectual vacuity of our higher education community. In their desperate effort to maintain the status quo, colleges and universities are throwing their students under the bus. Rather than change their business model, they raise their tuition rates every year and soothingly assure their students not to worry---they will have 25 years instead of 10 to pay off their student loans.
|American universities are using IBRs to throw their students under the bus.|
Paul Campos. Don't Go To Law School (Unless) (published by the author, 2012).
Monday, November 4, 2013
A lot of the major players in higher education like IBRs--"pay as you earn" plans as some people call them. In a co-authored essay in Chronicle of Higher Education, Sandy Baum of the College Board lauded the President's plan for notifying students about IBRs and said IBRs should be the "default option" for student-loan repayment. In other words, unless student borrowers affirmatively opt out, they would automatically be enrolled in a student-loan repayment plan that would stretch their payments out over 20 or 25 years. Wow, what a super idea!
And how will income-based loan repayments be collected? The details aren't clear yet, but I imagine the feds will do what the Brookings Institution recommends. Student-loan borrowers will have their loan payments deducted from their payroll checks. The IRS will become the national debt collector, and a student-loan borrower's monthly loan payments will go up or down based on the borrower's current income, like income-tax withholding payments.
Thus, the day may be coming when former college students will see their monthly student-loan payment appear as just another deduction on their paychecks--like Social Security, mandatory retirement contributions, and federal and state taxes. And for most borrowers, those deductions will last about a quarter of a century.
President Obama probably thinks he is doing college-loan debtors a favor by encouraging them to sign up for long-term repayment plans. He reminds me of Colonel Nicholson in Bridge on the River Kwai. Colonel Nicholson (played by Alec Guinness) is so obsessed with building a bridge for the Japanese army that he loses sight of the fact that he is hurting his country's cause, not helping it.. Not until the end of the movie does the Colonel realize that he has betrayed his country and the soldiers he commands. The last lines of the movie are: "Madness, Madness!"
|Col. Nicholson in Bridge on the River Kwai|
Why are all the insiders lining up in favor of IBRs? Two reasons:
IBR plans will hide the student-loan default crisis. First and most importantly, IBRs are a cosmetic fix for the soaring student-loan default rate. As I've explained before, the true student-loan default rate is probably twice as high as the anemic three-year default rate DOE reports every year. In the for-profit sector, the overall default rate is at least 40 percent. Over the long run, such a default rate is economically and politically unsustainable.
For years now, the for-profits have hid their institutional default rates by encouraging their students to sign up for economic hardship deferments so they won't be counted as defaulters. Millions of people have these deferments, but this shell game can't last forever. Eventually, the government will have to admit that a lot of people on economic-hardship deferments (probably most of them) are really defaulters who will never pay back their loans.
Putting people in IBRs is unlikely to increase the number of people who pay off their loans, but it will obscure the true student-loan default rate for several years. How? If people are automatically enrolled in IBRs, their loan payments will be lowered perhaps as low as zero for people who are unemployed or are in low-paying jobs. These people won't be paying off their loan balances because interest will continue to accrue. But they won't be counted as defaulters.
IBRs will take the heat off colleges and universities to keep their costs down. Second, IBRs benefit the colleges and universities. If students pay for their college experiences based on a percentage of their income instead of the amount they borrow, they will have little incentive to shop for a college based on price. And governmental agencies will have less incentive to try to keep college costs down. Colleges and universities can perpetuate the status quo indefinitely, raising their tuition rates every year without being pressured to keep their costs down.
The for-profits will be the big winners if IBR plans become the default option for student borrowers because their student-loan default rates will drop to zero in spite of the fact that too many students who attend for-profit colleges are paying exorbitant tuition and getting substandard educational experiences.
For most students and for American Society, IBRs will be a disaster. Income-based repayments may make sense for a small percentage of student-loan debtors, but if IBRs become the default option for college-student borrowers, the consequences will be disastrous.
First of all, as I just said, IBRs reduce students' incentive to borrow as little money as possible to attend college. In fact, many students will conclude that it makes economic sense to borrow to the max. Thus, if IBRs become popular, the total amount of money students borrow every year to attend college will continue going up--perhaps at a faster rate than in the past.
In addition, mass adoption of IBRs will hurt the American economy. If young people are locked into making student-loan payments for 20 or 25 years, their take-home pay will be smaller and they will have less money to purchase homes, have children, and save for retirement.
But this is the most chilling fact about IBRs: They have the potential for creating a large class of people who are in essence share croppers for the federal government They will be forced to contribute a percentage of their earnings to Uncle Sam for the majority of their working lives. No one can say with certainty what the psychological impact of this arrangement will be on American college graduates, but it could reduce their faith in the American dream and lead to mass cynicism about the American political process.
And IBRs will not increase the number of people who pay off their student loans. I predict that a majority of students who select IBR plans as their student-loan repayment option will be students who pay too much to attend for-profit colleges and don't make enough money after they complete their studies to pay back their loans. A lot of these people will be unemployed or working in low-wage jobs that entitle them to pay nothing on their loans or to pay so little that their payments won't cover accruing interest.
These poor people will see their federal loan debt grow, not shrink, over the years, even if they make all their loan payments on time. For example, the New York Times ran a story about a veterinarian who borrowed $300,000 to attend a for-profit veterinary school outside the United States. Even though this individual found a job as a veterinarian and is making regular student-loan payments under an IBR, her current job does not pay enough to enable her to make loan payments that are large enough to cover the accruing interest on her debt. A financial analyst estimated that when this veterinarian completes her 25 year repayment period, the amount of her debt will not have been paid off. In fact, it will have doubled--from the $300,000 she originally borrowed to more than $600,000!
In short--and I say this emphatically--wholesale adoption of income-based repayment plans is madness and its long term effect will be drive millions of people out of the middle class and into a new class of Americans--sharecroppers for the federal government.
Sandy Baum & Michael McPherson. Obama's Aid Proposals Could Use a Reality Check. Chronicle of Higher Education, August 26, 2013. Accessible at: http://chronicle.com/article/Obamas-Aid-Proposals-Could/141265/
David Segal. High debt and falling demand Traps New Vets. New York Times, February 23, 2013. Accessible at: http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?pagewanted=1&_r=0
Michael Stratford. You've Got Mail. Inside Higher Education, November 4, 2013. Accessible at: http://www.insidehighered.com/news/2013/11/04/education-dept-will-email-35-million-student-loan-borrowers-about-income-based
Thursday, July 4, 2013
Emigrate! To Avoid Becoming Sharecroppers, Some Young People Will Leave the United States to Escape Student Loan Debt
At this very moment, young people all over the world are emigrating from their home countries in search of a better life. Eastern Europeans, Asians, and Africans are particularly prone to emigrate. But the notion that young people in 21stcentury France should emigrate for economic reasons seems incredible. Indeed, according to Marquardt, he and two colleagues sparked a national uproar when they first proposed emigration for French young people in a newspaper article last year.
|State Highway Officials Moving Sharecroppers|
Photo credit: Arthur Rothstein, 1939
How about young Americans? Should they consider leaving the United States to begin new lives in other countries? Yes, the time has come for the nation’s young people to seriously explore emigration--especially if they are burdened by crushing student-loan debt.
Americans have amassed more than $1 trillion in student-loan indebtedness. Currently, more than 37 million people are burdened by student loans, including several hundred thousand elderly people. Nearly 6 million borrowers are behind on their loans or in default, and that doesn’t include people who received economic hardship deferments and are not making their loan payments.
Thanks to congressional legislation and heartless bankruptcy courts, this debt is almost impossible to discharge in bankruptcy. And thanks to a Supreme Court decision, the government can garnish loan defaulters’ Social Security checks to collect unpaid student loans.
Student-loan debt is not a big problem for people who hold good jobs and can comfortably make their loan payments. But young people are having a hard time finding good jobs. Sixteen percent of young people in the 18 to 29 age bracket are unemployed (Deruy, 2013), and that doesn’t include young people who are holding down low-wage jobs because they cannot find jobs suitable for their skills and training. About half of the nation’s college graduates hold jobs that do not require a college education and many of these graduates are working in low-paying jobs in the restaurant and service industry.
Thus, for Americans who are burdened with massive student loans and declining economic opportunities, emigration to another country is a reasonable option. Marquardt suggested that nations with growing economies such as China, Brazil, Turkey, India and Indonesia might be good places to emigrate.
Income Based Repayment Programs Turn Student-Loan Debtors Into Sharecroppers
President Obama knows that the federal student loan program is a huge problem for young Americans (and some not so young). In 2012, his administration introduced a modified IBR called a “Pay as You Earn” plan, which allows student-loan debtors to pay back their loans over a 20 year period based on a percentage of their income (U.S. Department of Education, 2012). At the end of the 20-year repayment period, any unpaid loan balance will be forgiven.
There are lots of problems with IBR initiatives--including the Obama administration’s “Pay As You Earn” plan. First of all, under current IRS regulations, loan debt that is forgiven is counted as taxable income. Thus, theoretically, at least, some people who conscientiously make their monthly loan payments for 20 years based on their income could face a huge tax bill when the repayment period comes to an end.
Second, an income-based repayment program removes a student’s incentive to avoid borrowing more money for college than is needed. Students who know their loan payments will be based on their income and not the amount they borrowed will have little reason to limit the total amount of their loans.
Some of these problems can be addressed through legislation or modified program design. For example, the IRS can amend its regulations to eliminate the tax consequences of forgiven student loans; and an IRP program can surely be designed to keep students from borrowing extravagantly.
In my mind, however, the chief evil of income-based repayment programs is that they require students to pay a portion of their income to student loan agencies for the majority of their working lives. In essence, an income-based repayment plan turns student-loan debtors into sharecroppers--people forced to fork over a portion of their income to the government for 20 years in return for the privilege of going to college.
Indeed, IBRs are identical to the economic model of the sharecropper system that prevailed in the South during the early 20th century. Sharecroppers paid a percentage of their crop to wealthy landowners in return for permission to work someone else’s land (Woodward, 1951).
Eventually, the rural sharecropper system collapsed, and hundreds of thousands of Southern sharecroppers abandoned farming and immigrated to California during the 1930s. John Steinbeck memorialized this tragedy in his great novel, The Grapes of Wrath.
Higher Education Insiders Endorse the Sharecropper Option
One might think the American higher education community could come up with a more creative proposal for addressing the student-loan crisis than income-based repayment plans. Unfortunately, a number of higher education policy groups have endorsed IBRs.
Recently, the Bill and Melinda Gates Foundation awarded more than $3 million to various higher education advocacy groups to make recommendations for improving our nation’s financial aid program for college students. Titled “Reimagining Aid Design and Delivery”(RADD), the project produced 16 reports from such groups as the National Association of Student Financial Aid Administrators (NASFAA), Education Trust, the Association of Public and Land Grant Universities, and the Institute for Higher Education Policy.
Incredibly, not one of these 16 reports recommended significant bankruptcy relief for student-loan debtors or legislation barring the garnishment of Social Security benefits from elderly people who default on their student loans. (Commendably, two of the 16 reports recommended legislation that would allow private loans to be discharged in bankruptcy.)
Even more incredibly, eight of the reports--fully half--recommended that college students be automatically enrolled in income-based repayment plans when they take out student loans. That’s right--half of the organizations responding to the Bill and Melinda Gates Foundation’s RADD project recommended putting all student-loan participants in a giant sharecropper program.
The specifics varied somewhat, but eight of the so-called RADD reports recommended some variation of an income-based repayment program as the default option for all student-loan debtors. All these proposals would require students who participate in the federal student loan program to make monthly payments based on a percentage of their income for a long period of time--at least 20 years.
For Some Overburdened Student Loan Debtors, Emigration Will Be Preferable to an IBP
The cost of a college education goes ever upward. The cost of attending an elite private university--tuition, feels, and living expenses--is approaching a quarter million dollars. Higher education leaders may think we can continue on this catastrophic spiral by forcing students to borrow more and more money and pay it back over an expanding period of time. In essence, they think America’s young people will consent to be sharecroppers.
I think they are wrong. Increasingly, we will see bright and talented young people forego expensive colleges altogether rather obligate themselves to 20-year repayment plans. I also think we will see some of the nation’s brightest young people immigrate to other countries where they perceive better economic opportunities than are available to them in the United States.
Marquardt described France as a country run by a “decrepit, overcentralized gerontocracy.” I see the United States as a plutocracy--a nation governed by the wealthy for the benefit of the wealthy. Exhibit A, in my opinion, is America’s prestigious universities, with their overpaid executives and obscene tuition prices. They say they offer financial aid to deserving applicants who are poor--but their main goal is to preserve the status quo for the rich.
Just as Europeans immigrated to the United States to escape plutocratic government, perpetual wars, military conscription, and lack of economic opportunities, American young people will soon be emigrating to other countries where they see brighter economic futures for themselves. And when that happens, America’s higher education community will bear a large part of the blame.
Durey, Emily (2013, May 3. April Jobs Report Paints A Bad Picture for Young Adults. ABC News. Accessible at http://abcnews.go.com/ABC_Univision/News/april-jobs-report-makes-clear-young-adults-struggle/story?id=19101235#.UdXM3DubP6c
Education Trust (2013). Doing Away With Debt: Using Existing Resources to Ensure College Affordability for Low and Middle-Income Families. Accessible at: http://www.edtrust.org/sites/edtrust.org/files/Doing_Away_With_Debt_1.pdf
Institute for College Access and Success. (2013 February). Aligning the Means and Ends: How to Improve Federal Student Aid and Increase College Access and Success. Accessible at: http://www.ticas.org/files/pub//TICAS_RADD_Executive_Summary.pdf
Marquardt, Felix (2013, June 30). The Best Hope for France’s Young? Get Out. New York Times, Sunday Review Section, p. 4.
National Association of Student Financial Aid Administrators. (2013, March 14). Policy Themes in RADD Reports: A Summary Matrix. Accessible at: http://www.nasfaa.org/EntrancePDF.aspx?id=13701
National Association of Student Financial Aid Administrators (2013). Reimagining Financial Aid to Improve Student Access and Outcomes. Accessible at: http://www.nasfaa.org/radd-event/
Rothstein, Arthur (1939). State Highway Officials Moving Sharecroppers, January 1939. A Photo Dossier on Sharecropping. Accessible at http://www.english.illinois.edu/maps/poets/a_f/brown/photos.htm
United States Department of Education (2012, December 21). Education Department Launches 'Pay As You Earn' Student Loan Repayment Plan. Accessible at: http://www.ed.gov/news/press-releases/education-department-launches-pay-you-earn-student-loan-repayment-plan
Woodward, C. Vann. Origins of the New South: 1877-1913. Baton Rouge, LA: Louisiana State Univsersity Press, 1951.